Pension Reform in China: Challenges and Answers

Abstract

China is currently in the process of developing the largest pension system in the world and it is doing this in the context of profound economic reform and demographic transformation. The central government has followed a step-by-step approach to set up a system that is capable of accommodating a rapidly aging society within a fast growing, but still largely underdeveloped economy. This dissertation analyses how far the process of building the public old age security system had proceeded and to what degree it has so far achieved its primary goal. Based on assessment on the implementation issues of the current system, this dissertation focuses on the major challenges confronting the system, aiming at finding where the pension reform is going in China.Since the crucial re-design of the pension system from an enterprise-based pure pay-as-you-go scheme to a partly privatized funded scheme in 1997, the government has laid out the framework to build up a national unified system, supported by the founding of NSSF (National Social Security Fund) as a fund of last resort. After years of experiment programs, the current system is further specified. Despite these significant reforms, the current system is still facing profound challenges: The coverage of the system is still limited due to the lack of incentive schemes; the rural population remains outside the national pension system and the majority of the population would remain dependent on the traditional family support to provide old age support for many years to come; the system is decentralized, characterized by fragmentation and intransparancy; central budgetary subsidy is still needed to fill the funding pap. Thus, China's pension system is in urgent need of reform to create a more sustainable and ultimately a truly national pension system.Yet the rapid economic development and productivity gains since the economic reform in 1978, as well as the demographic window due to the declining overall dependency ratio until around 2013 provide favorable opportunities for China to address the challenges facing the system. Extending coverage through improved compliance by employees and companies and improving fund investment by strengthening the financial market development and regulation as well as the continuing financial commitment towards the NSSF are believed to be crucial to create financial and institutional basis that would cushion the impacts of a rapidly ageing society as China.