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The evolution of the pension system in China

Updated on July 4, 2014

The evolution of the pension system has been marred by inefficiencies and unfairness. The purpose of this hub is to analyze the aspect of inefficiency and unfairness in the evolution process of the pension system in China. The determination of China in establishing a pension system that is partially funded is deemed a step in the right direction. However, if the individual accounts are not separated from the social pooling, the replacements, the efficiency of the implicit pension debt, improvements in fund regulations and management may not be sustainable.

The growth of the pension funds has consistently represented a challenge especially considering the present position of commercial banking. However, there have also been benefits related to expansion and growth of the financial markets, hence leading to efficiency and liquidity. This paper has found out that an effective pension system requires such pre-conditions as sound commercial banking, market stability, effective financial regulations, and commercial systems of insurance. In the perspective of China, the country is presently, at an important period with regard to its economic, and social transition. The comprehensive reform of China’s social security, and pension systems is a critical strategic factor that will assist in realizing a sustainable development in pension plans as well as a harmonious society. However, its current approach to pension system is inadequate in facilitating a realization of the country’s economic development objectives now and for future generation.


Key Words: Pension plan, Evaluation framework, China, social security


Introduction

Presently, china is at an important period with regard to its economic transition. The comprehensive reform of its social security, and pension systems is a critical strategic factor that is aimed towards realizing a sustainable development as well as an harmonious society. The common view by policy makers in China is that the current approach to pension is inadequate in facilitating a realization of the country’s economic development objectives now and in the future. According to these policy makers, a reformed pension system will see urban systems being sustainable, multilayered, protects at the basic level and has broad coverage. However, though the relevant authorities have placed the increasing premium on a more balanced development between urban, and rural areas, households and different regions, the pension system has a per today only contributed to divergence (Bleakney, 2013, 78).

The pension system is closely related with the capital market in many ways. This is more apparent in developed countries where pension funds, especially those with large amount of assets are the key element in institutional investment in the capital market. A reform of the pension system has recently been witnessed in the form of pay as you go to funded systems in counties such as those in Latin America and East Europeans nations. In these reforms, the pension benefits for retirees are mainly derived from individual accounts, and not really from the contributions of the next generations. Consequently, there has been a dramatic increase of pension assets, subsequently leading to an increasing level of the general GDP. There has been a significant effect of the investment performance of the pension funds on pension’s benefits for retirees over the past years. Because of this, many nations have now begun to emphasize on the aspect of diversifying their pension investments, subsequently leading to domestic capital investments (Helman et al 2012, 66).


Background Information

Retirement plans for the public sector, both for the state and government employees have a historical background in the 18th and 19th century. In most cases, these plans were established, and developed by employers in the public sector to offer retirement benefits for employees in the public service. Such programs were provided for making public employment to be competitive in relation to the private sector, which mostly paid higher salaries. The logic behind this reasoning was that, though employees in the public sector had lesser amount of money for their services, they were guaranteed retirement benefits; hence, this was an advantage to them. Such kind of guarantee could protect employees and members of their family during their retirement period (Mitchell, 2008, 234).

The state of New York was the first to create a retirement benefit for its public employees in 1857. This law offered a substantial amount of payment to police officers in New York City who were injured while on duty. This plan was revised in 1879 to include a lifetime pension for police officers who had attained the age of 55 years after working for more than 21 years. A similar plan was extended to fire fighters in New York City in 1866 (Helman et al, 2012, 45).

The pension programs in the last century were mostly depicted in the defined benefit (DB) plans. The employees especially in the public sector regarded defined benefit plans as the most significant benefit received for their long career in the public service. Although the history of pay in the public has lagged far behind that of private sector workers, the benefits for pension have been an efficient way for government authorities in attracting and retaining employees who are efficient and effective. In the last decade, the defined benefit plans have consistently come under attack. In an endeavor to reduce costs, partly due to increased global competition, may organizations have either terminated or frozen their Db programs and instead, replaced them with DC programs. Some government authorities have applied this same logic to local and state governments and have sought consistently sought to replace the DB plans with the DC plans. Although it has been anticipated that this change has a potential of causing negative ramifications to employees in the public sector as well as the general tax payers, such efforts have been successful in some states (Mitchell, 2008, 244).

