Fund shortage may spell social security crisis
(Reuters)
Updated: 2005-09-26 10:15

China's under-financed social security fund is searching for new approaches to tackling a widening deficit, four years after it scrapped a plan to sell some state assets to help close the gap.

The National Council for Social Security Fund (NCSSF) celebrated a tense fifth anniversary on Sept. 7, amid widespread worry over the program's ballooning deficit.

The World Bank estimates the gap could rise to 9 trillion yuan (US$1.1 trillion) by 2075. In July 2005, the fund was valued at only 181.8 billion yuan (US$22.4 billion), and had received just 30 billion yuan (US$3.7 billion) from sales of State shares. It can expect to receive even less in the future, as fewer State companies are listed on the overseas market and are thus subject to stricter contribution requirements.

The Party and the government have tried various approaches to shift State assets into the fund, but the conflicting interests of many different departments have complicated the transition. In September 2004, the State Council established a working group with representatives from four key central ministries to accelerate the process, according to a report in the September 19 issue of China's Caijing Magazine, quoted by Reuters.

Meanwhile, the privatization of State assets to bolster the fund is gathering steam. Many local governments have drafted timetables for selling State assets under their control to private or foreign investors. According to the NCSSF, all State-held assets should contribute to the social security fund, in addition to a portion of revenues from the sale of land and mineral resources.

Additionally, China's stock market, whose downturn in 2001 was blamed for worsening the fund's deficit by reducing inflows, now seems to be on the rebound and may be part of the solution. When the council was established in 2000, the State decided to bolster the social security fund by selling State shares not previously traded on the market. In May 2001, the State Council stipulated that state-owned companies would sell State shares equal to 10 percent of the value of their IPO or share issuance and contribute the income to the social security fund. The market slumped when the plan was announced, and within a month the State had reversed the move, temporarily lifting the market. (The contribution requirements still apply to companies listed overseas.)

But Wang Jianxi, vice-chairman of the State investment company Central Huijin, said the implementation of the regulation did not cause the stock market nosedive. "The small sum of capital concerned, about 1 billion yuan (US$123.5 million), is about the size of an IPO from a medium-sized company," Wang said. "That alone should not have rocked the market."

Wang said the 2001 plan could be resurrected if the market rebounds. He believes shares in listed companies should be transferred directly to the fund, for its managers to hold or sell as they see fit.

Long Yifei, a professor at Renmin University of China Law School, said that the fund must be replenished now, with little time to spare as China ages at an increasing rate.

In the mid-1980s, China adopted a semi-pay-as-you-go pension system, under which a working unit generates pension payments for its retired employees by collecting a percentage from current employees' salaries, and there is no social security or pension fund. Since 1993, it has shifted toward a funding scheme in which workers would pay a fixed percentage of their income into a government-managed social security fund. These accumulated savings would then be invested, in the stock market for example. When the employees retire, they will be paid their pensions from the fund, as well as returns on the investments.

According to State statistics, some 160 million urban and township employees had joined the program by late 2004, each contributing about 28 percent of their total salary. Official statistics estimate retirees could each receive about 750 yuan (US$92.6) per month, which would hardly cover their basic living expenses. Yang Yansui, a researcher at Tsinghua University's School of Public Management, warns of social unrest if a dysfunctional social security system cannot provide for a majority of the elderly.

The system is plagued further by transitional problems. Many retirees and workers who began work before China adopted the new funding scheme must depend on the State to contribute retroactively to their pension accounts. These "covert debts" could cost the State up to 2.88 trillion yuan (US$355 billion), according to a 1995 estimate by labor authorities. (Other estimates are slightly more modest: A 1996 World Bank report put the figure at 1.92 trillion yuan (US$236.7 billion), and in 2000 State Council experts put it at at least 2 trillion yuan (US$247 billion)).

During this transitional period, enterprises must pay into the accounts of both current and retired employees. Many have defaulted, forcing provincial social security departments to tap into individual accounts in order to meet present-day pension obligations. According to the Ministry of Labour and Social Security, the de facto debt owed back to those individual accounts reached 740 billion yuan (US$91.4 billion) last year. Analysts believe that if the government does not take immediate corrective action, it will face an epic repayment crisis as these workers retire.

From 1998 to 2004, the social security fund received about 200 billion yuan (US$24.7 billion) from State budget.