Causes refers to the urban employee’s at large corporations










behind Intentions of Raising retirement age














Table of Contents                                                                                                                                                           

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

1.            Unfavorable Demographics                                                                                                                        3

2.            Excessive Fragmentation:                                                                                                                            3

3.            Insufficient Funding:                                                                                                                                      4

4.            Limited Investment Choices:                                                                                                                        5

Bibliography                                                                                                                                                                      7





















The Chinese pension system as constituted currently
faces an ample number of challenges that will influence the present
arrangements unsustainable in the future.



China has been experiencing
a “demographic dividend”- whereby an economy is boosted by a change in the
aging structure of the country which is mainly due to low fertility and
mortality rates. In other words, China has a larger workforce and few retirees.
It has allowed the country to finance pension benefits to the retirees from its
current pension contribution for a long time. However, this situation will cease
once the population ages.

The ‘one child’ policy
opted by China is now clearly outdated: as China has to support its current
population through its own financial resources. The existence of one-child
policy will worsen the underlying challenges faced in the demographics in terms
of providing pension fund benefits to the population.

The increase in the
retirement age of the retirees is another means of increasing older workforce. The
current retirement age for urban workers is 55 for men, managerial or technical
women and 50 for the rest of the population. These retirement ages have been in
effect since 1950s where the life expectancy was 45 years at birth. In the
recent years, the life expectancy has risen up to 73.5 years which renders
these low retirement ages unsustainable in future. It is to be noted, that the
retirement age in China is relatively lower by international standards. The
retirement age as per Organization of Economic Cooperation and Development
(OECD) is 64 for men and 63 for women.



The pensions system in China is largely
occupied by UEPS, which is explained as the benefits attained outside the
service for the working population. It mainly refers to the urban employee’s at
large corporations inclusive of all foreign, private firms and SOEs. Recently,
the central government has introduced two voluntary pension systems; one for
rural workers and another for the non-employed urban residents. There is a high
level of fragmentation within UEPS, where each part is financed by the local
city or provincial government with varying rules. This is a major hindrance in
leading to lower labor mobility in China.


The division of pension systems
into two subsystems as mentioned above has resulted in fragmentation within the
population along with the government decision involved in the implementation of
policy. In 1990s, it would have been very difficult to implement UEPs to the
rural areas in terms of economic and administrative factors involved.
Therefore, the decision to limit the pension pooling at local level seemed to
be least disruptive and burdensome on the central government.


The trend of internal migration
increased in China when the UEPS was under formulation in the early 90s, therefore
the less focus was given towards the migration of population within the
provinces or within the same province. In any event, the central government has
now decided to accelerate migration from rural to urban areas without
undertaking major hukou reforms.


The centralization of the pension
system is another option. In the recent times, the government has provided more
focus towards the labor mobility and pension fragmentation. In 2009, State
Council issued guidelines for the workers within UEPs that intend to move
between the cities, it was clarified that the workers will have the right to
transfer both components of their pension – accrued social benefits and
accumulation in the individual accounts. However, as mentioned above these
workers face drastic hurdles to transfer their pension benefits. In addition to
the scenario above there has been a drop of 20% in pension contributions by the
employers. Therefore, it is important for the government to take initiatives to
standardize the current pension systems and take control of UEPS. The
government should establish a nationwide database for urban workers which could
be the first step in reforming the national pension system.

In order to harmonize
the various pension plans for more sustainable future, the various components
of the pension systems, the UEPS as well as the segmentation within the same
pension system should be unified. The eligibility rules and benefit levels
should be as uniform as possible in their legal interpretation and application
across the country. In reality, this reform will be decades away. The central
government should allow the benefits to vary as per the average cost of living
per person. By reducing disparities among pension programs will be helpful in
removing barriers in labor mobility and will be helpful to China’s large group
of temporary migrant workers, which is estimated to be 150 to 260 million
people out of which many people have opted out of participating in the UEPS by
the virtue of holding hukou.


The UEPS is funding by employer and
employee contributions. The employer is entitled to contribute a 20% of an
individual wages while on the other hand an employee individually contributes a
total of 8% of its earnings. These employer contributions forms a major part of
local funding and constitutes as a part of a pay-as-you-go (PAYGO) defined
benefit plan whereby upon retirement, the employee becomes entitled to a
monthly distribution of the amount from the contribution scheme based on an
annuity factor of 139 months.


The UEPS largely operates on PAYGO
schemes and an individually is benefited from these schemes substantially over
retirement. As the population ages, the PAYGO schemes will be unsustainable as
the contributions will be diminished over time. If the pension schemes are
regulated by the government, it will be more beneficial over time if the
contributions will be invested and accumulated over the years to fund the
future benefits.


The central government should
consider a move towards partial pre – funding of the UEPS for workers. It can
be categorized in three segments as follows:


Workers starting after a given date and
before 13th five year plan period (2016 – 2020) using 2017 for
illustrative purposes – their pensions would be fully funded. The employer
contributions will be set aside and invested in a manner to pay scheduled
benefits in future.