However, economic, and demographic pressures have led some public DB plans to reevaluate their plan strategies, and consider an integration of DB and DC plan characteristics. For instance, the median age of the public sector employees is approximately 45. This translates that about half of the present public employees are likely to go for retirement for the next 20 years. In replacing such retirees, many states and local governments will require to provide attractive benefits to younger and more mobile employees. Most pension schemes are designed for long-term workers and do not therefore, have the portability required by younger workers (Bleakney, 2013, 111).

Furthermore, the volatility in the stock market over the past decade has raised the awareness level of employers, and employees in the public sector with regard to the potential rewards and risks for the financial markets. While most markets are up, as was realized in the period of 1990s, there has been an increasing pressure on employees to be involved in pension scheme programs. However, the consistent decline of the stock market during 2000-2002 made many employees to devalue the pension scheme accounts. Many of these employees reevaluated the attractiveness of the pension scheme plans. The consistent decline of the stock market subsequently leads to increased pension scheme costs, making the sponsors to find other ways of sharing market risks equitably (Moo, 2014, 7).

Over the past ten years, the retirement benefit systems in public sectors have started to explore means of combining the DB and DC features into a “hybrid” plan design. Hybrid plans combine both the DC and DB plan features. While a strictly pure DB plan shifts a portion of the risks and potential rewards to employers, the hybrid approach essentially offers a tax advantaged means for worker in contributing towards their retirements and investing the same in diversified investments. When used in the public sector, the hybrid system typically enables workers to convert their direct contributions (DC) accounts to an allowance, contributing to employee’s lifetime benefits.

There are various ways by which most countries undertake their saving plans; This is defined by the World Bank in 3 pillars, that is retirement income security, government provided social security, employer provided social security, government provided social security, employer provided supplementary savings programs and individual savings (Moo, 2014, 7).

In essence, the present system of the pension scheme in China is defined as pay as you go system for retirees, and older workers. For younger workers, the pension scheme is designed in such a way that it combines individual accounts and social pooling. The system constitutes a compulsory defined benefit that is paid from the social pooling account, as well as the voluntary supplementary account paid by individuals. In accordance to the World Bank report, the total amount of pension assets that will be accumulated from the new system will reach US$1.9 trillion by 2030. The greatest beneficial however, will be the capital market due to the consistent inflow of capital (Ma, 2013, 56).

The evolution of the pension Scheme system in China

Retired people in China have historically depended on their families and the government in sustaining them when they reach old age. Both the family and government pillar are gradually collapsing in different extents. Further, there is an increasing extent of employees in relying to other sources of retirement income. Many employers have begun to step in to fill this void. Companies are also offering retirement benefits and other savings programs in various ways (Helman, 2011, 57).

For the last 100 years, dramatic changes have been experienced in China. There has also been a transformation of government leadership which has changed from one of Emperor to Nationalists and then to Communists, events that have been interspersed with civil wars. Since the takeover by the communist in 1949 and the beginning of the new era in China, there has been a great reorganization, and upheavals in the society. From the Cultural Revolution, the great leap forward to reform and opening. In all this dynamism, it can be hard to take a long-term perception of some of the challenges, which China is presently encountering, including the increased aging population (Moo, 2014, 6).

Among the reasons for the increased rate of the aging population is the decreased rate of births, which has been exacerbated by China’s one child policy) and a longer lifespan. The population reference Bureau reports that the population of aging people China is one of the fasted growing in the world. There is a projection by the United Nations that by 2050, the ration of employees to retirees will decrease from 9 to 2.5. This will post a heavy burden on the next generation in supporting the old age people during their retirement period. This makes it essential for employees to begin saving as soon as possible (Mitchell, 2008, 11)

China created its first old age pension system in 1951 under the regulation of the state council’s labor insurance. Since then, the pension system in China has undergone various transformations that have been precipitated by economic, political, and social environment changes. The original system was basically funded by employer contributions through local and national pools and provided by a pay as you go basis. During the period of Cultural evolution 1966-1976, social insurance was changed to become an obligation of enterprises. Every enterprise paid the pensions of its own retired employees out of its present revenue. The inclusive pension pooling system was eliminated, and the accumulated pension funds in the national pool were utilized for other purposes. Supervisory obligations were transferred to local labor bureaus (Ma, 2013, 44).

