Regional Conference on Enhancing Social Protection Strategy In Asia and the Pacific

Pension Reform in the People’s Republic of China

April, 2010 Hyung Ju Lee H J L East Asia Department

Contents
I. I Background of the Pension Reform

II. Development of the Urban Pension III. Development of the Rural Pension IV. Direction of the Future Reforms

I.

Background of the Pension Reform g

Aging society requires greater protection for the elderly
<Dependency Ratio in PRC>
(%) 90 80 70 60 50 40 30 20 10 0 1950
UN(2008)

78

Demographic D hi Dividends

Aging Society
63

Total Child Old-age

39

One child policy (1979)

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

3

I.

Background of the Pension Reform g

Economic divide between urban and rural areas calls for even greater protection for the ‘rural’ elderly rural
<Per capita household income>
18.00
100%

<Old age income sources>
5.00% 5 00% 8.20% 3.90% 3 90% 26.30%

15.78
15.00 Yuan (thousa ands) 12.00
60%

Urban Rural

80% 41.30%

9.00
40%

6.00 3.00 0.00 1978 1990 1993 1996 1999 2002

4.76
20% 45.50%

65.20%

0%

4.60% Urban Rural

2005

2008
Pensions

Family Support

Income from Work

Others

China Statistical Yearbook 2009

2005 one percent population survey of PRC

4

I.

Background of the Pension Reform g

Urban-Rural divide also created new needs for the social protection → ‘Migrant workers Migrant workers’
• ‘Hukou’ and ‘Migrant Workers’ • As of 2008, 115 milion of migrant workers exist (MOHRSS) → Th number i expected t grow The b is t d to up to 300 million by 2030 (ILO) • Migrant workers are poorly covered by the pension system due to its fragmented structure and lack of transferability
<Pension coverage for migrant workers>
100% Local Migrant 60%

80%

40%

20%

0% Formal Employment y
Cai, Du and Wang (2009)

Informal Employment y

5

II. Development of the Urban Pension p
From ‘iron rice bowl’ to ‘multi-pillar pension system’
• SOE

restructuring removed the comprehensive protection given by t t i d th h i t ti i b SOEs (lifetime employment, pension, healthcare and housing)

• Therefore,
− In − In

the government started the pension reform in late 80’s and continued to refine the system during 90’s and thereafter
1997, the State Council Document No. 26 set out a detailed guideline for a ‘multi-pillar’ p p pension system y 2000, the National Social Security Fund (NSSF) was established as a fund of last resort 2001 to 2004, Liaoning pilot project has been implemented 2004

− From − In

2004, the Enterprise Annuity (EA) was introduced

Multi-pillar Multi pillar pension system for all urban workers in place
6

II. Development of the Urban Pension p
<Multi-pillar structure of the urban pension> Features Pillar 1a (Social pools) l ) Pillar 1b (Individual accounts) Pillar 2 (Enterprise Annuity) Pillar 3 (Private Insurance) -Mandatory -DB -PAYGO PAYGO -Mandatory -DC -Funded -Voluntary -DC DC -Funded -Voluntary -Insurance Contributions -Employer -20% of employees wage 20% employees' Benefits -35% of replacement rate*

-Employee -8% of employees wage 8% employees'

-1/139th of balance per month -24.2% of replacement rate* 24 2% rate

-Employer & Employee (1:1) -Up t one-sixth of wages U to i th f

-Lump sum or annuity Lump

-Discretionary amount

-Lump sum or annuity
7

* In case of 35 years of contribution

II. Development of the Urban Pension p
Challenge 1: High level of the public burden from the pension
<Required contribution rate>

• Legacy costs
PRC Vietnam Thailand Philippines pp Canada Korea United States Japan 0% 10% 20% 30% 40% 50%

• High target replacement rate − PRC: 59.2% − OECD countries in EAP: 47% • Early retirement age − PRC: 60 (men), 55 (women) ( ), ( ) − Canada, Japan, Korea: 65 − U.S., U.K. Germany: 67
8

OECD (2009)

II. Development of the Urban Pension p
Challenge 2: Low incentive to participate in the pension
<Dependency ratio: Pension vs. Overall>
35% 32%

• Notional (empty) accounts • Low level of investment return − Limited investment: Bank & GB
17%

30%

25% Dependency Ratio y

20%

→ Lower rep. rate than targeted • Limited transferability

15%

10%

Pension System
5%

− Fragmented system → Loss of pension rights when moving to other localities
9

Overall Economy

0% 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Jackson, Nakashima and Howe (2008)

II. Development of the Urban Pension p
Challenge 3: Inequality among workers
<Coverage ratio by registration status>
100%

<Coverage ratio by regions>
(mil)

500
Uncovered

80%

400 300

Covered

60%

421.92 136.2
40%

200 100 0
SOE Enterprises Foreign Domestic Private Self Employed

20%

165.9 50.78

0%

Urban

Rural

2005 one percent population survey of PRC

National Statistical Bureau of China (2009)

10

II. Development of the Urban Pension p
Government responses to those challenges
Public Burden •Parametric change (replacement rate, annuity factor) •Establishing the NSSF •Increasing government subsidies •Strengthening firewall between the social pool and IA •Enhancing the transferability (MOHRSS, Jan 2010)
*60%(social pool) + 100%(IA)

Low Incentive

•Special schemes for flexible workers & self-employed
*Lowering the contribution rate to 20% (12+8)

Inequality

•Special scheme for migrant workers Special
*Lowering the contribution rate to 16~20% (IA only)

•Resuming the ‘Rural Pension System’

