Caixin Weekly | Nationwide Rollout of the Individual Pension System (AI Translation)

财新周刊｜个人养老金制度全国推广

The article discusses the recent nationwide expansion and ongoing reform of China's individual pension system, analyzing its policy enhancements, market response, product innovation, investment behavior, and the challenges that remain for further improving the system.

1. Recent Developments and Expansion: The push for individuals to open personal pension accounts has surged, driven by promotional activities from banks as the individual pension system, piloted in 36 cities over two years, extends nationwide from December 15, 2024. Now, any worker enrolled in China’s basic old-age insurance can participate and enjoy associated tax incentives. This extension includes expanding product choices (e.g., government bonds, special pension deposits, index funds) and piloting "default investment services" to assist less experienced investors, as well as easing early withdrawal restrictions (now also permitted in cases of major illness, unemployment, or low-income support)[para. 1][para. 2][para. 3][para. 4].

2. Structure of the Pension System: China’s pension system comprises three "pillars": a government-run basic pension (first pillar), employer/occupational pensions (second pillar), and individually funded personal pension accounts (third pillar). The third pillar, modeled on full individual account accumulation, is intended to supplement the state system and offer tax advantages[para. 3][para. 4].

3. Outcomes of the Pilot and Persistent Problems: By November 2024, 72.8 million people had opened personal pension accounts, but only 22% had actually deposited funds, averaging just 2,000 yuan per person, far below the 12,000 yuan annual cap. Only 62% of depositors had made investments, and the most popular products were low-risk bank savings, with public funds seeing little uptake. Only an estimated 1.47% of all participants had invested in public funds, indicating lackluster market engagement[para. 5][para. 6].

4. Expected Impacts of National Rollout: Analysts predict that the national rollout could multiply the potential participant base by 2–3 times, especially in populous or wealthier provinces like Guangdong, Zhejiang, and Shandong. Over ten years, pension wealth accumulation could surpass one trillion yuan. However, current tax incentive caps (12,000 yuan/year and the EET tax model) may not strongly motivate medium- and high-income individuals[para. 7][para. 8].

5. Tax Policy and Calls for Reform: China's current EET (exempt-exempt-taxed) model—tax-free contribution/investment but taxed on withdrawal—offers limited benefit to low- and middle-income people. Experts advocate for transitioning to an EEE (fully tax-exempt) model, dynamically adjusting tax-deductible limits, and integrating the second and third pillars for more effective wealth accumulation[para. 8][para. 9][para. 10].

6. Product and Service Innovations: Banks have updated marketing approaches, linking rewards to actual contributions. The range of available products now includes government bonds, special pension deposits, and more index funds. Still, most institutions offer similar, relatively conservative products, and many perform below expectations: nearly 70% of pension fund products have lost money since inception, with an average annualized return of -3.23%[para. 11][para. 12][para. 13][para. 14][para. 15].

7. Guidance for Investors: To help ordinary savers choose from hundreds of pension products, regulators encourage the development of "default investment services" and product recommendation lists, modeled on international practices, especially the U.S. 401(k). Some banks now propose tailored asset allocations or investment portfolios to customers based on age and risk profile[para. 16][para. 17][para. 18][para. 19][para. 20].

8. Withdrawals and Flexibility: New rules increase the flexibility to access pension funds early under certain conditions. While easing restrictions aligns with international best practice, experts warn against making withdrawals too easy, which could undermine the system's intended purpose of enforced long-term retirement savings[para. 21][para. 22][para. 23].

9. Remaining Issues and Recommendations: The gap between personal accounts’ intended and actual use, lack of product diversity, subpar investment performance, and weak tax incentives all require future reform. Suggestions include expanding institutional cooperation, providing more customized products, and better leveraging existing occupational pensions to motivate voluntary, long-term savings[para. 24][para. 25][para. 26][para. 27][para. 28][para. 29].