In 1978, the government of China began to redevelop the social security system, including the re-introducing the pooling in 1986. However, due to some government policies such as the one child system, and retirement incentives that are expensive which are designed to provide employment opportunities for young workers, and also the transition from a planned economy into a market economy, the pension system was in the first decade of the new millennium was depicted in crisis. Enterprises that were state owned have heavy pension responsibilities at a time when employment in these enterprises is gradually decreasing, and the number of pensioners in relation to employees is increasing. Many of the state owned enterprises have in recent perspectives begun to taking obligations for their profit as well as losses. However, many people cannot manage their pension obligations. The government has also come to a realization that it cannot afford to bear the pension responsibilities by itself (Ma, 2013, 5)

A reform for the country’s pension plan was instigated in 1991. This included a calling for individual contributions by all workers, and for experiments with personal accounts. This reform identified the need for the conventional three-pillar system. During the period of 1990s, experiments with personal accounts with the social security system and with different pooling levels were undertaken. However, these systems were marked by confusions over who was having authority over who with regard to this system and also how the separate programs could be unified. In 1998, the ministry of social security and labor ( which has since been renamed the ministry of Social Security and Human Resources was established for the purpose of consolidating the different departments that had been responsible for particular aspects of pension policy and social security. Despite the centralization of authority in the MOHRSS, many MOLSS departments, the ministry of National Tax Bureau and Finance have continued to influence the evolution of the fundamental pension system (Hozzo, 2009, 277).

In an effort to strengthen the basic pension system, the Chinese government established a reserve fund in 2000 that was identified as the National Pension Fund (NPF). The main aim for this fund was to act as a fund of “last resort” when the age wave in China began to wave began to increase the cost of pension. This fund is funded through a combination of subsidies from the main government that acquired from the sale of shares of enterprises that are owned by the state and the profits of the national lottery. Originally, the assets of the NPF were entirely invested as bank deposits and government bonds. In recent perspectives, the investment guideline for the fund has been slowly liberalized. This can be attributed to the government’s view as a valuable and significant instrument for bolstering the strategic organizations, and improving the capital markets. As at 2012, 48 percent of the NPF assets were outsourced to external managers who were bestowed with the obligation of handling the funds rising investment in both local and international securities (Bleakney, 2013, 334).

The Present Framework of the Pension Plan

In the last few years, the government of China has initiated various measures to improve the pension scheme system in the country. One of the major reforms to the pension scheme were initiated in 1997, and refined in 2009. In 2009, the government authorities created a national framework for rural pensions, and subsequently, the Rural Pension Pilot programs, which eventually became the New Rural Pension Scheme (NRPS) in 2011. In the middle of 2011, the authorities also came up with the National Pilot Urban Resident Pension Scheme (ERPS), which was actually aimed at covering a universal pension (Bleakney, 2014, 237).

Presently, china is at an important period with regard to its economic transition. The comprehensive reform of its social security, and pension systems is a critical strategic factor that is aimed towards realizing a sustainable development as well as an harmonious society. The common view by policy makers in China is that the current approach to pension is inadequate in facilitating a realization of the country’s economic development objectives now and in the future. According to these policy makers, a reformed pension system will see urban systems being sustainable, multilayered, protects at the basic level and has broad coverage. However, though the relevant authorities have placed the increasing premium on a more balanced development between urban, and rural areas, households and different regions, the pension system has a per today only contributed to divergence (Holzmann, 2013, 79).

Though substantial reforms to the pension scheme system have been undertaken, there have been suggestions from various stakeholders who have given suggestions on the necessity of more reforms. According to policy makers, more reforms are required in order to meet the needs of the increasingly changing society and economic conditions of China. Some of the issues that need to be focused include; costs associated with legacy, limited coverage, and system fragmentation. Similarly, there are also many challenges that are consistently cropping in including increasing rate of urbanization, rural-urban disparities, income inequality, and alteration of the family structure, in formalization of the labor force as well as the impact of increased globalization.

