Challenges Faced by the Chinese Pension System

In the previous article, we have already studied about the peculiarities of the Chinese pension system.

We are now aware that the Chinese pension system is quite different from the pension system operating in western countries.

The fact that the Chinese system is different does not make it better than the western system. The Chinese pension system has its own set of problems that need to be enumerated.

In this article, we will have a closer look at some of the prominent challenges being faced by the Chinese pension system.

1. Demographic Changes: The biggest challenge facing the Chinese pension system is that of an aging population. China had implemented a one-child policy for a very long time. As a result, the birth rate of the Chinese had fallen down quite drastically. This means that there are more people in the workplace now than there will be in the future.

   Hence, the number of people pooling money into pension funds will reduce drastically over the next few years whereas the number of people withdrawing money out of the funds will also simultaneously increase. Demographic changes are a problem for most pension funds across the world. However, in the case of China, the problems are a bit more accentuated.

2. Dependence on Subsidies: The Chinese pension funds are highly dependent upon the state in order to receive their funding. In other countries, pension funds receive funds from employers as well as an employee contribution. However, in China, a large number of people who contribute to pensions are state employees. Hence, their pension contributions are also made by the state.

   The effect of increasing pensions can be witnessed in the increased budget allocation towards pensions. Less than a decade ago, pensions accounted for less than 6.3% of the Chinese government budget. However, now that percentage has almost doubled to 11.6%. The Chinese state cannot afford to keep funding pensions for very long. Hence, this system is expected to change in the near future.

3. High Number of Temporary Workers: In the Chinese pension system, employers are responsible for managing the bulk of pension fund contributions. Private corporations have to make pension fund contributions to the tune of 20% of the salaries which they pay to their workers. This works out to be a huge burden for private firms. As a result, many of these firms try to use legal loopholes in order to avoid paying pensions.

   There have been many studies conducted that estimate that only 27% of the private workers in China are actually enrolled in pension funds. This can cause serious social security issues in the future as a large number of people are growing old without any safety net.

4. Higher Pension Leads to Higher Tax: The level of pension benefits provided by the Chinese state is deemed to be insufficient by many experts. Even if the Chinese government agrees that the pension benefit payments are insufficient, they will not be able to make too many changes. This is because the pension is mostly funded by the state.

   Any increase in pension fund benefits will have to be borne by the state and will ultimately be passed on to the taxpayers. Since raising taxes makes Chinese firms uncompetitive, it is unlikely that the government will raise any taxes.

5. Lobbying for Favourable Terms: The Chinese pension fund system is managed at the local level. This means that the government of smaller regions has the power to modify some of the pension fund rules. Large corporations take advantage of this situation. Since their business size is large, they often get local governments to compete with each other and sweeten the deal for them. This system of bargaining at the local level works against the government as well as small-time employees.

6. Forced Relocation: There is another big issue that arises because of the local management of pension funds. A lot of the time, migrant workers contribute to pension funds at their place of work. They make significant contributions during their entire life. However, when it comes to payment of benefits, they are paid at the native place of the worker.

   The result is that workers have to forcefully relocate to their native places if they want to obtain benefits. Also, the benefits in rural areas can be very less compared to urban areas. For instance, in urban Chinese areas, pension fund benefits are close to 4,000 yuan per month. However, in many rural Chinese areas, the benefits can be as low as 100 yuan per month!

7. Lower Coverage in Rural Areas: China has a huge rural-urban divide when it comes to pension fund investing. It is estimated that only about 9% of the people living in the Chinese hinterland make any contributions to pension funds. This is because a lot of them are self-employed and hence the employer-funded schemes are not relevant to them.

   Since the number of people staying in urban areas contributing to pension funds is quite large, the end result is that pension funds end up exacerbating the economic disparity in China. It is important for the Chinese government to immediately take steps to overcome this issue.

From the above points, it can be seen that the Chinese pension system cannot be said to be better than the west. It has its own set of challenges some of which are graver than the issues facing the western pension systems.