China to Overhaul Its Pension System?

CCTV reports, China to overhaul dual pension system:

China will reform its public sector pension system to reduce disparity between the public and private sectors, Vice-Premier Ma Kai said Tuesday at the bi-monthly session of the National People’s Congress Standing Committee.

Under China’s dual pension system, civil servants and employees in state agencies do not need to pay for their pensions — the government provides full support for them. But employees of private enterprises have to pay 8 percent of their salary to a pension account.

After retirement, private urban employees usually get a pension equal to about half of their final salary, but civil servants get much more without making any financial contribution.

"Some civil servants retire around the age of 50 but can get a pension of 5,000 or 6,000 yuan per month. I’m 70 years old now and I get 3,000 yuan per month. This is unfair," says a retiree in Guangzhou.

"My mother in law only has a monthly pension of 2,100 yuan. She worked for 30 years. I know many people have pensions of more than 10,000 yuan per month. That's a huge difference," says a Guangzhou resident.

The different methods of payment, accounting and management in China’s public pension systems have resulted in widespread disputes.

"Those who contribute a lot at work deserve high salaries. But after retirement there is no reason for them to get that much more than others. The government should call for fairness and not widen gaps. The five-times gap is huge," says Ding Li, research fellow in Guangdong Academy of Social Sciences.

And now the reform is coming. The aim is to build a system for Party, government and public institution staff that is similar to the one used by the private sector.

This move will affect around 37 million people: 7 million civil servants and 30 million public institution staff.

China has the world's largest number of civil servants and staff of publicly-sponsored institutions, and the national population is expected to reach 1.43 billion by 2020.

The State Council is making efforts to unify the nationwide management of the pension system to cover the entire population.

Telesur also reports, China To Expand Pension Coverage to Public Sector Workers:

Pension coverage for workers above the age of 15 has increased by 52 percent over the last four years.

About 40 million government, party, and public sector workers will be affected by the latest reform to China's pension system, a process that began in 2009.

"Next year, we will comprehensively deepen reform on social security regulations, and work out an overall reform plan to the pension system, as well as detail policies on unifying the national pension and completing personal accounts. It is expected to boost the level of pensions for both urban and rural residents," said Chinese Minister of Human Resources and Social Security Yin Weimin.

The latest proposals are part of China’s larger 12th Five Year Plan, which includes strategies to improve the social security system and expand the coverage of basic pension insurance to cover all urban and rural resident. The new reforms will go into effect January 2015.

During his address at the bi-monthly National People's Congress Standing Committee, Chinese Vice Premier Ma Kai said the government hopes to cover 900 million people by 2017, and 1 billion in 2020, raising the coverage rate from the current 80-95 percent.

Director of the International Labor Organization’s (ILO) Social Protection Department Isabel Ortiz praised the efforts by the Chinese government to expand pension and social welfare coverage throughout the country, stating, “China, for example, has achieved nearly universal coverage of pensions and increased wages.”

According to the ILO, pension coverage for workers above the age of 15 has increased by 52 percent over the last four years. By the end of 2013, 850 million people, nearly 75 percent of the population aged 15 and above, were covered under the four Chinese pension plans.

The Chinese National Social Security Fund currently stands at US$125 billion, which marks an increase of over US$93 billion in five years.

Despite important progress in expanding social security and pension system coverage, China has been urged to improve the protection of workers’ rights, labor conditions and the quality of collective bargaining.

After reading this, I decided to publish it as it was encouraging to see China moving ahead to improve pension coverage and to reform its dual pension system to make it more fair.

Under the current system, civil servants and employees in state agencies don't need to pay for their pensions. Instead, the government fully supports them. However, private sector employees have to pay 8% of their salary to the pension account.

After retirement, private sector employees usually get a pension equal to about half of their final salary, but civil servants get much more without making any financial contribution at all. The reforms are meant to cut these widespread disparities.

Of course, more reforms are needed if China is going to make these pensions sustainable over the long-term. They need to hike the retirement age, increase contributions, introduce risk sharing and more importantly, drastically improve the governance at all their public pensions, which isn't a given in a country where widespread corruption is rampant.

And these reforms can't come soon enough as China's state pension fund is set to grow just as the country is sliding into a pension black hole and is ill-prepared for the demographic challenges that lie ahead.

You can watch a CCTV report on why China is moving to overhaul its dual pension system. You can also watch a CCTV interview featuring Dr. Wei Nanzhi from the Chinese Academy of Social Sciences discussing pension reforms.

Below, a clip discusses why China's national pension is a time bomb. Watch this clip and keep in mind my comments on governance and reforms above.