The state council established the present pension plan in China in 1997. This was updated in 2005. The main aim of the plan was to shift the defined benefit, pay as you go system to a three-pillar model, while at the same time incorporating, self-employed, and enterprises in both urban and rural areas. Under this system, enterprises have an obligation to pay a tax-deductible 20% of their whole wage bill. The municipalities and provinces determine the specific rates of these contributions. In most of these cases, the wages that are used in calculating the contributions are subject to more than 300% and not less than 60% of average wages in the locality. On the other hand, employee has also an obligation of contributing to their individual accounts. Generally, the contribution rate is 8% of the wages (This is also subject to a 300% of the average maximum wages. These accounts are designed in such a way that they are fully funded. In essence, most of the provinces have been utilizing these funds in supporting social pooling and non-pensionable obligations. Therefore, individual accounts are purely notional. Each year, the accounts are credited with interest (the rate of which is announced by the local government (Bleakney, 2013, 114).

The current system in pension plans stipulates the eligibility as being in the age of 60 for men, 55 for specific hazardous industries, 55 for female cadres, and 50 for general female workers. Further, workers must have contributed to this plan for not less than 15 years. The social security pension retirement benefit constitutes of the following elements; benefits from the social pool whereby, the monthly pension constitutes of the percentage of the average salary in urban areas, based on the average of employees, and CAS indexed contribution salary and multiplied by the accurate rate for each year’s contribution (Helman, 2010, 112).

Effectiveness of the Current Pension Plan in China

Going by the legacy of the old mentality of “iron rice bowl” most of the Chinese workers are expectant that their employers, and the government ought to be responsible for their social securities. Nonetheless, the present mandatory pension system in China offers inadequate retirement income, particularly for those workers whose income levels are above 300% of the urban average salary. This means that Chinese workers will require having other income sources while in their retirements. Before we emphasize on employer provided programs, it may be useful to consider family, as well as individual savings.

It is quite clear that the insufficient social security system that is currently in place has created a need for more saving programs. For reasons related to social and cultural aspects, most Chinese employees have a likelihood of appreciating the opportunity of building up additional savings. This can be effective only if they are convinced that the employer is offering a better avenue than they could find in their own. Many NGOs from the community of employers, the government, and World Bank is significantly pushing towards unification of policies and regulations related to pension plans across the nation. Among the expectations is an inclusion of the long-term social security system, and in short term, a national tax policy for EA schemes. The creation of a national, standard policy could encourage many organizations. The details of such a policy should also be reasonable enough in order to attract as many companies as possible. The most significant incentive for most organizations is typically related on how the government treats tax. If they reduce, waive or defer (for both employers, and employees), and which could be provided through a savings program, many more organizations may be willing to divert their funds from cash compensations for this aim (Keith, 2008).

In essence, an effective public pension plan ought to offer an efficient protection avenue against the risk of longevity, and as a protection floor against old age for Chinese citizens. However, the deteriorating ratio of replacements alongside the consistent decline in income class by a large number of retirees as time goes by have instigated serious concerns on the effectiveness and fairness of the Chinese public pension plan on its basic function where the impact of inflation have taken an implicit but crucial role. The general perspective of the urban workforce and retirees scheme have resulted into concern that there is no efficient mechanism that has been established in the country to tackle the issue of post inflation adjustment problem which has been consistently been deteriorating. Additionally, the current pension plan is still not effective with regard to protection against inflation up to the retirement period especially for specific calibers of population such as migrants and urban residents (Mitchell, 2008, 112).

The aging society in the present day China is undergoing a rapid process. Specifically, there are challenges in the country that are in relation to the aging issue. Some of these issues include low benefits awarded to beneficiaries, and inadequate coverage. This will significantly jeopardize the goal of reducing poverty and smoothing consumption. With the increased rate of retirees who basically depend on their retirement benefits as their major source of income , it is expected that the effect of inflation will make the public pension plan to be in a dilemma. Moreover, the dynamic nature of the public pension plan and the integration process of the regional will result into negative ramifications that may not have been intended on the funding status, and plan liability. This will significantly jeopardize particular welfare of the urban population and population transition. The risk of inflation, which is essentially one of the most crucial financial risks in public pension scheme, requires to be seriously taken into consideration in a well-structured perspective (Munnell, 2011).

The 1997 and 2001 pension plans introduced by the Chinese government have not positively contributed to the resident consumption especially in the time of the high rate of swift income rising cycle. Further, the public pension plan has not been effective with regard to consumption smoothing. Taking an example from Shangai, the lowest income class has regularly crossed over the poverty line despite their reliance on retirement benefit. This is just but an indication the benefit plan’s function of poverty reduction from the public pension plan has not worked well even in the highly developed regions in China. Among other effects, the impact of inflation, as a significant benchmark for different parameters, and features has played an irreplaceable function with regard to those distortions.

