Commentary: How to Put China’s Pensions on Firmer Ground

China has prioritized boosting household consumption as part of its strategy to expand domestic demand and stabilize economic growth. To address the issue of insufficient consumption, core challenges such as spending power (income), willingness to spend (social security), quality of supply (supply system), and time constraints (vacation system) need resolution, with social security—including pensions—playing a major role [para. 1].

China’s basic pension insurance system, built over more than 70 years, consists of three pillars: state-led basic pension insurance (Urban Employee Basic Pension Insurance and Urban and Rural Resident Basic Pension Insurance), enterprise/occupational annuities, and individual/commercial pension plans. The system has achieved 95% coverage among those aged 16 and above, with 1.07 billion people enrolled as of the end of 2024, fulfilling the 14th Five-Year Plan ahead of schedule [para. 3][para. 4]. Of these, 534 million are urban employee participants and 538 million are urban/rural residents [para. 4]. Pension benefit levels have increased annually, with urban employee pensions rising for 20 consecutive years and urban/rural resident pensions up 1.6 times in the past decade [para. 5].

However, major disparities exist between the urban employee and urban/rural resident schemes in terms of covered populations, funding mechanisms, and institutional logic. Urban employee insurance—covering all urban employees—relies on employer and individual contributions, with benefits tied to contribution history. The contribution rate is nominally 24%, split between employers (16%) and employees (8%) [para. 6]. In contrast, urban/rural resident insurance, mainly for informal workers and rural populations, operates primarily on fiscal subsidies rather than contributions due to the low and unstable incomes of this group; about 82% of expenditure is covered by government funding [para. 7][para. 9].

Serious challenges persist in both adequacy and equity of benefits. The average monthly pension for urban/rural residents in 2024 was just 246 yuan, far below the rural minimum living standard of 594 yuan, making it hard to meet basic needs [para. 14]. The urban employee pension replacement rate fell to 52% in 2024, below the International Labour Organization’s recommended minimum of 55%—let alone the World Bank benchmark of 70% [para. 15]. Disparity is also evident in subsidy and benefit levels: government employees receive monthly pensions (6,243 yuan) that are 28 times that of urban/rural residents, and per capita fiscal subsidies for pensions are 12 times higher for government retirees than for urban/rural residents [para. 16][para. 17].

Sustainability is another critical issue. Pension fund contributions routinely fall short of expenditures, necessitating rising fiscal subsidies—from 1.2 trillion yuan in 2018 to 1.8 trillion yuan in 2023, now accounting for over a quarter of all pension expenditure [para. 24]. Contributing factors include a low effective contribution rate (due to underreported wages and policy flexibility), historical transition costs for workers not previously contributing under the new system, and accelerating population aging—by late 2024, 310 million people, or 22% of China’s population, were over 60 years old, with declining births further straining the system [para. 26][para. 27][para. 30][para. 31].

Progress toward national pooling of pension funds—centralizing contribution collection and benefit payments under the central government—remains incomplete. Urban employee insurance has reached provincial pooling; urban/rural resident insurance remains at city or county levels in some areas. National pooling is needed to address regional imbalances from labor migration and align central-local fiscal responsibilities, but so far, only a transitional “central adjustment system” exists [para. 34][para. 35][para. 36][para. 37][para. 38].

To address these issues, several policy recommendations are proposed: 1) Coordinate reforms linking state assets, finance, and social security to increase urban/rural resident pension benefits to at least the subsistence level using state-owned capital profits [para. 40][para. 41][para. 42]; 2) Narrow and eventually equalize fiscal subsidy standards between different groups, with benefits mainly reflecting contribution levels [para. 43][para. 44][para. 45]; 3) Lower nominal contribution rates and standardize reporting for urban employee insurance to stabilize the contribution base while preserving system sustainability [para. 46]; 4) Establish national pooling with a clear timetable for a centrally managed collection and payment system [para. 47]. These reforms aim to create a fairer, more unified, and sustainable pension system for China [para. 49].