Zhang Juan (name changed) has just returned to her hometown of Hohhot after six weeks vacationing in England. The 44-year old has the liberty of doing so because she belongs to a list of growing young pensioners; those who were able to turn China’s economic boom into millions of profit and hence could afford to retire in their fourties.
It is a fact that the numbers of Chinese millionaires, who are able to live out their uncommonly long-stretched days of retirement worry-free, is steadily increasing. In June 2014 reports quoted figures from the Boston Consulting Group’s Global Wealth Report 2014, which illustrated the country had reached the second place in the world’s leading countries based on numbers of millionaires. Specifically, the Middle Kingdom boasted 2,378,000 millionaire households in 2013, representing an increase of 82 percent compared to the previous year and almost double the number of Japan. At this point, China is only second to the US.Yet, in the grand scheme of things, with a population set to surpass 1.5 billion this coming year, millionaires who need not worry about their retirement plans make up a rather meager part of the population; only 0,0019 percent to be exact. What of the left over 99,9981 percent? Their outlook at receiving any form of pension is looking increasingly dire.
The proportion of China’s population over 65 currently totals 9 percent; however, this number is expected to rise up to 24 percent within the coming 35 years. In other words, by 2050 almost a quarter of the Chinese population will be over 65. Within the next ten years, the number of pensioners (the average retirement age ranges between 50 and 60) is estimated to rise from 200 million to 300 million, stated an Economist article published in April last year, quoting Du Peng of the People’s University, marking a 50 percent increase in non-working population. To add to the problem, the size of the working-age population has recently reached a tipping point and has been in decline since 2012. That year saw China’s pool of workers shrink by 3.5 million, while the following year of 2013 marked a slightly less but nevertheless serious decline of 2.4 million in the net number of working age citizens. Current projections believe that the declining trend will continue until approximately 2025. So, how is China’s pension system holding up against a growing group of pensioners and a shrinking supply of workers to pay? Not well.
While former President Hu Jintao achieved a substantial increase of spending on public support systems, making pensions the most expensive item on the to-do list of the government, even beating infrastructure, housing and defense, one might argue he was fighting a losing battle. Between 2006 and 2011, the government’s pension expenditures rose from ¥489 billion to ¥1.28 trillion. This amount in combination with civil service pensions covered only about half of those over the age of 60 at the time. While there is some good news insofar that by 2013, 290 million urban and migrant workers were paying into the public pension system, this does mean that the financial burden on the country to pay back is rising quickly. That same year a joint report published by Bank of China and Deutsche Bank estimated that the gap between assets and liabilities of the Chinese pension system would reach $10.9 trillion by 2033, an equal of almost 39 percent of the country’s GDP. . A second study by the Chinese Academy of Social Studies (CASS) came to an even more dire conclusion; if China continued on its course, by 2050 the accumulated debt would equal 90 percent of the country’s GDP.
CHINA’S PENSION SYSTEM – WHERE DID IT GO WRONG?
The first and foremost problem with the current system is maybe the most obvious one; the one-child policy. First came the familial excesses promulgated by a certain Communist leader of the country. At the time, the party went so far as to declare contraceptives illegal during the early 1950’s up until 1956. While the country’s leader did reach moments of clarity, in which he realized that uncontrolled population growth would cause the country to be unable to feed itself in the future, he abandoned his initial ideas of a family planning commission (still becoming the creator of the term and idea later reintroduced under Deng), and returned to his obsession that families should have as many children as possible, as population growth empowered the country. This trend carried on up until the 1960’s, and so it is very common for families of that era to have brought around five children into this world. If you have done the math, you will notice that the Mao generation is now marching quickly towards retirement; and therein lies the problem. Deng Xiaoping rightly realised that it was impossible to sustain a population growing at such a rapid pace; hence he introduced the one-child policy. While this system was necessary to keep China from starving, it has now created a fatal gap in which for every pre-planning family of five children, since the introduction of the policy in 1979 there is now only one child paying into the shrinking pension fund.