The increasing rate of aging population coupled with a rapid development surely needs a retirement plan that consists of broad coverage with sufficient and affordable benefit schemes. The system’s framework should be based on a universal protection floor against poverty in old age. This should be able to cover all elderly individuals in China, irrespective of their participation in the contributory pension plans. Concerning this basic, China should be able to depend fully on retirement savings that are fully funded.

I do recommend that the present basic pension plan for urban employees, that constitute of the first tier of pay as you go type of benefits and the second tier that mostly constitute of the “notional” individual retirement accounts, into a state system of properly funded individual accounts that will be regulated publicly but invested and managed privately. It would also be important to expound the supplementary retirement coverage under the newly established private enterprise annuity system in China.

The government’s recent initiatives of reforming the pension plan such as setting the goal of achieving a universal coverage by 2020, increasing funded savings have however, fallen short of providing a complete solution to the issues facing the national pension plan. This is because as at the present, the coverage for the public pension plan has remained far from being universal, even in urban areas. The government has until recently not taken serious measures to extend the program rural areas. The basic system of the pension plan labors under huge liabilities that are unfunded especially for the large number of retirees from China’s state owned sector that is already downsized. This translates that the rates of contributions, and subsequently evasions are already high. Since the existing social benefits are fully portable, employees have in most cases faced a tradeoff between retirement security, and job mobility. Although individual accounts are now partially funded, they are significantly earning quite a low return rate which they may not possible generate a promised rate of replacement.

As in 2012, only about 65% of employees in urban areas were contributing to and earning a benefit under the basic pension plan or specific systems for civil workers. This pension plan coverage has only be focused on state employees, and enterprises that are collectively owned. These groups of employees only account for a low share of the general employment. Most of the workforce from the highly growing private sector including rural migrants has not been covered. Alongside this low and partial coverage, the existing pension plan has significantly suffered from structural issues that constitute its basis for building a future retirement security (Roeder, 2012, 5).

There have been complains from members of the national pension plan of being required to pay high rates, and which are increasing on regular basis. This has imposed a huge burden on employees. Although it can be construed that the present day retirees are receiving a generous benefit, the low return rate on contributions, the small base of coverage, and lack of portability have translated that it may not possibly offer a sufficient benefit to future retirees. It is quite unfair that residents in rural areas, including those employed in manufacturing plants and enterprises have not been able to access pension benefits. The government has not provided an adequate response regarding the exclusion of a large number of workers in rural areas from the pension plan. Although there exists a special rural pension plan, which mainly constitute of personal accounts, the benefits in this plan are tiny. Furthermore, participation is voluntary. For instance, as at present, only a mere 11 percent of rural employees are involved in the system. This share has been consistently fallen and not risen. On average, beneficiaries in this system receive an average of 12 dollars on a monthly basis.

The newly established enterprise annuity system may be meeting a crucial need. However, it is currently facing a considerable number of obstacles in its development process. Some of the notable challenges include but not limited to high set up costs since custodian, trustee, fund manager, and administrator functions ought to be performed by different financial institutions. Other obstacles include first obtaining an approval from the supervisory agency, insurance approval, and the investment security approval. As we also noted earlier on, there have no clear guideline from the government with regard to the issue of tax treatment on aspects such as investment earnings, employee contributions as well as the basic pension plan itself. Hence, this assumes a burden to some portion of its unfunded liabilities (Roeder, 2012, 22).

Individual accounts for the basic pension plan are still earning a far lesser amount of market rate of return, despite being partly funded. The increment of subsidies by the central government though moving in a good direction have been inadequate to effectively enable the government to reduce the pension system’s rate of contribution that is prohibitive. In comparison to some years back, for instance in 1997, the membership contribution rate as per today is much higher than it was in 1997. In spite of the progression towards a provincial level type of pooling, there are very many employees today who are stilling facing a stark tradeoff between retirement security, and job mobility. Pension coverage have until now remained to be far from universal or nationwide not only in rural areas, but also in some sections of urban regions. Despite the government issuing promises of covering all in pension plans, it has not really taken serious measures towards achieving these objectives. There is therefore, a need for a more critical restructuring of the entire retirement system.

