How to fix China's pension system

Updated: 2013-08-01 13:10

By Michael Barris in New York (China Daily)

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China must increase its work force by easing family-planning restrictions and raising the retirement age for women to avoid putting pressure on its pension system and causing "a drag on economic growth", according to a new report.

Written by Robert Pozen, a Harvard Business School lecturer and former member of a Social Security-reform committee established by US President George W. Bush, the report also urges centralizing the pension system by moving pension administration out of local governments, embracing pre-funded pensions and creating more long-term investment vehicles.

China is making "great strides" in expanding pension coverage for its population but needs to tackle four main challenges to improve its pension system, Pozen told China Daily in an interview. the report, released on Tuesday, identifies the challenges as a rapidly aging population, system fragmentation, a lack of funding, and low investment return.

The report was issued by the Paulson Institute, a non-partisan institution at the University of Chicago that promotes sustainable economic growth and a cleaner environment around the world. It was established in 2011 by Henry M. Paulson Jr, a former US secretary of the Treasury and chairman and chief executive of investment bank Goldman Sachs Group Inc.

"It is critical for China to address its pension challenges as soon as possible because they will exert enormous pressures on the government's , scal capacity and put a drag on economic growth," the report said.

While Pozen called the report's recommendations "very implementable", he said turning them into official policy will require "a degree of political will".

As China has grown into the world's second-largest economy, , guring out how to prevent the combination of its aging population and shrinking workforce from straining its government-funded pension system has become a major issue.

Under current projections, the percentage of the Chinese population aged 65 or older will double by the early 2030. By 2050, there will be fewer than 1.6 workers for every retiree in China, the report said.

The longevity of China's citizens also is seen putting pressure on children caring for elderly parents and grandparents. As the government's population-control policy generally restricts urban couples to only one child, that child someday will have to take care of as many as two parents and four grandparents, according to the report.

To increase the working portion of the population, the report urges China to repeal or ease the one-child policy.

The report calls the policy "outdated," given that it was instituted in 1980 when China's population was nearing 1 billion and studies showed the nation's resources could only support 700 million, "making population control an urgent issue."

'China certainly (today) has the , nancial resources to support its current population," the report said.

Signaling that the central government might be reconsidering the policy, the National Health and Family Planning Commission, which enforces the one-child policy, was recently merged into the Ministry of Health.

Last November, outgoing President Hu Jintao deleted a reference to maintaining a low birth rate in a work report to the 18th Congress of the Chinese Communist Party.

The report also recommended that China expand its workforce by raising the retirement age for women to 60, matching that of men. "Since women have become an integral part of the Chinese workforce, the government should equalize the retirement ages for both sexes," the report said.

The nation's retirement ages have been in effect since the 1950s, when the life expectancy at birth was about 45 years, the report said. But life expectancy at birth has since climbed to 73.5 years, making the low retirement ages "unsustainable and anachronistic', the report said.

The report said China's pension system has been undermined by fragmentation into sub-systems such as the urban enterprise pension system, mostly for urban employees at large businesses, the rural pension plan for rural workers and another, smaller pension plan for non-employed urban residents.

"There are signi, cant administrative hurdles" in transferring accrued benefits when an individual moves from one city to another, the report said.

Since there is no centralized record-keeping system and each jurisdiction has its own rules with respect to matters such as eligibility, fragmentation "could dissuade an individual from moving to obtain better employment," the report suggested. In the interview, Pozen said China would benefit from studying the US Social Security system, "where everyone can work wherever they want and be within the system".

The report also notes that "most local governments in China' have found that employer contributions - known as social pooling - where the employer contributes 20 percent of the individual's wages and the individual 8 percent - "are insuC cient to pay current bene, ts", including legacy pensions from before the UEPS was introduced in 1997.

Estimates of shortfalls in individual accounts range as high as 90 percent, the report said. This prevalence of socalled "empty accounts" has "undermined the trust of Chinese workers in the pension system", according to the report.

"Many workers doubt whether they will ultimately receive any of the contributions from their individual accounts, let alone their contributions plus interest as promised by the government," the report said.

Pozen, a former chairman of MFS Investment Management, was a member of Bush's Commission to Strengthen Social Security in 2001 and 2002. the following year he served as secretary of economic aE airs for Massachusetts Governor Mitt Romney.

(China Daily USA 08/01/2013 page2)