BOFIT Viikkokatsaus / BOFIT Weekly 2017/28

China’s pension system needs reform to put its funding on a sustainable footing. China’s population has been aging rapidly due to the one-child policy introduced in 1979 and rising life expectancy. The World Bank notes that China’s old-age dependency ratio in 2016 rose to 14 persons aged 64 and above per 100 working-age persons (Finland 34). The measurement method overlooks the fact that retirement ages in China are well below 64. While currently the situation is still manageable, the greying of China gives reformers little opportunity for delay. The UN forecasts that China’s old-age dependency ratio will hit 44 by 2050 (i.e. 44 people over 65 for every 100 working-age persons).

China’s pension system consists of the state pension system, corporate pensions and voluntary worker pension savings arrangements. Payment into the government pension system is mandatory for urban workers. An urban-dweller pays a mandatory work pension payment equal to 8 % of his or her gross wage into a personal pension account. The employer then contributes an amount equal to 20 % of the gross wage to the pension fund. The pension is paid in part from the pension account and in part from the pension fund. All people who have paid into the pension system for at least 15 years are entitled to a pension. Large, wealthy firms also pay into a corporate pension scheme. In rural areas, government pensions are small and contribution to the system is not compulsory. For this reason, most people do not pay into the pension system and do not receive pensions.

Without reform, the current system will suffer from a severe financing deficits as the numbers of elderly Chinese grow. China’s human resources and social security ministry reports that pension fund spending in 2015 rose faster (up 20 %) than revenues (up 17 %). The same year, China announced the elimination of the public-sector exemption from pension contributions. Last year, pension funds gained the right to invest in equities. Both measures are intended to increase pension fund revenue streams. In January-May 2017, fund revenues increased slightly faster than expenditures. Investment of pension fund assets in domestic shares is problematic in terms of system sustainability due to the high risk of speculative stock market bubbles in China.

China’s low retirement age poses a huge challenge. Women are generally eligible for retirement between 50 and 55. The retirement age for men is usually 60. By one estimate, raising the retirement age by one year increases annual pension revenues by 4 billion yuan and reduces pension costs by 16 billion yuan. An increase in the pension age would ease the financing deficit, which by some estimates could be as much as 1.2 trillion yuan (155 billion euros) by 2019.

Progress in reform is slow. The government is expected to issue information on pension reform this year, even if preliminary reports suggest that implementation would not begin until 2022, after which the retirement age would be gradually increased over the next 30 years. At that time, the pension age would reach 65 for men and 60 for women. A planned hike in the pension age for women threatens to further lower China’s already low birth rate and labour force participation rate of females. Chinese families have traditionally relied on grandmothers to provide child care as there are few possibilities for getting children into organised daycare.