Society

No country for old folk?

New report predicts pension scheme deficit by 2035

A 92-year-old woman takes a break from sorting corn cobs for selling to a local factory in an effort to make extra income in the village of Jianhua

China introduced its first pension payments in the early 1950s as part of the Work Unit model – the Soviet idea that your employer or danwei would be responsible for housing, healthcare and looking after you in your retirement.

But that model began to rupture with the economic reforms of the late 1970s. At about the same time, China introduced the One-Child Policy. Fast forward 40 years and the aftershocks of these two changes can be seen in China’s pending pension crisis.

According to a recent report by the Chinese Academy of Social Sciences – a leading think tank – the country’s provincial-level pension funds will run out of money by 2035. “The long-term financial sustainability of the basic pension system is worrisome,” it said.

Of course the government was aware of this problem long before the report was made public. In March during China’s annual parliament Premier Li Keqiang promised that pensions would be paid even if the coffers run low on cash.

“It would be very disappointing if decades of hard work cannot earn one a decent retirement,” Xinhua quoted him as saying.

But that – and other public pledges of a similar type – didn’t stop people panicking when the China Times published another article repeating the bleak pension predictions from the CASS report this month.

“Do you remember when the government said ‘only have one child, we will provide for you when you are older’?” asked one concerned Weibo user.

“So if you were born after 1980 you won’t get a pension?” posited another incredulously.

The debate became so fierce that that censors stepped in and removed the majority of the posts. And in the following days, state media ran a series of articles reiterating the government’s pledge to honour pension commitments, regardless of the state of the collections pot.

So how has China got to the point where its state-backed pension funds won’t be enough to meet demand? As with elsewhere in the world, the basic issue is that people are living longer and making more demands on the system.

In China there is also the added problem of a rapidly shrinking workforce due to the effects of the One-Child Policy. In the 1990s when provincial governments took over the responsibility for paying pensions, five people were paying into the pot for every person drawing out. Right now that ratio is 2:1 and by 2050 it will be 1:1.

According to the CASS report, the pension funds for urban workers – which currently hold Rmb4.26 trillion ($618.9 billion) – will continue to grow until 2027, before declining and going into negative territory by 2035.

The urban workers pension scheme covers some 400 million residents of towns and cities (there is a separate rural scheme) and it aims to pay retirees approximately 60% of an average local salary for the rest of their lives. In places like Shenzhen that can be as much as Rmb4,400 a month – which is almost exactly the same as the basic payout on a UK state pension.

An additional problem with the urban pension fund is that it is administered at provincial level – meaning rustbelt provinces such as Heilongjiang and Jilin have lots of former workers claiming social security but far fewer younger workers paying in.

The CASS report said five provinces were already over the “warning line” in terms of facing financial difficulties with their schemes and the national government established a “central adjustment system” last year to move money from richer provincial pension funds to weaker ones.

In another move to boost the economy – but not helping with the pension deficit issue – Premier Li also announced in March that the government was reducing monthly pension contributions from employers. Previously companies were expected to pay the equivalent of a fifth of an employee’s salary every month. Now it is 16%, with employees still contributing the equivalent of 8%.

WiC has written extensively about China’s pension crisis in the past. People like Herald van der Linde, HSBC’s head of equity strategy in Asia-Pacific, have called for a more nuanced view, for instance, arguing that the Chinese don’t have the same expectation as many other nationalities that retirement should be funded by the state. “They know they have to save for themselves, so they aren’t relying on the government for support,” he reckons.

The Chinese also stand out for how much they put aside for the future, while older people in other parts of Asia are working beyond their official retirement ages.

The government is also expected to look at other solutions to the shortfall, including raising the retirement age from the year 2022. Women, who start receiving their pensions at 50, will see their retirement age pushed back by a year every three years until it reaches 60. Men will see their pension-claiming threshold raised to 65.

This follows a similar move last year by Vladimir Putin in Russia – although he rehashed an original plan to raise retirement ages for women to 63 by 2034 after a slump in his personal approval ratings. Increases in the retirement age aren’t likely to be greeted with enthusiasm by older Chinese either, when they start to take effect in three years.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.