Breakingviews on Twitter
Search League Tables

Saturday, 25 October 2014

To get old is not so glorious

Greying China could be left in the red

China is developing a rich country problem: old age. The number of Chinese aged 60 or over may more than double to 438 million between 2010 and 2050, according to the United Nations. That will dent China’s competiveness and worsen social strains. A higher retirement age is one idea proposed by the country’s State Council to counter a huge pension fund shortfall. It’s not popular, but there may be little choice.

Chinese pensions don’t seem high in absolute terms, but they are reasonably generous relative to salaries. An average pensioner in Beijing receives $360 a month, half of the average working wage in the city, according to official figures. To fund pensions, employees contribute 8 percent of their pay to the pension pool, and employers contribute another 20 percent. And people can retire young - women as early as age 50. That means they can easily receive their pension for more years than they work.

Perhaps not surprisingly, the system is facing a funding crisis. On a net present value basis, China’s unfunded pension liabilities for the next 70 years amount to $3 trillion, a Bank of China study reckons.

That’s still less than countries like the United States – its social security fund had unfunded 75-year obligations worth $8.6 trillion in present value as of 2011. But China is younger, and less rich. The problem is grave.

Ageing brings other problems. For every Chinese person of 60 or over, there are more than five aged between 15 to 59 years. But the support ratio is expected to fall to just two by 2040, when the first generation of China’s “little emperors” retire. The one-child policy, enforced in the late 1970s following rapid population growth in the 1950s and 1960s, coupled with longer life expectancy is skewing China’s population pyramid.

The options to defuse the demographic time bomb aren’t so different from those being considered in the West. Raising the retirement age is one, and just as in other countries such as France, the idea isn’t popular. Some 96 percent of people polled by a Guangzhou newspaper said they didn’t like the notion. Men and women should probably retire at the same age, too. And people who chose to retire early should receive lower pensions. It would help if the government stopped state-owned companies from letting employees in their 50s or even 40s “retire” as a way to push through delicate job cuts.

Raising the average retirement age by seven years will increase the working population by 25 percent and reduce the retirees’ population by 28 percent, according to Deutsche Bank. The change may bring down the annual pension payout gap down to 10 percent of GDP from 20 percent, assuming no other changes, in 2050.

It may also help to rebalance the burden between the central government, provinces, and the private sector. The pension burden is falling disproportionately on local governments. Shanghai, for instance, where a quarter of the residents are 60 or older, spent $2.5 billion - 9 percent of its budget - on social security and pension in 2011. Even so, pensioners in Shanghai complain their incomes are low compared to other cities.

There’s a backstop, in the form of the National Social Security Fund (NSSF). It gets funding from various sources, such as the central government’s budget, equities from state-owned companies’ overseas share sales, and lottery license fees. Its assets had reached $138 billion by the end of 2011, but that’s still tiny as compared to the potential $3 trillion shortfall. So far, the NSSF doesn’t seem to have been tapped. The State can beef up the NSSF by transferring state-owned assets, like bank shares, to the fund.

Third, local governments could make their pension funds work harder.

Currently, provincial level pools of pension cash can only be invested in bank deposits or government bonds, which currently yield 3 percent a year. In comparison, the more actively managed NSSF has reported an annual return of 18 percent for its stock portfolio since its inception nine years ago till 2011, and its overall return is a respectable 8.4 percent. With the appropriate safeguards in terms of prudence, provinces could be allowed more investment leeway.

For China, being a nominally Communist country adds an extra wrinkle: citizens still expect the government to take care of them from cradle to grave. And the central government isn’t entirely transparent about pension finances, perhaps for fear that shortfalls or mismanagement could provoke dissatisfaction. Making the transition to a more market-based, better equipped pension fund will be slow and challenging. Starting now should be a priority, before the red republic really starts turning grey.

Context News

The Chinese State Council’s 12th Five-Year Plan for 2011 to 2015 states that as far as social security goes, the country will “study policies to flexibly delay the age to receive a pension”. The proposal is for the retirement age to be gradually raised to 65 by 2045.

The retirement age is 50 for female workers, 55 for female white-collar workers, and 60 for men.

Guangzhou’s Nanfang Daily found that 96 percent of the 5,000 people it surveyed through telephone interviews were against the extension of the legal retirement age.

A Bank of China study found that the net present value of China’s pension revenues less expenditures over the next 70 years is $3 trillion.

Assuming no change in retirement age and the expected growth rate in pension assets, the annual pension shortfall will be equal to 0.2 percent of GDP in 2020 and 5.5 percent of GDP in 2050, according to Deutsche Bank.

(Launches in a new window)