The Chinese Pension System
February 12, 2025
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Pension funds have witnessed a dramatic increase in the number of assets that they control. This increase has been the result of an ever-increasing workforce that has been diligently contributing to their financial future.
The funds being managed by pension funds have increased both in developed as well as developing nations. Many developing nations are witnessing the positive spillover effect of the increased investment in these pension funds.
In this article, we will look at the various ways in which pension funds lead to overall economic growth.
Many studies have proved that the countries in which pension funds are more prevalent are the ones that tend to have higher savings rates. Since savings rate is important for the overall capital formation in an economy. Hence, when pension funds increase the savings rate, they lead to an overall improvement in the economy.
Projects related to renewable energy and such other sustainable technologies generally follow this cash flow pattern. Since pension funds can afford to fund these sectors, they not only increase the savings rate but also invest in the desirable sectors of society.
Pension funds continue to transact even during periods of liquidity which makes them strategically important as far as market liquidity is concerned. This liquidity is very important for investor confidence. Hence, it can be said that pension funds help in improving investor confidence and therefore in improving the overall state of the economy.
The end result is that pension funds end up positively influencing the level of corporate governance in the markets. This in turn attracts more investors and improves the functioning of the overall economy.
If more people are enrolled in pension schemes, fewer people will need welfare benefits. Hence, the government does not need to tax its people at a higher rate to fund these liabilities. This can have several benefits for the economy.
The lower tax rate makes companies more competitive. Hence, in a way pension schemes enable private corporations to become more competitive in the international market. Also, the lower tax provides more disposable income in the hands of the country’s citizens. This additional income also creates upward pressure on aggregate demand which leads to overall growth and development of the economy.
The bottom line is that it would be fair to say that pension funds are the institutional pillars that strengthen the foundation of any economy. It is for this reason that governments encourage investments in pension funds. Developed countries are already known for encouraging such investments. It would be in the best interest of developing countries to also do so.
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