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Public Basic Pension Sustainability in China

This article provides an in-depth analysis of the current financial situation of public pensions in China, outlining future challenges, projections, reform choices, and discussions on sustainability. It covers the structure of the basic pension system, contribution levels, benefit adjustments, future cost projections, and reform choices to ensure financial sustainability. The text explores demographic shifts, longevity risks, investment returns, actuarial balance, reform choices, and recommendations to maintain the financial sustainability of China's public pension system.

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Public Basic Pension Sustainability in China

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  1. Public Basic Pension Sustainability in China Xiaojun Wang Center for Risk Management and Actuarial Studies School of Statistics, Renmin University of China Email: xiaojun_wang@ruc.edu.cn

  2. Contents Current Basic Financial Situation about Public Pension in China Some Future Challenge Projections of Future Financial Status Reform Choice and Discussion

  3. Basic Situation • PAYGO, Pooling fund + IA • For workers, employer 20%(pooling fund)+ Employee 8%(individual account) • For self-employment, 20% social average salary (8% IA+12% pooling) • Ceiling: 300% of social average salary, floor: 60% of average salary • Defined benefit with redistribution • Benefit linked to contribution years and, • ½ contribution base+ ½ average salary • Benefit adjustment: irregularly with wage and inflation index

  4. Basic Situation-cont1 • Basic pension including three different schemes • Workers: different contribution level for formal and unformal employment • Civil servant and other public employee • Rural and urban resident • Public employee: cover about 40 million in 2016 • Urban worker: cover about 403 million, active 293 million, cover about 69% of urban employment in 2017 • Resident: cover about 513 million in 2017 • Average benefit 1521 Yuan/ Per Person

  5. Urban Workers’ Basic Pension: Coverage and Dependency Ratio

  6. Average Benefit, Contribution and Replacement rate

  7. Contribution Income, Balance and Fiscal Subside

  8. Rural and Urban Resident Basic Pension: Participant and Dependency Ratio

  9. Future Challenge • Population ageing • People live longer, longevity risk, old age poverty • Life Expectation: 68.55 in 1990, 76.34 in 2015, Beijing 80.18, Shanghai 80.26 in 2010 • Investment risk and low Investment return

  10. Financial Sustainable • Basic pension expenditure is about 4.6% GDP in 2016 • Average pension/GDP per employee is about 32% in 2016 • With population ageing, full employment, full social insurance coverage assumption, pension expenditure will increase to 21%(retirement age 60) or 13%(if retirement age 65) of GDP in 2050s

  11. Future Population Projection 2015-2090年人口结构 （left：International right：retirement age in China）

  12. Possible Future Trend

  13. Actuarial Balance and Financial Sustainability Future Income cash flow • Fertility, Mortality • Employment • Salary Increase • Coverage • Contribution base, rate • Fiscal subsidy • Investment return • …… Future cost cash flow • Risk rate • Retirement age • Benefit level • Benefit adjustment • Life expectation • …… Long term actuarial Balance Asset/liability Balance

  14. Current Reform Choice • National social pooling: redistribution between pooling region • Increase retirement age: Female 55, Male 60 to age 65 • Postponing retirement can delay the appearance of the financial gap and improve the balance in the short run, but not obvious in the long run under current system • Tax Bureau collect contribution: Check contribution base and increase compliance rate • current contribution base /salary, 51% in 2015 • Social pension fund balance investment: interest income and investment risk • Encouraging more private pension plans to supply more benefit

  15. Discussion • How to keep the financial sustainable of PAYG-financing public pension? • Clarify fiscal subsidy and government responsibility • Transparent and annual financial report • Encourage more and longer contribution, less and shorter benefit. • Auto-enrollment and auto contribution levy mechanism • Delay pensionable age, link pensionable age to life expectation to protect longevity risk • Separate insurance and redistribution

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