China faces major strains in its pension system after dipping into social security funds to stimulate the economy over the past two years.
On February 26, China’s Human Resources and Social Security Minister Zhang Jinan said the government had paid all its old-age pensions “on time and in full” last year with increases for 120 million pensioners. despite concerns about deficits and dues. reductions, the official Xinhua news agency reported.
Public concerns have grown since a 2019 report by the ministry and the Chinese Academy of Social Sciences (CASS) warned that the urban workers’ pension fund would start running deficits in 2028 and become insolvent by 2035, largely due to demographic trends.
China’s population over 60 is expected to increase from 254 million in 2019 to 300 million in 2025, according to the Ministry of Civil Affairs, while a decreasing number of young workers will contribute to social security funds.
The forecasts have become a potential source of social instability because young workers bear the financial burden of pension fund support, as well as the risk that the funds will run out before they retire.
On Feb. 26, President Xi Jinping spoke about the need to improve the social security system at a study session of the Politburo of the Communist Party Central Committee, Xinhua reported.
“Social security is the most imminent and realistic issue on people’s minds,” Xi said, raising expectations of major changes in the 2021-2025 period of the 14th Five-Year Plan.
“Although China has basically established a fully functioning social security system (…), the country still needs to (…) make practical improvements to the weak links in the system, because the main contradiction of Chinese society has evolved,” Xi said.
In its outline of the five-year plan, the National Development and Reform Commission (NDRC) pledged to “increase efforts in social security”.
“We will refine the unified national platform for public social insurance services, place basic old-age insurance funds under unified national management, and develop a multi-tiered, multi-pillar old-age insurance system,” said the government’s main planning agency.
Earlier this week, Bloomberg News reported that banking regulators are considering a plan that could be one of the mainstays.
The plan calls for the creation of a national pension corporation with banks and public insurers as shareholders, Bloomberg said, but the details have yet to be worked out.
The pressures on pension funding from China’s discredited one-child policy are likely to be felt over the next decade.
“By 2030, people over the age of 55 will increase by 124 million (…) (while) people under the age of 35 will decrease by 46 million due to the aging of the population”, a said Robin Xing, chief China economist at Morgan Stanley, in a report by China Global Television Network (CGTN).
The retirement age for men is 60. Women in the blue-collar workforce retire at age 50, or 55 for white-collar workers, Xinhua said.
China’s main pension fund has already posted an annual deficit of 730 billion yuan ($113 billion), according to the CGTN report.
The strain on the system comes despite a government decision in 2017 to inflate reserves by ordering China’s state-owned enterprises (SOEs) to transfer 10% of their shares to the national pension fund.
In January, the Ministry of Finance declared that transfers from centrally administered state-owned enterprises had been completed. The value of shares in the 93 major companies was estimated at 1.68 trillion (260 billion U.S. dollars), the State Assets Supervision and Administration Commission (SASAC) said.
But transfers can be little more than a paper mix.
Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, described the assets as “clearly illiquid” and unlikely to generate cash to pay benefits.
The government has added constraints to the system by allowing companies to reduce their contributions to social security funds since 2019 as part of its plan to ease “business burdens”, boost profits and stimulate the economy.
The plan predates the COVID-19 crisis, which dealt a further blow to payroll taxes.
As part of its campaign to save the economy by easing business costs, the government increased its tax and fee cuts from 2 trillion yuan ($308 billion) in 2019 to 2.6 trillion yuan. ($400 billion) last year.
Based on figures cited by Zhang at his press conference last month, cuts in employers’ social insurance contributions accounted for nearly 60 percent of government tax and fee cuts last year.
More than half of the cuts came from cuts in payments to pension funds.
The reported balance of 4.7 trillion yuan ($723 billion) in the pension fund appears to have fallen 6% in less than two years.
The state of the fund could be considerably worse if the shares of public companies have been overvalued.
One of the implications of share transfers is that the pension fund will be a major player in public companies, but without influence on their activities.
“The transfer does not change (the) management of state-owned enterprises because the pension fund will be a long-term financial investor, benefiting only from a stock dividend and not interfering in operations,” said Du Tianjia, a SASAC research manager at CGTN.
The government is working on plans to reduce underfunding, but all seem to be having problems.
A clear task is to unify the country’s pension funds into a comprehensive national system by 2025, as announced by the Central Committee last year, the official China Daily reported in English.
Merging funds from lower levels of government would allow financial support to shift from areas with younger populations to older areas that have relied on government bailouts, according to the newspaper.
Unification at the provincial level from funds managed by cities and lower-level authorities has already been “largely achieved”, said Lu Quan, secretary general of the China Social Security Association.
But the unification plan has met with resistance from the younger workforce in coastal regions, concerned about heavier financial burdens and higher company contribution rates.
“They have become the biggest opposing force to a unified system,” Lu said as quoted by China Daily.
An even more difficult solution could be to raise the pension thresholds.
The government laid the groundwork for the tough decision, which has met with public outcry every time it comes up.
At the social security press conference on Feb. 26, You Jun, vice-minister of human resources, said the government was working on a detailed plan to raise the retirement age limits “gradually” for the period of the 14th five-year plan. .
You’s comments echoed a government announcement about phased changes in November, citing targets for 2035, Reuters reported.
Officials have argued to no avail that China’s long-standing benchmarks are lower than those of other countries, including South Korea and Japan, while China’s average life expectancy has risen to 77.3. years in 2019.
The average lifespan is expected to increase by one year during the 14th Five-Year Plan period, Premier Li Keqiang said in his government work report.
You said the plan to raise the retirement age “will be based on both international experiences and practices and take full account of China’s condition, traditions and history,” reported Xinhua.
The announcement of retirement changes in November sparked complaints on social media, according to Reuters.
“Delaying retirement means we have to postpone our pension,” one user wrote on Weibo. Another user said the decision “has no rationality or necessity”, Reuters reported.
In an email message, Hufbauer said solutions to underfunding problems are bound to be difficult, noting that the social security system in the United States also faces pressures.
Last year, the Social Security Administration projected that its trust fund could run out by 2035, forcing it to cut benefits unless corrective action is taken.
“I think the ultimate solution for China, as for the United States, will be to dip into the general fund. But in the meantime, there could be small solutions, like raising the retirement age a little bit, increasing a little taxes, etc.,” Hufbauer said.
“The solutions will be painful, but I don’t expect China or the United States to cut pension benefits,” he said.