Why is China's plan to raise the retirement age objected?

By He Qinglian on October 25, 2015
Source article in Chinese: 何清涟:中国推迟退休年龄为何一片反对声?

Finally China's coming up with a plan to reform the pension system: the retirement age is to be raised gradually. This article will be about the key measures of the reform, the reasons the government intends to initiate this plan and why the public oppose it.

Key measures of this reform

On October 14, head of the Human Resources and Social Security Ministry (MOHRSS) Yin Weimin said in a meeting that currently China's retirement age is the lowest in the world, standing on average below 55 years old; upon the approval from the central government, the MOHRSS will disclose to the public its plan to reform the pension system, the aim is to make the retirement age reasonable by raising it a few months every year.

One of the reasons this reform is introduced is the mounting pressure of the aging population in China. Currently, the number of people aged 60 or above is 210 million, accounting for 15.5% of the total population; and according to projection, the ratio of people of this age group will reach 19.3% in 2020, and 38.6% in 2050, this makes China's dependency ratio increasingly higher and the burden heavier.

The current retirement policy in China was formulated in the early 1950s. In those days, the life expectancy in China was below 50. Now, more than 60 years later, the life expectancy reaches above 70, the Corporate Workers' Pension Security System has now over 80 million members whose average age of retirement is below 55 years old.

This pension system reform, a plan set to comprise the basic national pension and individual savings, has clearly drawn inspiration from the English experience.

In view of the fast approaching problem of each English person with a job having to support two retirees, the English government formally announced in 2014 its pension reform scheme. By lifting the retirement age 6 months every year, the English government seeks to raise the pension age to 69 by 2040 and save 500 billion Pounds in the next 50 years.

Pension age reform as a way to pass the buck

Introduction of pension age reform is a clear sign that the Chinese government wants to pass the buck.

A few years ago, several studies in China found in the country’s pension system a massive gap, which has two contributing factors.

First, the big problem of “empty pension accounts”

The term “empty pension accounts” refers to pension accounts which appear to have money but none could actually be withdrawn. The reason pension accounts becomes empty is because the local government appropriated the money deposited to pay people already retired.

Back in July 2010, a China-wire report stated that “only about 40 percent of Chinese workers pay into government pension funds, and…the system is carrying a 1.3 trillion yuan ($192 billion) deficit, drawn mostly from what are supposed to be individual pension accounts”; and the website reported this problem again in March 2012.

In the subsequent years, this deficit in individual pension accounts continued to grow. In May 2015, Chinese media reported that the deficit in individual pension accounts was nearing 3 trillion yuan.

Second, a huge gap in the pension system

There are several official figures as to how big the pension gap is. In July 2012, a Bank of China report stated that if the current level of pension payout is to be maintained, an additional 18.3 trillion yuan would be needed in July 2013 to ensure the payment of pension for the next 70 years.

And a CASS research found that, under the current social security system, if each of the retired persons is to be guaranteed reception of pension in 2020, the pension gap would continue to widen and become unbridgeable in 2015 at the earliest.

In China Pension Development Report 2014: Transition to a notional account, it was projected that, using 2012 as the benchmark, the hidden debt of the basic pension of urban laborers was 86.2 trillion yuan, which amounted to 166% the country’s GDP that year. The Report also found that an unbridgeable gap will emerge and the pension pool would soon dry up.

On the other hand, Zheng Wei and his colleagues at the Peking University projected that the unbridgeable gap would emerge in 2037 and the pension funds would be depleted in 2048.

That the unbridgeable pension gap has not emerged at this stage can be attributed to the following three factors:

First, in general, the money in an individual pension account currently makes up no more than 10% of a person’s pension.

Second, provincial governments appropriate funds from individual accounts to pay pension to people already retired.

Third, the Central government has been keeping the pension system afloat by subsidizing the local governments.

In China Pension Development Report 2011, it was shown that by the end of 2010, the accumulated basic pension fund was 194.97 million yuan. However, between 1997 and 2010, various levels of government altogether injected, using subsidies from the Central government, to the pension fund as much as 125.26 million yuan.

In other words, without subsidies from the Central government, pension system in many provinces and cities would have gone bankrupt.

Simply put, people already retired now are still able to collect state pension. People below 50 today are not to expect this when they retire.

Chinese government: do not count entirely on the government for pension

Under the circumstances stated above, the way to keep China’s pension system running would either be raising the contribution level of laborers or lowering the amount of pension retired people can receive.

There is no room to raise laborers' contribution, though. In China, it is mandatory that every laborer makes contribution to an endowment insurance, medical insurance, unemployment insurance, and employers have to make contribution to employment injury insurance and maternity insurance for their employees; individual/ corporate contribution to the Housing Provident Fund is optional.

With all these insurance policies in place, an employer would need to fork out 14410 to pay for the five types of insurance for an employee whose monthly salary is 10,000. And the employee would only pocket 7545.3 yuan after making his own insurance contributions.

These premiums are heavy burden for corporate owners and they are part of the reason that foreign investment are leaving China in recent years—the labor cost in China is far higher than in other countries.

According to Bai Chong'en, a professor at Tsinghua University, the social security contribution rate in China is the highest of the 181 countries around the world, roughly double the average contribution level of Brazil, Russia and India, three times the rate of the five Scandinavian countries, 2.8 times that of G-7 countries and 4.6 times that of its neighboring countries in East Asia.

Experts are of the view that for China’s public finance in future and corporations not to be crushed by the social security system, the only viable reform measure would be to shrink the scale of social security (reduce the premiums and scale down the system’s coverage).  Without this reform, businesses would be crushed, and the government and the public would get nothing.

In a press conference held on March 6 this year, Financial Minister Lou Jiwei had already disclosed some of the social security system reform measures, saying that the pension system would become backed by three pillars: the public endowment scheme, corporate pension (Definition in Chinese) and employment annuity (Definition in Chinese), and the commercial health and endowment insurances laborers acquire on their own.

What Lou said in that press conference meant that, while laborers in the urban area could rely heavily if not solely on the public endowment scheme for their pension in the past, they would now need to have corporate pension, employment annuity, as well as their personal health and endowment insurances if they want to live well after they retire.

The reasons the public oppose raising the retirement age

The plan to raise the retirement age has been vocally opposed by the Chinese public since its announcement. Those who object this plan generally believe that postponing the retirement age is not a viable solution to the problem of the massive gap in the pension system.

To begin with, this plan will put more pressure on employment. In China, there are at least 6 million people who reach retirement age each year. If the retirement age is raised, at least 6 million job opportunities would be taken away from young job seekers, thus adding more to the employment problem as China’s economy is slowing down.

According to several research institutions, around one million job opportunities would be gone with each percentage point of reduction in the GDP. The rate of China’s economic growth has already dropped from 10% to below 7%, this means that around three million job opportunities have disappeared each year.
Take these two together and we would see that about 9 million job opportunities are taken away because of the slowing economy and the postponement of retirement age.

Second, to raise the retirement age would prolong the hardship of the middle-aged unemployed persons. As a result of foreign investment and corporations leaving China on a massive scale, coupled with the huge number of businesses that had gone broke, many people lost their job. Many of these people are over 40 and it is difficult for them to get hired again. Those unemployed who aged over 50 are only getting by with their savings, hoping that their hardship would be alleviated when they reach the retirement age.

When Chinese officials introduce this “gradual postponement of retirement age”, they listed the retirement age in England, Canada, Australia and the United States to justify the change. However, they intentionally omitted one important matter: unlike in Britain, Canada, and Germany, where the unemployed could rely on the various social relieves in place and won’t have struggle to get by; in China, those without a job have no such social safety net to fall back on.