China requires a deeper, and broader capital markets in effectively establishing a funded pension system in order to successfully tackling the issue of the increased aging population. However, it as well needs a system of pension plan in building a deeper and broader capital markets which is highly depended upon by the economic development agenda. An effective retirement reform could play a positive and profound role in facilitating the development of China’s development markets. It can be agreed that later or sooner, there would be a need for a developing economy to establish a deep and broad capital markets in efficiently allocating capital to the merging companies and enterprises that could propel its economy up the global value scale in future years. The nation of China is presently at a crossroad, mainly due to the fast approaching age wave, alongside the high upward spiral with regard to dependency costs, this aspect tends to hamper economic development. Apparently, this is the time when China need to take up serious measures towards achieving a universal pension plan objective.

The Fairness of the Pension Plans in China

There is a need for a pension plan that can cater a basic level of income support for the aged in both the urban and rural areas who are not able to meet their basic needs from pension sources that are contributory. Elimination of such people from pension plans is unfair since it may not be the wish of these elderly people to lack these basic subsistence needs. Such Kind of benefit should be designed in such a way that in incorporates the national framework with regional variations that is structure. Further, the benefit level should be grounded on the proportion of the regional average wage in the case of urban areas, and the regional average per capital income in the case of rural areas. In addition, it should also offer a minimum income support that is higher that the threshold in the social assistance. Persons who have attained the age of 65 years should be entitled to a minimum level of social security benefit with application of pension test that could reduce the amount of benefit by a proportion of other pension benefits which those aged 65-74 receive. The extent of such a reduction should be a policy choice that is guided by the relative focus on retirement incentives, incentives, and final costs. These benefits should be indexed on the same basis as other contributory benefits that have been proposed, that is a mix of wages in urban areas or the capita income in the case of rural areas.

The reform vision should address both the present and long-term needs on the assumption that reforms on insurance plans should not carried out too often. Policies on insurance plans should constitute of standards that are uniform, yet have adequate flexibility in order to accommodate the diverse economic characteristics, and regional needs of China. They also need to reflect the decentralized nature of the present policies, and administration, but seek to achieve risk pooling for the long term. Pension insurance and savings require a sharing a sharing of risk management and financial risks burdens at multiple levels including the central government, prefecture governments, country levels, municipal and provincial management.

In essence, the logic behind a unified framework for all citizens while at the same time offering flexibility for local situations is to accommodate the diversity of economic situation and the decentralized administration structure. It is also aimed to reduce the coverage gaps and fragmentation, provide the portable instruments for labor mobility, and ensure that all the elderly poverty protection as a policy goal is satisfactory for all employees. A broadened individual, and occupational pension savings arrangements could provide security retirement savings avenue for employers, and workers who are seeking to supplement those benefits that are offered by the contributory pillar.

citizens in China have been critical that the government authorities do not really require to input the nation’s pension pool but will enjoy higher rate of annuities after their retirement in comparison to their peers from farming or enterprises owing to the different plans that are in pace. China’s adoption of divergent pension plans for urban dwellers, rural residents, enterprise employees, government employees and institutions that are sponsored by the government. The differences of these pension plans have caused a gap in the payment of pension benefits to different groups of people. The lack of centralized and uniformed pension plan system has resulted into imbalanced payments in various regions. Apparently, the divergence has hampered the sustainability, and fairness of the countries’ pension system.

Why the Current Pension System Requires a Further Reform and Change

Presently, China is in the middle of a major economic and demographic transition. For instance, the country is currently facing a demographic transition, and aging process because of decreased fertility, and a significant increase in longevity. There is therefore, a projection of dependency ratios for old age immensely rising up over the next three decades. The high rate of economic transformation and growth in this country have raised the demand for both the dynamic , and mobile labor force that can efficiently adjust to the high pace of change. Similarly, the rapid demographic change is expected to constrain the size of the working class population. The limited portability, and fragmented pension provisions of the accrued benefits are some of the barriers to the mobility of labor. In addition, the decreased ages in urban retirement have greatly contributed to the constrain caused by the high rate of labor demand (Roeder, 2009).

Though the government officials and policies have placed a growing premium on a relatively balanced growth between the rural and urban areas, households, and different regions, the pension system is as per today contributed to divergence. As the government and policy makers find ways of rebalancing the growth model towards a greater reliance on domestic consumption, the uncertainty and lack of coverage in regard to financial protect secured with the present pension plan have only encouraged a high precautionary savings.

