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Yueran Zhang senior contributor

Why Time is Running Out on China’s Social Security System

(Via Bigstockphoto)

In recent years, issues about China’s pension system have repeatedly hit a public nerve. Among the hot topics consistently reappearing on the front pages of Chinese papers, the social pension perhaps has the most direct influence on people’s lives. Yet convoluted procedures and a lack of transparency make the institution hard to decipher. From time to time, officials, scholars and citizens have debated whether there is a major crisis about the system, and how to fix it. On April 7, at the Boao Forum for Asia, Dai Xianglong, chief manager of the National Council for Social Security Fund, became the first top-level official to openly admit that the pension system as currently constructed is on track to generate a major deficit. The unprecedented statement might suggest that a major reform would be unavoidable.

An overview of China’s social pension system and its emerging crisis

The current social pension system, founded in 1997, is a hybrid of two traditional models adopted by most countries: the pay-as-you-go system, in which the current workforce contribute to the pension fund that pays for current retirees; and a fully-funded system, in which every worker saves for his or her own pension and every retiree gets paid by what he or she saved while working. Neither of the two original models could function smoothly in China. The pay-as-you-go system could hardly adapt to a changing demographic structure, especially in the face of aging population, while the fully-funded system could not attend to people who have already retired or were going to retire soon without sufficient fund in their individual accounts.

Facing with this dilemma, the system was ultimately designed between 1995 and 1997  in a way that seemed to best solve the cost-benefit equation. Under this system, a worker’s contribution to the Chinese national pension fund contains two components. Eight percent of his income is required to be saved in his individual account, and when he retires, he gets back all the money and the interest it accumulated during his career. Another 20 percent of his income is contributed to the “social pension fund” (社会统筹基金). This fund pays 1) pension to seniors retired before 1997 or shortly after 1997 without sufficient accumulation in their personal accounts and 2) pays every retiree a “basic pension” which, while not identical for each worker, is weighted to average incomes in a given province and so serves a redistributive purpose. The latter is only paid to retirees who have contributed pension payments for longer than 15 years.  When one retires in the future, the total pension he receives is the sum of what has been accumulated in the individual account and the redistributive “basic pension.”

At first glance, the financial situation of the system seems to be in good shape. According to a report by the Chinese Academy of Social Sciences (CASS), by the end of 2011, the overall pension fund had an accumulated surplus of 1.95 trillion RMB (or about US$320 billion). During the 2011 fiscal year, the sum of all inflows outnumbered payments by 413 billion RMB (or about US$67 billion).

But a more meticulous examination reveals a slowly crumbling system. First, the seeming financial health of the pension system is subject to an increasingly large government subsidy, which in effect takes money from all taxpayers to pay out to retirees. In 2002, the government spent 45 billion RMB (or about US$7 billion) to subsidize the fund. In 2011, the number grew to 220 billion, making up 53 percent of the total balance of the year. Second, it has become widely known that social security agencies have used funds in individual accounts to finance the social pension fund, against official regulations prohibiting the practice. In other words, current workers are paying much large amounts to current retirees than they should. By the end of 2011, the cash actually in individual accounts was only 12 percent of what it should be, falling short by 2.22 trillion RMB (or about US$359 billion) and putting almost all workers at the risk of finding that there is no money left in their individual accounts when they retire.

This is exactly what Dai Xianglong was referring to when he claimed that the current institution lacked sustainability. What’s worse, thirty years of birth control has inevitably led to an aging population, which means that in the future, an even smaller workforce will shoulder pension payments for a larger population of the aged. It is estimated that in 2050, 332 million Chinese, or approximately 23 percent of the total projected population, will be 65 or older. Major reform measures must be devised to alter this disastrous trend.

Retirement delay: an unpopular solution

The only way to save the system from debacle is to seek more inflow for the funding pool. The most outright measure would be to increase the rates of mandatory worker contribution. Nonetheless, since citizens are already paying a relatively large proportion — 28 percent in total — of their income, resistance to such a measure would be impossible to overcome.

For netizens — who tend to be younger than the Chinese population as a whole — one major reason for resistance is that as the aged occupy positions for a longer time, the young will struggle even more to find jobs. (Via Bigstockphoto)

The same goal could be achieved less obtrusively by delaying the retirement age. Later retirement means that people pay for the fund for more years and receive benefits for fewer. According to Zheng Bingwen, president of the Social Security Research Center of Chinese Social Sciences Academy, one-year delay of retirement will bring an extra four billion RMB to the social pension fund and lessen the burden of payments by 16 billion.

According to the Economic Reference Daily (@经济参考报), the government started to consider retirement delay as early as 2008. On March 16, 2013, Wang Xiaochu, vice minister of the Ministry of Human Resources and Social Security, made it clear that the Ministry was planning to delay the retirement age.

