China's pension system faces major
reform By April Cai
GUANGZHOU - China is beginning a reform of
its pension system to overcome an expected
shortfall in retirement payments. Under the new
scheme, all businesses in the country, including
foreign-invested ones, will have to increase their
contributions to pension funds for employees.
The government hopes the reform will solve
the problem of a ballooning deficit in the
nation's retirement system. If the current pension
system remains unchanged, and as the population
grows older, China's pension funds will begin to
have a deficit in next few years, which could
snowball into trillions of yuan by 2040.
Zheng Silin, former minister of labor and
social security, recently
warned
that the national pension funds could be short 2.5
trillion yuan (about US$313 billion at current
exchange rates) over the next two decades if
nothing is done now.
It is compulsory
under the current system for an employee to set up
a special account, called an individual pension
account, into which both the employee and his or
her employer have to make a monthly contribution.
The amount varies in different regions. The
employee cannot withdraw any money from the
account until he retires. Upon retirement, he
receives a monthly stipend from the account.
The crux of the reform, launched under the
supervision of the Ministry of Labor and Social
Security (MLSS), involves setting up community
pension funds. Instead of going into employees'
individual accounts, employer contributions will
go to these community funds set up in regions
where their businesses are located.
Employees will still have to pay a certain
percentage of their monthly salaries into their
individual pension accounts, but the community
pension funds will pay for all of pensioners'
basic retirement salaries. It is hoped that this
would help ease the deficit in the current pension
funds.
Under the present system, 11% of an
employee's salary goes into his personal
retirement account. Of that, 8% comes from the
employee himself and the rest directly from the
company. Under the reform proposal, the employer's
contribution - 3% - will go directly into the
community pension funds. The individual funds will
be maintained by the employees alone.
Analysts say that while workers who are
already retired may immediately benefit from the
new scheme, those employers and employees who are
still working may have to contribute more to make
both ends of the pension funds meet in the future.
In Shenzhen, under the new policy, workers
will have to pay 8% of their wages, instead of the
previous 5%, to their individual pension accounts.
And employers will have to pay 10% of their
employees' wages to the community pension funds.
Currently, employers in Shenzhen pay only 6% of
their workers' salaries to the employees'
individual pension accounts and 2% to the
community pension funds.
Shenzhen is a
special economic zone, so taxes and other extra
costs of doing business are much lower than in
other Chinese cities. In Shanghai and many other
cities, employers may have to pay 20% or more of
their employees' salaries to the pension funds and
workers 8%, much more than their Shenzhen
counterparts. Similarly, all the employers'
contributions will go to the community pension
funds after the reform.
"Shenzhen is a
young city, without very many senior citizens. So
Shenzhen employers can pay less to afford the
retirement payment," said a consultant with the
city's labor and social-security authority.
Officials hail the move to reallocate
employers' contributions as a much-needed step
toward fixing China's problematic pension system.
The amendment to the pension-fund regulation will
ensure that individual accounts have adequate
deposits, said Du Bin, vice director of the
Shenzhen Social Security Center.
A large
number of current retirees who began work before
the pension scheme was introduced in 1997 have to
depend on the state to contribute to their pension
accounts. As a result, some less developed
provinces have been transferring money from
younger and middle-aged workers' individual
accounts to pay for current retirees' pensions,
causing a huge shortfall in individual pension
accounts. Government officials told the China
Daily last year that about 600 billion yuan from
the accounts of today's workers has been used to
pay current retirees' pensions.
Since the
1990s, China has gradually abandoned the
cradle-to-grave welfare provided by the state,
which in fact was paid by the working population.
Before then, work units provided people with
housing, medical care, kindergarten education and,
ultimately, a retirement stipend. Replacing it is
a new system that combines mutual-help social
pensions with individual retirement accounts.
While current retirees don't have to worry
about getting their pension, it is widely
suspected that 20 years down the road, retirees
will not get their promised pensions.
Because of the one-child policy and with
more people living longer, the aging segment is
claiming an ever larger proportion of the
population. This means that fewer workers support
more pensioners. Today the official retirement age
for men is 60, for women 55. China has 134 million
people aged 60 or older, accounting for 10% of the
total population. By 2050, it is estimated that
one in three Chinese will have reached retirement
age.
Now China has three main ways of
obtaining social-security funds: through
government allocation, welfare lotteries, and
investment funds. The government-managed funds
have a low yearly yield of 3-4%. The Ministry of
Finance, MLSS, and the People's Bank of China have
approved investing pension funds overseas
beginning May 1. The National Council for Social
Security Fund is currently recruiting candidates
to manage overseas funds. Corporations that have
at least six years' asset management experience
and have managed assets of not less than $5
billion qualify.
Across China now, only
170 million urban workers have taken part in the
pension scheme, accounting for less than 15% of
the population.
April Cai is a
freelance writer based in Guangzhou.
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