China's Pension Funds Face Rising Risk

Government plans to increase retirement age after cutting company contributions.
An analysis by Michael Lelyveld
China's Pension Funds Face Rising Risk Elderly people sit in a street during morning rush hour in Beijing, China, November 3, 2020.

China is facing major strains in its pension system after tapping social security funds to stimulate the economy for the past two years.

On Feb. 26, China's minister of human resources and social security, Zhang Jinan, said the government had paid all of its old-age pensions "on time and in full" last year with increases for 120 million retirees despite concerns about deficits and contribution cuts, the official Xinhua news agency reported.

Public concerns have been rising since a 2019 report by the ministry and the Chinese Academy for Social Sciences (CASS) warned that the pension fund for urban workers would start running deficits in 2028 and become insolvent by 2035, largely due to demographic trends.

China's over-60 population is projected to rise from 254 million in 2019 to 300 million in 2025, according to the Ministry of Civil Affairs, while a declining number of younger workers will be paying into the social security funds.

The forecasts have become a potential source of social instability because younger workers bear the financial burden of supporting the pension funds, as well as the risk that the funds will run out before they retire.

On Feb. 26, President Xi Jinping cited the need to improve the social security system at a Politburo study session of the Communist Party Central Committee, Xinhua said.

"Social security is the most imminent and realistic issue the people care about," said Xi, raising expectations of major changes in the 2021-2025 period of the 14th Five-Year Plan.

"Although China has basically established a fully functional social security system ..., the country still needs to ... make practical improvements on the weak links of the system, as the principal contradiction in Chinese society has evolved," Xi said.

In its outline of the five-year plan, the National Development and Reform Commission (NDRC) promised to "increase social security efforts."

"We will refine the national unified platform for social insurance public services, bring basic old-age insurance funds under national unified management, and develop a multi- tiered, multi-pillar old-age insurance system," the government's top planning agency said.

Earlier this week, Bloomberg News reported that banking regulators are considering a plan that could form one of the pillars.

The plan calls for creating a national pension company with state-owned banks and insurers as shareholders, Bloomberg said, but details have yet to be worked out.

Demographic fallout

The pressures on pension funding from China's discredited one-child policy are expected to play out over the next decade.

"From now up till 2030, people aged above 55 will increase by 124 million ... (while) people aged below 35 will decline by 46 million as a result of population aging," said Robin Xing, Morgan Stanley chief China economist, in a report by China Global Television Network (CGTN).

The retirement age for men is 60. Women in the blue-collar workforce retire at 50, or 55 for white-collar workers, Xinhua said.

China's main pension fund has already been running an annual deficit of 730 billion yuan (U.S. $113 billion), according to the CGTN report.

The strain on the system comes despite a government decision in 2017 to pump up reserves by ordering China's state-owned enterprises (SOEs) to transfer 10 percent of their shares to the national pension fund.

In January, the Ministry of Finance said the transfers from the centrally-administered SOEs had been completed. The value of the shares in the 93 big companies was estimated at 1.68 trillion (U.S. 260 billion), the State-Owned Assets Supervision and Administration Commission (SASAC) said.

But the transfers may be little more than a paper shuffle.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, has described the assets as "clearly not liquid" and unlikely to generate cash to pay benefits.

The government has added strains to the system by allowing enterprises to reduce their contributions to social security funds since 2019 as part of its plan to ease "corporate burdens," boost profits and stimulate the economy.

The plan predated the COVID-19 crisis, which dealt a further blow to social security contributions.

As part of its campaign to rescue the economy by easing corporate costs, the government raised its tax and fee cuts from 2 trillion yuan (U.S. $308 billion) in 2019 to 2.6 trillion yuan (U.S. $400 billion) last year.

Based on the numbers cited by Zhang at his press conference last month, the reduction in employers' social insurance contributions accounted for nearly 60 percent of the government's tax and fee cuts last year.

Reduced payments

Over half of the cuts came from reduced payments to old- age pension funds.

The reported balance of 4.7 trillion yuan (U.S. $723 billion) in the pension fund appears to have fallen by 6 percent in less than two years.

The condition of the fund could be considerably worse if the SOE shares have been overvalued.

One implication of the share transfers is that the pension fund will be a major stakeholder in SOEs, but with no influence over their activities.

"The transfer does not change (the) state firms' management as the pension fund will be a long-term financial investor, only enjoying stock dividend and not interfering in operations," Du Tianjia, a SASAC research official, told CGTN.

The government is working on plans to reduce underfunding, but all appear to face problems.

One 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 English- language China Daily reported.

Merging the funds from lower levels of government would allow financial support to flow from regions with younger populations to older ones that have relied on government bailouts, the paper said.

Unification at the provincial level from funds run by cities and lower-level authorities has already been "widely achieved," said Lu Quan, secretary-general of the China Association of Social Security.

But the unification plan has been resisted by younger work forces in coastal regions with concerns about greater financial burdens and higher corporate contribution rates.

"They have become the biggest opposition force to a unified system," China Daily quoted Lu as saying.

An even tougher solution may be to raise the retirement thresholds.

The government has been laying the groundwork for the difficult decision, which has met with public outcries every time it comes up.

At the social security press conference on Feb. 26, You Jun, vice-minister for human resources, said the government is working on a detailed plan to raise the retirement age limits "in a gradual manner" for the 14th Five-Year Plan period.

You's comments echoed a government announcement of the gradual changes in November, citing targets for 2035, Reuters reported.

Officials have argued to no avail that China's longstanding benchmarks are lower than those for other countries including South Korea and Japan, while average life expectancy in China has risen to 77.3 years as of 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 ages "will both draw on international experiences and practices and fully consider China's own condition, traditions and history," Xinhua reported.

The announcement of retirement changes in November drew 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 that solutions to the underfunding problems are bound to be difficult, noting that the social security system in the United States is also facing pressure.

Last year, the Social Security Administration projected that its trust fund could be depleted by 2035, forcing it to reduce benefits unless remedial measures are taken.

"I think the ultimate solution for China, as for the U.S., will be to tap general funds. But in the meantime, there could be small fixes, like increasing the retirement age a little bit, raising taxes a little bit, etc.," said Hufbauer.

"Solutions will be painful, but I don't expect either China or the U.S. to cut pension benefits," he said.


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