Sustainability of China’s State Pension Fund in Question

The financial sustainability of China’s pension fund has recently come under the spotlight. According to a report released in April by the Chinese Academy of Social Sciences, the reserve held by the urban worker pension fund—the cornerstone of China’s state pension system—will peak at 7 trillion yuan in 2027 and then start to drop steadily, reaching zero by 2035. The report also mentions that net outflows from the pension fund would already have begun this year had there not been fiscal subsidies for the pension fund, and that the gap between pension contributions and withdrawals will become as large as 11 trillion yuan by 2050. One important reason for the dire financial situation of China’s pension fund is the rapid ageing of China’s population and the concurrent decline in the available workforce. Other reasons include the relatively low age threshold for claiming pension benefits—60 for males and 55 for females—and the lax regulatory enforcement of pension contributions by both employers and employees. The looming pension crisis has caused fear in China, notably among younger generations. In response to these concerns, the Chinese authorities have pledged that they will ‘fully guarantee’ further pension payments and announced that they are pondering different solutions to make China’s pension fund more financially sustainable, including raising the retirement age while tightening the enforcement of pension contributions. To further address the adverse effects of demographic changes on China’s social security, the Chinese government has decided to completely lift the restrictions on migrants obtaining household registration (hukou) in second-tier cities, and is contemplating the removal of these restrictions in first-tier cities with populations of three to five million for particular social groups, such as university students and recent graduates. NLiu

(Sources: Bloomberg; Caixin; Reuters; Sina 1; Sina 2; South China Morning Post; Tencent)