China’s pension challenge getting bigger (and bigger)

The pension schemes of 13 Chinese local governments are reportedly now in deficit, or close to deficit, and the number will only grow if nothing is done.
China’s pension challenge getting bigger (and bigger)

Thirteen local governments, representing almost a third of the Chinese population, are reportedly unable to fully cover their pension expenses from worker contributions, highlighting the big challenges facing China as a result of its rapidly ageing population and historic one-child policies.

While there were roughly 7.6 workers for every retiree in 2016, this is expected to fall to 2.1 workers per retiree by 2050.

To plug the projected pension funds deficits, the 13 cited regions, which include Guangxi and Tianjin, will have to lean on fiscal budgets, creating a precedent that other Chinese regions might have to follow as the Chinese population continues ageing, Wu Haichuan, head of retirement business at Willis Towers Watson, told AsianInvestor.

Increasingly aware of the need to make up shortfalls in the public retirement system, the Chinese government last month initiated a plan to shift stakes in state-owned enterprises to national pension asset managers and some province-run ones. The initial stage of the SOE asset transfer is set to take place over the coming 12 months, although the capacity of these stakes to offer sustainable sources of dividend income in the years ahead remains to be seen.

According to a study issued by China's Ministry of Human Resources and Social Security and reported by Beijing News on Sunday, 13 of 32 districts would be unable to fully cover their projected pension fund outgoings over the coming 12 months. 

Beijing News further reported that northeastern Heilongjiang province had an accumulated pension fund deficit of Rmb23.2 billion ($3.5 billion), citing the report on the development of social insurance in China for 2016. 

The article did not specify whether its figures were as of the end of last year but, if so, all 13 public pension fund schemes look set to end the year in the red. AsianInvestor tried to contact the ministry to get the full report but was unable to before press time. 

Soaring spending
Total spending from the country’s total basic pension insurance fund for the urban employed rose 23.4% year-on-year to Rmb3.2 trillion in 2016. This rate of increase outpaced by 3.9 percentage points the rate at which income grew to Rmb 3.5 trillion, extending a trend seen since 2012.

Guangdong ranked number one on the list of districts reportedly covered, based on the number of months that the district’s basic pension insurance fund could support. The province had an outstanding balance of Rmb725.8 billion in 2016, which could support social security payments for its retired population for 55.7 months.

Beijing and Tibet followed. Beijing’s Rmb 352.4 billion could last for 39.8 months. Although Tibet had a much lower positive balance of Rmb5.9 billion, that is enough to cover the needs of its retired population for 32.8 months.

The 32 districts covered in the study include 22 provinces, four direct-controlled municipalities, five autonomous regions and a unique economic and paramilitary organisation in the Xinjiang Uyghur Autonomous Region.

Workforce movements

In China, the social security system is not implemented on a national level. Each local government collects social security contributions from employees and employers in its district and uses the amount to support pension payments for the retired, Wu said.

The contributions are linked to the wage levels of the individuals, while the pension payments are linked to the average salary level in that district. When the pool of money collected solely for social security is not enough to meet the payment needs, the government has to make up for the shortfall with fiscal expenditure, he said.

In China, as with most countries, the pension system is made up of three pillars. The first pillar is run by the government, the second pillar is mainly made up of corporates' annuities schemes, while the third pillar is built from personal savings and voluntary individual contributions to pension plans.

The deficit happens when the district has an ageing workforce, or in the case of Heilongjiang, most of the younger generation flees their hometown in search of better job opportunities, Wu said.

“Guangdong, Beijing don’t have big problem, as more [working] people are contributing. Many people are leaving for big cities because of urbanisation in China,” he said.

“[Taking the country as a whole], there is still more people contributing now, as the working force aged between 20 and 60 is still more than the dependants…but the excess will decline gradually, even in Beijing and Shanghai,” Wu warned.

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