The pensions will be partially funded
for the existing workforce. The benefits accrued prior to the starting date,
say in 2017, would be paid out of future revenue upon the worker’s retirement.
But beginning in 2017, the employers’ social pooling contributions would be set
aside and invested to pay the benefits that accrue after 2017.

The central government should introduce
a new law, stating that after 2017, the contributions by new and existing
workforce in their pension schemes cannot be burrowed or used for any other
purpose other than the funding of an individual account.

The government should
also make efforts to complete actual funding of individual accounts. The above
mentioned three way proposal would involve very high transitional costs. The
benefits attained by the retirees are paid from the current pensions
contributions would be required to be financed by some other means. Pre-2017,
employees that retire would be paid a portion of their pensions in advance and
the remaining will be finance by another means. On the other hand, there have
been no rough calculations of the cost of implementing changes in the pension
plans. However, it can be noted that as a rough approximation, it may likely
involve trillion dollars to implement this scheme. These transition cost for
pensions must be considered in relation to China’s fiscal policy.

Investment Choices:


The funds from an individual
contributions account should be invested to buy the Chinese government bonds or
as a fixed deposit in banks at a very low interest rate as an alternative
option. The interest rates are repressed by the Chinese government due to
policy regulations as a result of which these investments yield a lower return.
In comparison, to average career salary the retirement benefits acquired by
this investment is relatively lower.


The capital market in China is
underdeveloped despite its modernization and economic growth. This can analyzed
in terms of understanding the investment options in China, which are limited
due to the volatile environment. As discussed above, the interest rates in
China do not fluctuate with the inflation rates and therefore it yields
negative returns. This volatility in the Chinese stock market has restricted
multinationals or international corporations to invest in Chinese retirement
plans (See box). This concept can also be explained by knowing that the Chinese
market is regulated more by the rumors than by economic speculations.


To create a more sustainable
environment, China should consider opting for long term investment plans for
its potential investors in the market. The reforms could include; The National
Social Security Fund should invest pension assets to provide sufficient
retirement income without imposing high contribution requirements. After 2017,
the Chinese government should consider segregating the pension contributions in
two pools i.e. at the national level (one for each employee and employer
contribution) and by appointing a National Social Security Fund (NSSF) as the
chief officer to monitor these pools with a main objective of achieving higher
returns on investments in relation to the risk of the investment.


China must also consider developing
a second pillar of its retirement savings i.e. the tax subsidized savings for
individuals through employer sponsored plans. This can be established in terms
of Enterprise Annuity; the contributions by employer on behalf of employees.
These schemes should be encouraged by government by providing tax subsidies for
the employers. This can result in an effective regulation of pension programs.









Under the new Rural Pensions, the normal retirement
age is 60 for both men and women.

Population Prospects: The 2012 Revisions,”2013, United Nations, Department of
Economic and Social Affairs, Population Division, Population Estimates and
Projection Section, accessed at

The average is unweighted. See “Statistics on
Average Effective Age and Official Age of Retirement in OECD Countries,” OECD,
accessed at

Chan, Kam Wing, “China, Internal Migration,”
Immanuel Ness and Peter Bellwood (eds.), The Encyclopedia of Global Human
Migration, Blackwell Publishing, February 2013, accessed at

Ian, “China’s Great Uprooting: Moving 200 Million into Cities,” New York
Times, June 15, 2013, accessed at

Council Interim Provisions on Portability of Pension Benefits of The Urban
Enterprise Pension System,” State Council, December 2009, accessed at


with Stuart Leckie, July 2013.


an effort to raise pension benefits for lower income individuals, the
government already subsidizes each participant’s annual contribution, and then,
at retirement, provides an additional 660 yuan per year to participants in the
new pension programs for rural workers and non-employed urban residents. See
Zuo Xuejin, “Designing Fiscally Sustainable and Equitable Pension Systems in
China,” presentation at IMF OAP/FAD Conference, Tokyo, January 9-10, 2013,
accessed at


Kam Wing, “China: Internal Migration,” Immanuel Ness and Peter Bellwood (eds.),
The Encyclopedia of Global Human Migration, Blackwell Publishing,
February 4, 2013. See also Zhu Jianhong, “2012 National Migrant Workers Survey
Report: Migrant Workers Total 269 Million,” People’s Daily, May 26,
2013, accessed at


also Song, Sophie, “China Now Has More Than 260 Million Migrant Workers Whose
Average Monthly Salary Is 2,290 Yuan ($374.09),” International Business
Times, May 28, 2013, accessed at


28 percent in total contributions is paid only on wages up to three times the
city average. For example, if the average wage in Shanghai were 2,700 yuan
($440) per year, the 28 percent would be paid only on the first 8,100 yuan
($1,320) of an employee’s wages.