Social security with Chinese characteristics

THE 18th-century Chinese emperor Qianlong made elaborate preparations for retirement. He commissioned an exquisite retreat in Beijing’s Forbidden City, complete with trompe l’oeil paintings and meditation cushions. Its name translates as the “Studio of Exhaustion from Diligent Service”.

Many elderly Chinese have shown equal diligence and felt similar exhaustion. But their retirements have been less gilded. In 2009 less than 30% of China’s adults were covered by the government’s pensions patchwork. The only cushion for most rural folk was their field and their family.

Since then, however, pensions have spread at extraordinary speed. Last week China’s national audit office reported that 622m people were now enrolled in one scheme or another: over 55% of adults. China’s new rural pension has added over 240m people in just two years—more than are covered by America’s Social Security (see article). The audit office says that China’s social-security system is now “basically” in place.

That is an historic achievement. But “basic” is still the right word to describe Chinese pensions, which vary enormously between town and country, prosperous east and poorer west, private sector and public. In some rural counties the basic pension can be as low as 55 yuan (about $8.75) per month.

China’s system does not, therefore, share the European problem of overgenerosity. But it does suffer, like Europe’s, from underfunding. In the cities, workers are obliged to supplement the state pension with contributions to individual accounts. In the countryside, they are encouraged to do the same. By one estimate about 2.5 trillion yuan has been paid into these accounts. But precious little of that money has stayed in them.

Unlike individual accounts in nearby Hong Kong or Singapore, China’s nest-eggs are not carefully segregated and invested in financial portfolios, held in the contributor’s name. Instead, local governments use the money for other things, such as paying the bills, speculating in property, or paying the pensions of today’s retired—especially those shed by state-owned enterprises during the downsizings of the 1990s.

Despite this plunder of the pension pots, China has no shortage of saving and investment. It ploughed 49% of its GDP into investment last year, and almost 3% into foreign assets. The country as a whole is making provision for its future. But individual pension contributors do not have title to these assets. They must instead pray that their contributions will be honoured by local governments from whatever resources officials can muster in the future. And migrants fear losing their entitlements when they cross provincial lines.

One sensible reform would be for the central government to take charge of the pension system. It could fill the empty accounts, glue the fragmented system together and ideally make pensions much more portable. In terms of structure, the long-term goal should be to give individuals greater control over their own accounts, choosing their investments as they do in Hong Kong (with appropriate safety nets and so on). The problem here is that China still lacks the mature and open financial systems of Hong Kong and Singapore: its helter-skelter stockmarket is hardly ideal for retirement savings at the moment. So change will have to be gradual.

Qianlongevity

One step forward would be for the government to hand over some of its foreign assets to the National Social Security Fund. That would fill the accounts and diversify household portfolios, without asking too much of China’s own immature financial markets. Another option is to turn the empty accounts into so-called “notional” accounts, as pioneered by Sweden. Under this system, individual contributions determine benefits, according to a transparent formula that reflects the retiree’s life expectancy and the economy’s ability to pay. The benefits are still paid out from a mix of current taxes and a central pension fund. But as the financial system matures, the pension system should steadily shed its Chinese characteristics in favour of capitalist ones, as in the Hong Kong model.

However China finances its pensions, their burden will increase as the country ages. By 2035 almost 30% of Chinese will be 60 or over (compared with about 13% today). The country cannot afford to put so many people out to pasture. Over the next decade the official retirement age should be raised from 60, for men, and as early as 50, for blue-collar women, to 65 for everybody. In deferring retirement the Chinese can take inspiration from their former emperor. Qianlong officially abdicated in 1796 after 60 years in power, but carried on ruling for another three years. As it turned out, he never spent a night in the studio of exhaustion.