Think Tank Warns of Impending Chinese Pension Dilemma

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A new report from one of the China’s leading think tanks warns that the country’s pension system could soon run aground due to demographic shifts, prompting the central government to flag an expansion in the investment scope of aged care funds.

The “China Aged Care Fund Actuarial Report (2018 – 2022)” (中国养老金精算报告2018~2022) released by the Chinese Academy of Social Sciences World Social Welfare Research Centre on 3 January, indicates that aged care insurance funds are seeing a slew of problems as a result of factors including the accelerated ageing of the Chinese population, slower economic growth as well as supply-side structural reforms.

Those problems include easing growth in aged care insurance fund revenues, accelerated growth in expenditures, as well as the risk of fund depletion in certain regions.

When it comes to Chinese urban enterprises, the report indicates one out of every five people do not pay for basic endowment insurance, while by 2022 this figure is expected to rise to one in every four people.

In 2018 China has over two fee payers on average to support one retiree, yet by 2022 the number of fee payers for each retiree is set fall to under two.

Consequently the report claims that China’s basic endowment insurance funds may soon not generate enough revenue to support expenditures if fiscal subsidies are excluded, a trend which is likely to worsen with time.

“Our country’s basic endowment insurance has grown at a rate of over 10% for the past ten years, yet in the next five years the growth rate will be under 5%, said Fang Lianquan (房连泉), chief secretary of the China Academy of Social Sciences World Social Welfare Research Centre.

According to Fang the reason for this is the mandating of full coverage when it comes to basic endowment insurance, yet easing growth in participation due to the emergence of new work conditions in China such as flexible employment.

“Growth in aged care funds could fall from between 10 – 20% to under 10% in the next five years, as the pace of expansion declines while growth in wages also slows.

The report also highlights increasing regional disparities in the performance of China’s pension funds, with the funds of some provinces on the verge of bankruptcy.

“The disparity in the total fund balance for the provinces is even more pronounced, and structural contradictions are becoming more evidence,” said Fang. “In cities and provinces such as Guangdong and Beijing the size of funds continues to increase, while in the provinces of the north-east and the north-west the risk of balance exhaustion has increased.”

In order to address this risk, the report proposes the establishment of a central fund which will appropriately supplement basic endowment insurance funds when necessary, as well as the linking of the payment levels, payment terms ands full career salary earnings of insurers, and the establishment of indexed adjustment mechanisms for post-retirement pensions.

The report also advocates the adjustment of pension fund revenues and expenditures when appropriate, based on population and socio-economic shifts.

Tang Xiaoli (汤晓莉), vice-head of the social insurance fund department of the Ministry of Human Resources and Social Security’s  said at the launch of the audit report that easing growth in earnings in tandem with accelerated growth in expenditures would be increasing pressure on pension funds, and that the best means for ensuring the sustainable development of the system would be to “expand sources and economise flows.”

With respect to “expanding sources” Tang said that a key measure would be improving and expanding the investment operations of Chinese pension funds – a trend that Beijing has driven over the past several years.

In 2015 the State Council issued the “Basic Aged Care Insurance Fund Investment Measures” (基本养老保险基金投资管理办法) which called for the “marketisation ” of state pension funds and the pluralisation of investment principles.

In 2016 China’s state pension funds launched new investment operations, with 9 provinces executing contracts with the National Council for Social Security to entrust a total investment sum of 430 billion yuan.

The National Council for Society Security adopted “prudential investment principles” for the inaugural year of entrusted investment, and did not invest large sums in the Chinese stock market.

Four more provinces, including Gansu, Jiangsu, Tibet and Zhejiang have also decided to outsource their pension fund investments, for a projected total increase of around 150 billion yuan.





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