Despite the government having taken crucial reforms, there is a necessity of a holistic long-term vision than can effectively guide future policies. The current insurance pension plan have a number of positive features but it requires to respond to the increasing needs of China’s increasingly mobile and complex labor force. A long-term vision would take into consideration both the urban and rural economies. Further, an effective framework is required that can effectively serve all the workers both outside, and inside the formal sector. It should consider workers who until recently have not been served including, migrant and rural workers, self employed, informal employees, and non-salaried workers. Although the Enterprise Annuity (EA) offers supplementary pension plans, it is main focus is on the formal sector enterprise. The supervisory, and regulatory framework, similar to incentive framework requires a substantial reform. This includes a tax treatment that needs to be broadened in providing a supplementary pension plan for small organizations, self-employed individuals and other groups of individuals.

The aging society in the present day China is undergoing a rapid process. Specifically, there are challenges in the country that are in relation to the aging issue. Some of these issues include low benefits awarded to beneficiaries, and inadequate coverage. This will significantly jeopardize the goal of reducing poverty and smoothing consumption. With the increased rate of retirees who basically depend on their retirement benefits as their major source of income , it is expected that the effect of inflation will make the public pension plan to be in a dilemma. Moreover, the dynamic nature of the public pension plan and the integration process of the regional will result into negative ramifications that may not have been intended on the funding status, and plan liability. This will significantly jeopardize particular welfare of the urban population, and population transition. The risk of inflation, which is essentially one of the most crucial financial risks in public pension scheme, requires to be seriously taken into consideration in a well-structured perspective (Robalino, 2013, 78).


Conclusion

This paper has analyzed the evolution of the pension scheme in China, and its efficiency and fairness in various aspects. Though the government has undertaken substantial reforms to the pension scheme system, including those that have placed a growing premium on a relatively balanced growth between the rural and urban areas, households and different regions, the pension system in China is as per today contributed to divergence.

There have been complains from members of the national pension plan of being required to pay high rates, and which are increasing on regular basis. This has imposed a huge burden on employees. Although it can be construed that the present day retirees are receiving a generous benefit, the low return rate on contributions, the small base of coverage, and lack of portability have translated that it may not possibly offer a sufficient benefit to future retirees.

China’s adoption of divergent pension plans for urban dwellers, rural residents, enterprise employees, government employees and institutions that are sponsored by the government. The differences of these pension plans have caused a gap in the payment of pension benefits to different groups of people. The lack of centralized and uniformed pension plan system has resulted into imbalanced payments in various regions. Apparently, the divergence has hampered the sustainability, and fairness of the countries’ pension system.

There have been suggestions from various stakeholders who have given ideas on the necessity of more reforms. According to policy makers, more reforms are required in order to meet the needs of the increasingly changing society and economic conditions of China. Some of the issues that need to be focused include costs associated with legacy, limited coverage, and system fragmentation. Similarly, there are also many challenges that are consistently cropping in including increasing rate of urbanization, rural-urban disparities, income inequality, and alteration of the family structure, in formalization of the labor force as well as the impact of increased globalization.

In order to make the system efficient in Chinese perspective, the author proposes incorporation of a common framework for a basic citizens social pension for all citizens. In addition, the author also argues that the old age insurance system should be strengthened to include the integration of all employed people such as PSU employees, civil servants, migrants and so on. It would also be fair to incorporate a voluntary individual retirement insurance scheme that will be capable of providing state subsidies as incentives for persons to save for their retirements above those that is presently at place.

There is a need for an effective reform vision to tackle policy issues which the present system do not adequately provide for. The policy makers need to take into consideration the emerging needs of the pension scheme system and generally anticipate, and consider the future needs in China’s dynamic and changing society. Despite the government having taken crucial reforms, there is a necessity of a holistic long-term vision than can effectively guide future policies. The current insurance pension plan have a number of positive features but it requires to respond to the increasing needs of China’s increasingly mobile and complex labor force. Along-term vision would take into consideration both the urban, and rural economies. Further, an effective framework is required that can effectively serve all the workers both outside and inside the formal sector. It should consider workers who until recently have not been served including, migrant and rural workers, self employed, informal employees, and non-salaried workers.


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