Shanghai’s elderly are everywhere. Stretching in morning exercises in parks, sunning themselves on benches during the day and dancing on the sidewalks at twilight, they are just one of many constant reminders of the daunting challenge China faces in providing for its fast-aging population. Less than a third of its elderly are covered by pension schemes today, and though programs are now being expanded to cover a wider range of pensioners, the problem is likely to get worse before it gets better.
China is now reaching a “tipping point” — as a percentage of the total population, China's workforce has peaked while the number of elderly is soaring, says Richard Jackson, director of the Global Aging Institute at the Center for Strategic and International Studies (CSIS) in Washington, D.C. This is mainly due to the one-child policy, which combined with rising affluence has accelerated a sharp decline in fertility. “The fertility decline was extremely steep, from five children per women on average in the early 1970s to two by the late 1980s and now 1.6,” he adds.
While the surge in the elderly population is an issue confronting all industrial societies, China faces a much bigger challenge than many. Its average income and level of social and economic development are much lower than, for example, Japan or South Korea. “The challenge for China is bigger because it has not yet had time to put in place full pension protections of a modern welfare state,” asserts Jackson.
As the Chinese population ages rapidly, the government faces the daunting task of expanding pension programs for not only for urban workers but also farmers and the urban unemployed. All this leaves a looming collision of demography and policy that's likely to compound concerns about social stability and economic growth in the country, say a range of experts.
A Policy Collision Course
The country’s remarkably strong economic growth over the past three decades has brought China's population of some 1.3 billion unprecedented prospects of affluence and longevity. Longer life expectancy thanks to improved living standards and health care means that nearly a third of the population, or 438 million Chinese, is expected to be over the age of 60 by the end of 2050, predicts the United Nations, compared with a world average of about 22% and is more than double the 178 million over-60s in China in 2010.
Last year, there were 7.8 working adults (aged between 15 and 59) for every elderly person in China. But the United Nations predicts that the ratio will fall so that by 2050, there will be 2.4 working adults for every elderly person. Between 2015 and 2050, China’s working age population will contract 23%, assuming current demographic trends, according to a report co-written by Jackson titled, “China’s Long March to Retirement Reform: The Graying of the Middle Kingdom Revisited.”
Meanwhile, the gap in living standards between the wealthy coastal cities and the poorer rural areas is widening, and the government hasn't made much headway in redressing the disparities. The lack of adequate pension coverage and funding is likely to worsen the politically volatile gap between China’s haves and have-nots, while pressure intensifies on families to continue handling elderly care on their own.
While state pensions are woefully inadequate in urban areas, they're virtually inexistent in the villages. “The biggest challenge is to create some degree of equality between rural people and urban people,” says Pieter P. Bottelier, professor of Chinese studies at Johns Hopkins University in Washington, D.C.
Most of China’s work on pension reforms has focused on urban areas, where workers once enjoyed relatively generous cradle-to-grave benefits at state-owned companies. Since state enterprise reforms began in the 1980s, however, local governments have taken up the responsibility for managing basic pension systems. In 1997, China launched a pay-as-you-go system so employers pay 20% of employees’ salaries into pension accounts while employees pay 8% of their salaries every month, for a minimum of 15 years. The program is based on "defined benefit" formulae, so that when they retire (at 60 or 65, depending on the sector), employees receive a predetermined monthly income based on tenure, salary and age regardless of how their investments have performed.
Part of the problem is that while the central government sets the policies, it's up to local governments to run the programs, leaving a mish-mash of practices. “China’s pension system is so fragmented,” says Ce Shen, a professor of social work specializing in China’s pension system at Boston College. The ideal, he says, would be to set up a unified, national pension system.
Until that happens, however, many obstacles deter urban workers from joining even the mandatory pension schemes set up by local governments. Chief among them is that workers can't take their pension accounts with them if they move to another city.
Many workers are also wary about how their pension contributions may be used.In 2006, a huge scandal in Shanghai over the use of city pension funds for other local government, and even personal, spending led to several arrests, including that of the Party secretary, further eroding trust in the system.
“Chinese people, unlike the Japanese, do not trust their government at all," says Wang Wenliang, a China social security specialist at Kinjo Gakuin University in Nagoya, Japan. "That is why the government had to create individual accounts for which they know how much money they put in every month and every year.”
For workers who migrate regularly and often work in China’s sizeable informal sector, there is even less incentive to join, adds Wang, who was born in a rural part of central China’s Jiangxi province.
Jackson agrees that compared with the urban schemes, implementing rural schemes to accommodate migrant and casual labor is a different challenge altogether. “China has such a large informal sector," he notes. "It is very difficult to force compliance when workers do not have formal contracts or were hired casually.” What’s more, according to Jackons, the government estimatesthat about 30% of workers have pension coverage is overly generous. “I would say about 20% to 25% are earning meaningful pension entitlements.”
According to the country's Ministry of Human Resources and Social Security, 257 million Chinese were enrolled in basic urban pension programs as of the end of 2010, while 102.7 million rural Chinese were part of a rural pension program launched in 2009.
