In January, the State Council announced reform of the public-sector employee pension system to rectify inequalities between workers in the private and public sectors, a problem that has remained unresolved for years. However, with few specific details available, there are renewed fears that the changes could still result in an unfair system.
In general, China's pension system faces three major challenges: fairness, flexibility and sustainability. Sustainable development is by far the biggest problem.
In recent years, there have been many reports about a decrease in the size of the basic pension fund. Academics and officials have repeatedly said that pensions will be paid in full and on time. Yet, there is no doubting that sustainability is becoming a serious problem, as China's population ages fast and payouts grow at a faster rate than revenue going into the fund. What's more, under new economic conditions, growth in fiscal revenue has slowed.
At the National People's Congress Standing Committee meeting at the end of last year, Vice Premier Ma Kai said that if China does not reform the system, "there will be a gap in old-age pensions, and it will not be a small gap, but a large one."
Actually, reform planners foresaw such concerns years ago. The National Social Security Fund was set up in 2000 using government funds and investments that would allow the pension fund to keep growing. However, at the end of last year, the fund's balance stood at only 1.1 trillion yuan – hardly sufficient to cope with the largest "silver wave" in history. Under the pay-as-you go system, workers are reluctant to put money into the fund, which leads to more sustainability problems. The workforce is also shrinking. It is a vicious circle, affecting every corner of the economy and society.
The problem is a complicated one, but the prime culprit is past debt. During the planned economy, workers at state-backed companies earned little, but their pensions were provided directly by state-owned enterprises for their entire lives. In the 1990s, when China shifted to a socialist market economy, it introduced a social security pool for the state, enterprises and individuals to share responsibility. However, the government and SOEs have failed to keep their promise to inject money into the pool, and the country has never recovered from the shortfall.
For a healthy, balanced and sustainable pension system, coverage needs to be expanded, investments increased, operational standards improved – and the retirement age raised. But the priority has to be to inject government capital to replenish the social security fund, as decided during the third plenum of the Communist Party's 18th Central Committee in November 2013. Policymakers now need to show determination in carrying out the pledge, and that involves dealing with vested interests within government departments.
Legally, the assets belong to the people, but past reforms have been confined to looking at how the funds could be increased and transferred. Plans to sell off state-held shares were put on hold in 2001 amid a slump in the stock market and other barriers. The sell-off only began in 2009, and since then, the social security fund has only increased by about 230 billion yuan – far from enough to cover pension payouts.
Officials have to identify the amount of state-owned assets that remain before formulating specific measures. Nationwide, SOEs in non-financial industries have more than 100 trillion yuan in assets, and centrally administered SOEs have made profits totaling more than 1 trillion yuan annually. So although the reforms may come late, they can still break the pension impasse.
However, the Ministry of Finance has said the reform proposal for state-owned assets must be carried out before social security assets can be transferred. Therefore, SOE reform cannot be delayed, as the need to replenish the social security fund is becoming increasingly urgent.
After the transfer, social security funds must not be divested or used for day-to-day business operations. The focus should be on exercising shareholder rights, which can improve SOE governance standards.
Some officials and academics have suggested that state-owned capital should also go to supplement pension funds. At the third plenum, a proposal was made to raise to 30 percent by 2020 the proportion of SOE capital gains handed over to the public coffers, from the current level of between 5 and 15 percent. It seems reasonable that a certain proportion of the money should go into social security.
The pension system can be an effective way to boost consumption, ease poverty and distribute income more fairly. Social security issues affect all nations. Policymakers should push ahead with pension reforms to benefit the whole of society. With SOEs doing well, now is an opportune time to use state-owned assets to replenish social security funds.
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