Consolidating social security

In the United States, unless there is major surgery to the federal medical and pension schemes, social security is projected to take 70 percent of the government budget (from its current 30 percent) by 2040. China may be a long way off from that position but it's moving there fast. It entered the aging society period in 1999 when 10 percent of its population became at least 60 years old. In 2012, the proportion of elderly people is close to 15 percent and rising fast. About 3 million people are retiring every year and the number of people in their 80s, who often require the most intensive support, is rising by more than 1 million a year.

For most of the past decade China has experienced not a demographic dividend, but a participation dividend as millions of workers not previously enrolled joined as contributors, swelling the contributor-retiree ratio even as the number of retirees has risen sharply. But the total workforce will peak next year, after which the contribution dividend will start declining.

So the new leadership cannot put off taking measures on retirement age. It needs to strike early and fast - perhaps the next National People's Congress - by raising women's retirement age to that of men before 2015.

After that, the retirement age should be automatically raised every year so that by 2025 it would be over 63. At the same time, the minimum contribution period for a full pension needs to be raised to 35 years and, for equity reasons, civil servants should be made to pay higher contributions. These changes will begin to defuse the worst financial impacts of the demographic time bomb.

But policy changes alone will not be enough. The technical management of changes also needs to be improved.

For years local authorities at all levels have jealously protected their rights to manage and invest in their own pension funds and, as a symbol of their sovereignty, resisted all central government efforts at real "unified" pooling. This policy stance can no longer be supported.

With many local governments suffering real revenue pressure because of falling housing markets, existing surpluses need to be fully pooled, and properly invested. For more than 10 years the National Social Security Fund has been growing its reserve funds steadily through a cautious but gradually more ambitious investment strategy.

Now provincial governments need to be given the same freedom, under central supervision, to realise the same benefits. Large reserve funds that are sensibly managed will not reduce the costs of retirement, but will help ease the burden for the next generations of workers.

Finally the youth need to be educated in the benefits of investing in their own retirement and persuaded to act on it.

The government implemented the Enterprise Annuity Scheme in 2004 to introduce a standard company pension scheme for the evolving private sector. But after a good start participation in recent years has stagnated.

Enterprise annuities need to be revived by sensible tax incentives to companies and individuals, and a more permissive investment regime, but most of all by making pension rights individual and transferable. China expects its young workers to be very flexible. Its workers have the right to expect nothing less of its pensions policy.

The author, based in Kuala Lumpur, is an international financial consultant and former fund management expert on the EU-China Social Security Project.

(China Daily 10/31/2012 page9)