All things worrisome about the Chinese pension fund system

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It is officially confirmed that the balance sheet of the Chinese pension fund is in red.

The chair of the Chinese National Council for Social Security Fund, Xianglong Dai, said at a recent conference that soon the government will be struggling harder to pay those life-long hard workers. Economists are in heating debate about the size of the deficit, but consensus has been made that it is at least 13 trillion RMB ($2 trillion). One result of which could be extending the age at which one is allowed to retire. Currently the age is 60 for men and 55 for women, and a three-year extension could be quite possible if the government could not find a solution to shrink the deficit soon, according to various Chinese media reports.

The reason for the deficit is the poorly set up system. For non-governmental workers, sources of their pension are deductions of their income, company contributions, and government contribution. The system can not stop the pension fund being sucked into the governments’ overall budget planning. The government of various levels have control of the distributions of the fund. More often than not, the pension fund would take hits during the budget meetings, because apparently, there are many  projects that need money more urgently than those who have stopped working.

However big this deficit is, one group of people are not getting sweaty at all. Those on government payrolls are the least likely, if ever, to be influenced by the looming situation. Chinese pension fund system go to separate lanes when it comes to the difference between governmental workers and non-governmental employees. Governmental employees, unlike those who have to contribute to their own retirement, are taken care of by the tax money. On top of this, the amount they get are usually 3 to 5 times more than that of non-governmental workers.

It’s not like that the government has not tried to fix it. The amount going to non-governmental workers have been raised 8 times in the past few year, by almost 500 RMB on average. However, seriously, how much can an increase of $73 a month help, let alone inflation, and little regulation of the execution of this policy across the country.

Another loophole of the system has something to do with the residence registration policy of China. “Hukou”, or residence proof, bound workers in many ways to their birth places even when they move to other cities. Workers are only allowed to collect their pension fund to the amount in accordance to the standard of  the places where their residence registration is. Hundreds of thousands villagers migrate to cities for work; pay a lot of money in accordance to the city standard for their retirement, but end up collecting way less when they retire. This is just not right.

So here it is, a highly divided and broken system. Good thing is that the government has been experimenting ways of investing the pension money. That’s the reason why the National Council of Social Security Fund is established. Yet to happen is to let the pension fund go public. Tons of analysis have been done about the stock market reaction when countries such as the U.S. and Japan let their pension go public. I really dont see the point of these analysis because of the difference of market situations and time frame of China and other countries. I would say, given how big this step is, China should wait until some of the loopholes mentioned above have been decently fixed before trying to steer the pension fund to another direction.

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