According to the sixth national census conducted in 2010, the average life expectancy for a Chinese person is now 74.83 years, while the legal age of retirement now is 60 for men and 50 for women. Within academia, a consensus has emerged that the retirement age should be elevated as life expectancy and the average number of years spent for education both increase. But scholars continue to hotly debate whether the measure should be adopted immediately.

On Sina Weibo, China’s Twitter, Web users seem to say “Nay” rather unanimously. For netizens — who tend to be younger than the Chinese population as a whole — one major reason for resistance is that as the aged occupy positions for a longer time, the young will struggle even more to find jobs. One widely-shared online joke encapsulates this sentiment:

In the future, China will probably be like this: the young wander in parks or sit in bars every day because they can’t find jobs. The old are forced to work and not allowed to retire. Every morning, the grandma will say to her grandson: ‘Look after your grandpa on his way going to work before you go play.’

On the other hand, older workers, with their productivity in decline, would be the first to suffer if employers plan to cut back. With China’s unemployment insurance system still incomplete, retirement delay would expose workers to new social insecurity.

The real reason for dissatisfaction

But another issue lurks, and is perhaps the most powerful reason that citizens have resisted change: those who work in public sectors and other sectors financed by public expenditure are exempt from the system. Their pensions are paid for by government spending — or in other words, all taxpayers — rather than their own previous payments. Moreover, the payment standard they enjoy is much higher than that of the social pension system. According to CASS, 92.3 percent of retirees in public sectors receive monthly payments higher than 4,000 RMB (about US$647); while 75.4 percent of retirees covered by the social pension system receive monthly payments lower than 2,000 RMB (about US$323). Those in public sectors and the rest of society are living in different worlds.

Needless to say, web users are furious about this practice. @山东常东’s comment is representative. “One word to describe the dual-track system: evil. Civil servants, who do not pay anything for their pensions, can receive pensions three times as much as average people! This is both economic robbery and political discrimination.”

Moving the social pension system forward is conditioned upon elimination of the dual track. Practically speaking, the system’s financial burdens would be lessened if public servants could contribute to the social pension fund and the money spent on privileged pensions could be reoriented to subsidize the fund.

More importantly, calling off the public sector’s privilege would have symbolic significance. The existence of such bald inequality ignites feelings of relative deprivation, and promotes resentment of the public against the government. The dual track is perceived to be the root cause of the financial chaos of the social pension system, whether it actually is or not. In fact, Web users like @sj1212 have explicitly linked antipathy against retirement delay to existence of the dual-track system. “Why not tackle the system of privilege first? Why not call off the dual-track system. Why not always require ordinary workers to sacrifice their interest for policymakers who profit from policies they make? To put it simply: merging the two tracks much precede retirement delay.”Any major measure to reform the pension system – such as retirement delay – will only secure wide support when the privileged agree to forgo their vested interest.

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Yueran Zhang

Yueran Zhang is a student at Duke University, class of 2015, currently majoring in sociology and math. He spent all of his life before college in Beijing.
  • Jack

    Very interesting article. I wasn’t aware of this dual track system in China.

  • Harold Janson

    The dual-track isn’t bad at all. Public jobs pay nothing of note, with the appeal being the stability and grey-income potential for a few years before retirement. Believe it or not, most public employees do not benefit from corruption, have no real savings, and the pension is their reward. The system isn’t really in trouble either. Earlier retirement is better than later retirement, plain and simple. Opening up more opportunity for those who need it. That retirement money gets spent and goes right back into the system, and for mom and pops who live with their kid, that money subsidizes the family income allowing for even more financial stability. The analysts who poke at these stats lack even the most basic understanding of reality.

    • Paul Schoe

      Harold, I am surprised that you do not find the dual-track system bad.
      On average, the salaries of government officials are already higher then those in the public sector and, more importantly, the continuity of their income is more secure. Although I agree that most public employees might not have savings, they do enjoy a much more luxurious life style because on top of their higher salaries, and the security of continuity, they do not have to pay into the pension fund which makes the net difference in salary between government workers and others (so the money that people can actually receive and can spend per month) even bigger.

      All over the world people’s health increases and they live longer. It places a burden on all pension systems. The effects of the one child policy most likely compounds to this problem. To blame people who look at this problem of “lacking even the most basic understanding of reality” seems hardly useful when we are heading for uncharted areas that can result in massive pension problems when people and government are insufficiently prepared.

  • etudiant

    Seems the Chinese copied the US system, where the Federal Government and the military are on separate pension systems from the rest of the country.

    This allows early retiring participants in those plans to earn a second pension and Social Security by taking a job in the private sector after they retire from government service.

    I’m surprised the entrepreneurial Chinese leadership cadres have not yet exploited this opportunity.