What's the Next Step in Pension Reform? (AI Translation)

【周刊提前读】养老保险近忧远虑：改革下一步怎么办？

After 30 years of exploration, China’s pension insurance system faces critical reforms at a crossroads. Historically, government employees did not contribute to pension insurance, relying on fiscal subsidies, creating disparities with corporate employees, whose pensions were much lower [para. 1]. In 2014, the average monthly pension for government retirees was RMB 2,741.5 versus RMB 2,063.9 for corporate retirees, but by 2022, the gap increased to RMB 6,099.8 and RMB 3,148.6, respectively [para. 2][para. 3].

Another significant liability is the transition to the "combined accounting" system. Early employees, who hadn't fully contributed, left trillions in empty accounts when personal account funds were misappropriated by local governments. Although attempts to solidify accounts failed, discussions on financial emptiness and scale of accounts continue, adding uncertainty to reforms [para. 4][para. 5].

China’s demographic shift accelerated with its first negative population growth in 61 years in 2022, marking a higher elderly dependency ratio. Predictions for 2050 indicate an increase from 2.65 working individuals per retiree in 2019 to just 1.03 [para. 6][para. 7]. This shift pressures the current pay-as-you-go pension system, with academia predicting that the enterprise employee pension fund might be exhausted in about a decade [para. 7].

At the inaugural "China Pension Industry Forum" in April 2024, former Finance Minister Lou Jiwei mentioned the significant challenges in improving the sustainability of the corporate pension insurance system [para. 12]. He proposed feasible reforms like delayed retirement and developing corporate annuities and personal pensions [para. 13]. Policymakers have suggested two main approaches: altering policy parameters such as retirement age and payment years or expanding individual account funds [para. 14][para. 15].

Zhou Xiaochuan, Vice Chairman of the Boao Forum, proposed expanding individual accounts as a long-term fundamental reform [para. 14][para. 17]. Historical disparities also need addressing, with the urban-rural pension gap signifying another dimension of conflict in the system [para. 21]. In 2022, urban and rural residents received an average monthly pension of RMB 204.7 compared to corporate employees’ RMB 3,148.6, showing an enduring disparity since the 2014 reforms [para. 24][para. 26].

Local practices, like Henan's minimum basic pension example, illustrate continued urban-rural disparities. Fiscal policies reflecting subsidies reveal 2022 figures showing government employees receiving significantly more support than urban-rural residents [para. 30][para. 32]. Proposals to align benefits between government/public institutions and enterprises include the mandatory occupational pension for the former, whereas enterprise annuities remain less widely adopted [para. 34][para. 36].

Sustainability issues and budget deficits pose ongoing challenges. "Historical debts" and balancing pension funds in face of an aging population remain critical concerns [para. 47]. Academic discussions highlight the National Council for Social Security Fund's role, expected to peak at RMB 6.99 trillion by 2027 but run out by 2035 [para. 58][para. 60]. Some view notional accounts, advocated by Zhou and Zheng, as a way to enhance personal motivation and fund sustainability by aligning contributions with benefits [para. 83][para. 84].

Notable reforms include potentially extending the retirement age and increasing contribution periods. The urgent necessity of delayed retirement stands out, considering that China's current retirement age lags behind those of developed countries [para. 78]. Implementing reforms smoothly via "gradual" and "flexible" approaches offers a way forward, yet the process entails overcoming social resistance and ensuring sufficient preparatory time [para. 87][para. 91].

Future projections envision raising the retirement age to 65 and extending minimum contribution periods, borrowing successful practices like Germany’s phased increase [para. 99]. Strengthening the system’s motivational mechanism is essential, illustrated by Zhou's "one-to-one matching" proposal where contributions enhance individual accounts [para. 104][para. 105]. Improving transparency and recalibrating parameters to incentivize longer contributions can ensure sustainability amidst demographic changes [para. 132][para. 134].