Cover Story: China’s Pension Plan Faces Prospect for Change or Going Bust

China's pension system for employees of state-owned and private businesses is at a crossroads, facing potential bankruptcy without significant reforms. [para. 1]

Demographic changes are exerting pressure on the system where current employee contributions pay for retirees. As the working-age population shrinks and the number of retirees grows, the burden on younger workers increases, reducing their incentive to participate in the pension scheme. A 2019 report from the Chinese Academy of Social Sciences predicts that basic pension assets for urban employees might be depleted by 2035. [para. 2]

In 2022, China's population declined for the first time in 61 years. The elderly (aged 65 and older) comprised 14.9% of the population, with a dependency ratio over 20%. The ratio of contributing workers to retirees is expected to drop from 2.65:1 in 2019 to 1.03:1 by 2050. [para. 3]

Potential solutions, discussed at a recent Caixin forum, include raising the retirement age, extending the contribution period, and encouraging contributions to private pension accounts. [para. 4] The disparity between government and enterprise pension plans is substantial, with government retirees seeing much higher pension increases and no requirement for contributions, unlike enterprise employees. [para. 5][para. 6][para. 7]

China's statutory retirement age, set when life expectancy was lower, is 50 for female workers, 55 for female managers and executives, and 60 for male employees, with a 15-year minimum contribution period. Delaying retirement could reduce the number of retirees and improve the dependency ratio to 1.53:1 by 2050, extending the pension fund's viability by seven years. [para. 10][para. 11]

Discussions on raising the retirement age have been ongoing for years, but social resistance has slowed progress. A more moderate retirement delay plan exists but remains unpublished. Changing the retirement age involves balancing population structure, labor supply, and intergenerational equity, a process which took over a decade in countries like Japan and South Korea. [para. 12][para. 13][para. 14]

A gradual delay and allowing employees to choose their retirement age are favored approaches. Experts suggest raising the retirement age to 65 by 2045 and aligning retirement ages for men and women. [para. 16][para. 19] Former central bank governor Zhou Xiaochuan warned against significantly raising the retirement age due to potential declines in physical function and productivity. [para. 20]

Experts recommend extending the minimum contribution period from the current 15 years, which is seen as outdated. Measures from the 1990s set a low contribution period to manage laid-off workers but now contribute to financial gaps as life expectancy increases. Aligning the contribution period with international standards, typically over 30 years, has been suggested. [para. 21][para. 22][para. 23]

The introduction of personal pension funds in 2022, with tax incentives for contributions, aims to address pension funding challenges. However, low contributions and investment uptake limit its effectiveness. More than 50 million personal pension accounts were set up by the end of last year, but only one-fifth had contributions by mid-2023, averaging about 2,000 yuan per account. [para. 25][para. 26][para. 27]

To boost participation, matching employer contributions like the U.S. 401K plans was suggested. Lack of transparency in the pension system also hampers participation, with retirees often unsure of their benefits. Increased transparency in pension calculations and access to real-time account balances could help individuals plan better for retirement. [para. 28][para. 35][para. 40]

Clear policy expectations are needed: a basic state-funded pension, varying incentives based on contribution periods, and options for additional personal pension products, ensuring financial security throughout one's life. [para. 44][para. 45]