Aside from this major issue, there are a number of smaller problems, which are just adding to the overall mess. For one, retirement age in China is incredibly low, ranging between 50 to 55 for women and 55 to 60 for men. This age bracket was defined by the Communist Party in the 1950s, right after the civil war, when age expectancy remained as low as 45, and has not been revised over the past 60 years. The average age of retirement is 53 according to a study released in early 2014, in comparison with a life expectancy of 75. Hence, it is simple math that the outdated design is no longer viable in the 21st century.
In terms of design, the current system is anything but fair. Based on reform conducted in the 1990’s in a first attempt to combat the looming crisis, there are now three pension systems in China, the major one being the nationwide urban system, which attempts to cover the full population, aided by the other two systems, the rural pension system initiated in 2008 and the resident’s pension scheme of 2011, for urban citizens who do not qualify for the regular urban plan; both of which are expected to become compulsory by 2020. However, the levels of pension that are paid out show extreme variations depending on the system as well as the city and province, causing discontent among the population. The most serious issue is a common problem in China; the urban-rural gap. According to reports by CASS, in 2012 a retired urban worker could expect an average annual pension of ¥20,900 as opposed to an agricultural retiree, who is looking at a ludicrously low average of ¥859. Unsurprisingly, said gap is continuously rising. A budget report in March 2014 announced proudly that urban pensions had risen by 10 percent to ¥22,800 per year, while conveniently not a mention was made with regards to rural pensions.
Another rather serious issue, as is so often the case in China, is corruption. The worst case to become known to the public was the Shanghai Pension Fund Scandal of 2006, when a number of government and party officials were caught up in a scheme to illegally redistribute billions of Yuan into other businesses such as real estate and Shanghai tollways. This has shaken the faith of the Chinese populace in the pension system, as illustrated by an article by Reuters published September 2012. The news agency’s reporter quotes Li Mei, a 40-year-old migrant worker, who explained: “I didn’t join the rural pension system and will not in future. It’s safest to put my money in my own pocket, I prefer to trust myself over others.”
COMBATTING THE PENSION CRISIS
It is impossible to ignore the signs that the current pension system is heading for terrible failure and as a result could cause social unrest; the bane of the party’s existence. To that end, the government is currently attempting a two-thronged approach of loosening the one-child policy while also considering a raise in retirement age. In February 2014, the government allowed couples with one single-child parent to have a second child; prior to the easing of the legislation, only parents who were both single children were allowed dual procreation. However, as the proverb goes; the best laid plans of mice and men. As it turns out, China’s new generation of parents are pretty content with just one offspring due to the stress and financial burden any new addition to the family would bring.
While the National Health and Family Planning commission had estimated that a number of less than two million couples annually would apply for the permit to have another child, in reality only about half of the anticipated number have come forward. Especially in big cities with higher living costs and where the career break would be even more serious for a mother of two, China’s young parents are anything but enthusiastic about a bigger family. In the year since the easing of restrictions, a total of 30,305 Beijing couples applied for the permit; meaning only 6.7 percent of eligible couples in China’s capital made use of the new policy. In Shanghai, enthusiasm is even less widespread. In a previous survery, over half of all Shanghainese couples expressed the desire for another child, yet in reality only 15,000 applications have been made over the past five years.
It seems China needs to focus on raising the retirement age after all. This on the other hand could create discontent among the people. According to a survey published in November 2013, in which people in 11 Chinese cities were questioned, almost 70 percent of participants opposed an increase of the retirement age. In light of this, it is no surprise that people like Zhang Juan and Li Mei would rather trust in their own money-earning and saving capabilities than rely on a system that might in the end pay them only a quarter of the amount they are due. Whatever the future holds for China’s pensioners, one thing seems certain at this point; it ain’t gonna be pretty.
This article was first published in The Nanjinger Magazine, February 2015 Issue. If you would like to read the whole magazine, please follow this link
