A pension shortfall is looming in China as the country is confronted by a rapidly aging population and slowing economic growth. The government has continued to raise the basic pension for urban retirees, as it has for nearly two decades, but is doing so in increasingly smaller increments, with the smallest ever addition made in 2023. In May, the Ministry of Human Resources and Social Security and Ministry of Finance announced a 3.8% per capita monthly increase in basic pensions for retirees from urban enterprises, public institutions and government agencies, lower than the 4% increase granted last year.
This year’s change was the 19th consecutive raise since the two ministries began adjusting pension ratios on an annual basis in 2005. By the end of July, all 31 provincial-level regions on the Chinese mainland had announced their respective adjustment ratios, which are capped at the national level. But the ratio has been falling since 2016, when the basic pension was increased by 6.5%, following an eight-year stretch of 10% rises, government data show.
The protracted slowdown is mainly due to China’s dissipating economic growth, an aging population and shrinking workforce, as well as growing spending pressures on the pension system and local governments, which saw their budgets strained by three years of the pandemic, Xue Huiyuan, deputy director of Wuhan University’s Center of Social Security Studies, told Caixin. Amid the slowing pension growth, experts have said it is important to upgrade the adjustment process to stabilize people’s expectations, as retirees are increasingly concerned about reduced benefits. They also called for greater efforts to improve the sustainability of the pension system.
China operates a three-pillar pension system which is heavily dependent on the first pillar: the state-run basic old age pension scheme under which there are two types of insurance, one for urban employees and the other for the remaining urban and rural residents. The scheme covered more than 1 billion people as of the end of 2022, according to a report published on the central government’s website. The second pillar consists of enterprise and occupational annuity schemes, while the third pillar of the system, personal pensions, is government-backed, voluntary, and market-oriented in terms of operation.
Low replacement rate
As the growth rate of pensions for retired urban employees is slowing, experts say there is a need to promote the development of the second and third pillars of the pension system in order to safeguard the quality of life of retirees. The average replacement rate — the ratio of the average monthly pension of all retired workers to the average monthly salary of workers in the previous year — is an important indicator of the standard of living after retirement.
For the first pillar, the average was 48.2% in 2021, according to Xue’s calculations based on government data, lower than the 55% rate proposed by the International Labour Organization, which warned of a sharp drop in living standards if the replacement ratio falls below that level. The World Bank, meanwhile, recommended a level of no less than 70% to maintain people’s preretirement lifestyle. “The lower pension level in the country is still some way off from meeting (people’s) needs for a decent old age,” Xue said. But to continue raising the replacement rate of the first pillar will only add to the huge pressure on the basic pension fund and government spending, the head of a central Chinese city’s pension insurance department told Caixin. The official instead suggested making multipillar developments to improve retirees’ treatment.
However, it is difficult for businesses and individuals to participate in the second and third pillars due to their large expenditures on the basic pension insurance plans, an expert who has long been concerned about adjusting the country’s pension system told Caixin. There are also not many financial products under the personal pension scheme and the relatively low contribution ceiling has made people less willing to invest, said a person familiar with the situation in a provincial-level city.
This view is shared by Zheng Bingwen, director of the Chinese Academy of Social Sciences’ Center for International Social Security Studies (CISS), who said in a recent interview with Caixin that problems such as product homogenization and low return on investment will seriously affect the sustainable development of the third pillar. The difficulty in expanding the coverage of these two pension schemes is that the current system has not been able to meet the various needs of the industry and the market, resulting in a lack of interest in the pension products hitting the shelves, Zheng said.
The second pillar accounted for only a quarter of all pension funds in 2018, according to a study by the National Institution for Finance and Development, a state-backed think tank. The third pillar accounted for less than 0.01% of the country’s total pension funds in 2020, according to analysts at Industrial Securities Co. Ltd.
Mounting pressure
Discussions about future adjustments to basic pension levels indicate that even lower increases are likely. The person familiar with the situation in a provincial-level city told Caixin that the central government may set 3% as the lower limit for the adjustment ratio, adding that after this ratio is reached, the government may introduce an automated system to make regular adjustments. “Overall, the adjustment ratio will definitely get lower and lower,” said the pension insurance department head. But ultimately, retirement benefits for urban employees are still rising, together with an increase in retirees amid an aging society, putting increasing pressure on the basic pension insurance funds, the official said.
China’s pension system will inevitably face a shortfall, said Zheng of CISS. The nation’s pension fund for urban employees held a reserve of nearly 5.9 trillion yuan ($809 billion) last year, government data showed. The fund is expected to peak at 6.99 trillion yuan in 2027 before running dry by 2035, according to a 2019 report by CISS. The central government has sought help from local governments, asking them to use their budgets to subsidize urban pensions. Although the pressure on localities is not great at present, they will face increasing pressure as the demand for pensions continues to grow, an industry insider said.
Nikkei Asia
