The Chinese Pension System
February 12, 2025
As investors, we are often perplexed by the behavior of the markets. For instance, we may find a stock to be overvalued. Hence, ideally, the stock should drop in value and become fairly priced. However, in reality, it may keep on increasing in value, and the quantum of overvaluation may increase vastly. Similarly, we may […]
How Dire is the Bad Debts Problem in Indian Banks In recent months, the news reports about India’s bad debts problems have been appearing almost on a daily basis. With the ballooning NPAs or Non Performing Assets (the term used to refer to debts owed to banks going sour), the Central government is grappling with […]
In this entire module on personal finance, we have written several articles on steps that need to be taken to ensure that a person has a good future. However, in the field of personal finance, it is almost as important to not do certain things as it is to do certain others. Financial mistakes can […]
The financial world has not witnessed much innovation since the 2008 meltdown. This is because any innovation in this sector is scrutinized for possible systemic risks. However, during this period peer to peer lending has evolved. The industry is still in a pretty infant stage. However, in 2015, peer to peer credit accounted for over […]
The primary function of investment banks is to help their clients raise equity capital. This is often done by initial public offerings. This is where investment banks provide their biggest service i.e., underwriting. Most people have a basic understanding of underwriting. They know that when an investment bank underwrites a share issue, they guarantee to […]
The purpose of pension funds is to ensure that the wealth created by an individual is invested and distributed in such a way that they can afford to maintain their standard of living throughout their lifetime.
Pension funds have become a very important tool for retirement planning. An average pensioner plans to survive almost twenty years of their life with the money received from pension funds.
A basic assumption is that pension funds will distribute the income in a fair and equitable manner. However, this is not the case. Pension funds have come under heavy criticism because many people believe that pension funds end up redistributing the personal wealth of an individual.
In this article, we will have a closer look at some of the redistributive effects of pension funds.
It has been statistically proven that there is a significant difference in the life expectancy of people belonging to different socio-economic classes. Hence, in effect, pension funds take an equal amount of money from everyone. However, they pay more money to the wealthy. This ends up redistributing the income from the poor to the wealthy making it a form of regressive taxation!
Such pensions are paid out based on a single criterion which is the age of the pensioner. Now, here too, there is redistribution of income taking place. Only the wealthy income earners are making contributions to the pension funds. However, everyone is getting pay-outs in return. This amounts to a transfer of wealth from the wealthy to the poor.
The pension system is not supposed to be a means of progressive taxation. It is for this reason that pension funds face a lot of criticism.
There are several studies that have shown that women tend to have a longer average life than men. Now, men and women contribute to the pension fund in equal amounts. However, when it comes to withdrawing money from pension funds, women are able to have higher pay out. Hence, the entire system can be seen as a mechanism that transfers wealth from male contributors to female contributors.
Now, when it comes to people who are not married, they do not have a spouse. Hence, their pension payments stop immediately after their own death. This is considered to be unfair by many because all pensioners contribute in equal amounts. However, people who have spouses are able to withdraw from the fund for a longer time duration. This coupled with the fact that women live longer than men, makes the odds stacked against unmarried pensioners.
In many parts of the world, pay-as-you-go schemes are followed. This means that an individual does not contribute to their own pension account. Instead, their contributions are used to pay out the benefits of the previous generation. Therefore, if there are a large number of workers in a particular generation, the per head contribution becomes lower.
On the other hand, if the population is on the decline, the per head contribution being to rise. The dangerous and potentially catastrophic side effects of the intragenerational transfer of wealth have become known to the entire world because of the demographic changes taking place in countries like China as well as Western Europe.
Many critics consider the intragenerational transfer to be a crippling burden that can have a huge negative effect on the financial well-being of the next generation.
All the above points of criticism are valid to some extent. It is true that pension funds lead to transfers of wealth between various groups. However, this distribution is a game of chance.
If the funds start charging different rates to different groups, then that will be considered to be discriminatory. Hence, it can be said that the pension fund is better than the alternatives even though it is not perfect.
Your email address will not be published. Required fields are marked *