Running on Empty
To reduce risks, local governments managing the programs are not allowed to invest in shares, but that limits them to the minimal returns earned through government bonds and banks. More worrisome is that in many localities, programs are insolvent because the modest funds collected since pensions were set up have been siphoned to pay for today’s retirees, who didn't contribute to any funds during the earlier era of lifetime employment.
“What happened in the late 1990s is that many localities ran out of money to pay pensions and they just could not pay them at all," says Bottelier. "That led to social discontent in many localities." The central government provided some funding to help stabilize the situation, but the problem lingers.
During the state enterprise reforms in the 1980s, “no provisions were made to fund pension obligations for those people already entitled to pensions or close to the pension age,” Bottelier notes. “When the new system kicked in in urban areas, all the funds they collected from payroll deductions had to be used to pay current pension obligations, while individual accounts remained empty in most places.”
In July 2010, Zheng Bingwen of the Chinese Academy of Social Sciences told a reporter at Global Times newspaper that China was running a RMB 1.3 trillion (US$203 billion) pensions deficit. But Wang of Kinjo Gakuin says the exact scale of the problem is uncertain. “No one knows how big the deficit is right now, since local governments refuse to provide the figures," he asserts. "In the end, the central government will have to pay the deficit. If it doesn’t, those living on pensions will rise in protest.”
One of China’s main objectives for setting up the National Social Security Fund (NSSF) in 2000 was to address the acute cash flow problem of the pension plans by serving as a last resort. “The NSSF has not been used yet. It is still growing and is not big enough," says Lillian Zhu, a senior analyst at Z-Ben Advisors in Shanghai, a fund management consulting and research company.
The NSSF has grown more than tenfold, to RMB 856.7 billion as of the end of 2010 from the initial RMB 80.59 billion. That's the equivalent of about 2% of China’s GDP today, and Jackson estimates the country needs 2% to 3% of GDP annually for the next 20 years to fix its pension problem and cover unfunded state enterprise liabilities.
The legacy of pensions from state enterprises, which for years paid low salaries but provided hefty pensions, is a heavy burden for not just governments, but also employers and employees. At 28% of salaries, pension contributions in China are more than twice as high as in the U.S., according to Jackson. “The unfunded liability has to be paid one way or another,” he says. "What the government ought to do is 'socialize' the unfunded liability and pay for it through general revenues, reducing the contribution rate to 15%. Then, you will begin to increase the participation rate.”
Beijing is mindful of the obstacles. In 2009, for example, it enacted regulations to make pensions portable. But such changes have not been implemented by local governments, says Wang of Kinjo Gakuin. Moreover, the salary gap between rich provinces and poor ones makes pensions hard to transport. Last year, the average per capita income was RMB 5,919 in China’s rural areas compared with RMB 19,109 in urban areas, according to the national statistics bureau. That wide disparity means wealthier governments are resisting paying more to make up the difference. “The Shanghai government would not like to accept a pension account from my hometown in Jiangxi because they would have to make up for the difference between the contributions,” Wang says.
Piecemeal and Underfunded?
While the problem of providing for urban workers is daunting, it pales in comparison with dealing with China’s 242 million migrant workers when they retire. Most migrant workers "do not want to join [plans] because they change jobs very often and move from one place to another,” says Zhu of Z-Ben Advisors. The rural pension program launched in 2009 consists of two tiers — the first is guaranteed and paid by the central government at a rate of RMB 55 a month, and the second is supported by individual contributions ranging from RMB 100 to RMB 500 a month. But most migrant workers balk at paying a contribution of even just RMB 100. “Even the lowest pension premium is too high for them,” says Du Peng, director of the Gerontology Institute at Renmin University in Beijing.
So far, 102 million of China’s 674 million residents have joined the rural pension program. Most farmers are even more wary than their city counterparts of paying into a government-run system. “This is the first time ever in Chinese history that farmers have a pension system. But the system has big problems,” notes Shen of Boston College, who is originally from Shenyang in northeast China. “Farmers do not have confidence in the government pension system and they’re not sure if they will benefit from their contributions when they retire.”
Seeking to expand overall coverage, the government launched a similar program for about 50 million urban unemployed residents. The central government pays the first tier of RMB 55 while participants pay between RMB 100 and RMB 1,000.
So far, such efforts are piecemeal and underfunded, say experts. “The Chinese government has made economic development the priority when they should make social security problems, such as pensions and health care, their top priority,” says Wang.
The World Bank and the International Monetary Fund have repeatedly warned China’s leaders that without a better social safety net, the country will struggle to shift its economy from being heavily reliant on exports as it is today to one that is more driven by domestic demand.
Time isn't on China's side. Even in wealthy Shanghai, it's not uncommon to see elderly rummaging through rubbish bins, looking for bottles to recycle and sometimes food. “I call it a ‘humanitarian aging catastrophe,’” says Jackson. “Over the past four to five years, the Chinese government has become acutely aware of the challenges and they are taking steps. But it is a big problem and the steps have to be bolder. And it is going to take more money.”