Further reforms need to be implemented
11

III. Development of the Rural Pension p
From ‘informal collective security’ to ‘explicit social security’
• T diti Traditional l • The

support measures (l d f il collective subsidies, ‘fi t (lands, family, ll ti b idi ‘five guarantees’ etc) lost their effectiveness

government introduced a rural pension system* in 1991 but retreated in 1999 due to low participation and high risk
* Voluntary participation and individual accounts only

• In

the mean time, numerous pilot programs are implemented by local governments
* Many local governments introduced multi‐pillar systems (Basic Pension + IA)

• The government resumed the rural pension * Aiming to cover full rural areas by 2020

pilots in 2009 (MOHRSS)

The rural pension system awoke from a long sleep
12

III. Development of the Rural Pension p
<Design of the 2009 rural pension system> Basic Pension Contributors -Voluntary -Rural residents aged 16~59 -The central and the local governments (50% for each)
-Aged 60 for both male and female -15+ years of contribution to IA (transitional measures exist) -Parents of current contributors -Flat rate pension (CNY 55/month)

Individual Accounts -Voluntary -Rural residents aged 16~59 -Individual contribution (CNY 100~500) -Local government subsidies (CNY 30+) -Collective subsidies possible Collective

Funding

Eligibility for Benefits

-Aged 60 for both male and female

Benefits

-Monthly payment of 1/139th of IA balance Lump -Lump sum payment (less than 15 yrs)
13

III. Development of the Rural Pension p
Challenge 1: Insufficient pension benefits for the elderly
<Replacement rate of IA at retirement>
12%

• Flat rate benefit from BP: CNY 660/yr → 14% of avg HH income in ’08 avg. 08 (lower than the target rate, 20%)
Replacement Rate

10%

Target rate T t t

• The replacement rate of IA is also likely to fall short of the target (10%) • Bigger problem is that benefits (BP) and contributions (IA) are flat → Since they are not indexed to the income growth or inflation, the replacement rate will decline further

8% 100 200 6% 300 400 4% 500

2%

0% 3% 4% 5% 6% 7% 8% 9% Wage Increase

14

III. Development of the Rural Pension p
Challenge 2: Unfair burden sharing between central and local gov’t
<Share of costs among contributors>
100%
16.0% 14.0% 12.8%

80%

• Local go s will assu e g ea e bu de oca gov’ts assume greater burden than the central gov’t • Local gov’ts’ burden will be bigger, if the parent s parent’s pensions are taken into account • Since the local gov’ts have less financial resources, greater burdens on them would cause th financial instability of ld the fi i l i t bilit f the rural pension system.

S hare of Co osts

60% %

54.7% 4 %

57.5% 57 5%

59.3% 59 3%

40%

20%
29.3% 28.4% 28.0%

0% 15 20 Contribution Periods Individual 25

Local Government

Central Government

15

III. Development of the Rural Pension p
Challenge 3: Low investment return will increase the public burden
<Public burdens per each pensioner>
4,000

• Low investment return will increase the public burden to support pensioners − Current bank rate (2~3%) and annuity factor (1/139th) → IA will be depleted in 14yrs after retirement → Government should assume y p y additional 4~7 yrs of benefit payment
* Life expectancy at 60: 18(M), 21(F)

3,500

3,000

2,500 2 500

2,000 3% % 4% % 5% % 6% %

• 6% of rate of return can allow IA to cover the whole periods without gov’t subsidy gov t
16

Rate of return

IV. Direction of the Future Reforms
PRC took a big step forward to a better pension system, but… still needs to push ahead with its reforms
Common issues 1. Improve the consistency among regions
−Expediting the process for a new ‘National Social Insurance Law’ −Medium term: dual system (urban vs. rural) → Long term: one national pension

2. Centralize the pension management
−The draft NSSL calls for the pooling of the Pillar 1 at the national level by 2012

3. Strengthen the administrative capacity g p y
−Recruiting/training staffs, standardizing the procedure, developing the IT infrastructure

4. Enhance the transferability of the pension entitlement
−MOHRSS regulation is easy to implement, but more sophisticated method is needed to MOHRSS regulation is easy to implement, but more sophisticated method is needed to  enhance the fairness and the equality
17

IV. Direction of the Future Reforms
Common issues (cont’d)
<NSSF investment return>

5. Increase the return on investment
− − Diversifying the investment with  stronger prudential regulations Trusting the NSSF with managing  the pool of local funds → Utilizing the NSSF’s expertise & Utilizing the NSSF s expertise &  monitoring funds more efficiently

50% 40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 -10%

Annual Return Average Return

6. Revise some parameters
− − − The annuity factor needs to be changed in accordance with the actual life expectancy  Retirement age of men and women needs to be equalized Retirement age can be raised with caution
18

IV. Direction of the Future Reforms
Issues for the urban pension 1. Deal with the legacy costs
−Insulating the current pension from the legacy costs  the legacy costs into public debts) −Raising sufficient funds for the NSSF Raising sufficient funds for the NSSF (converting 

2. Expand the coverage
−Special (supplementary) schemes + stronger monitoring of the compliance

3. Encourage the establishment of Enterprise Annuities
−Unifying tax treatment for EAs −Increasing tax benefits for EAs −Allowing the mater trust for SME EAs All i th t t t f SME EA
1,400 1,200 1,000 800 600 400 200
19 152

<EA asset size projection>
1,162

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

19

BBVA (2009)

IV. Direction of the Future Reforms
Issues for the rural pension 1. Increase government subsidies
−Raising the flat rate benefit of the basic pension −Indexing the basic pension benefit to the combination of inflation and wage increase −Raising the government subsidy and investment return of the individual accounts R i i h b id di f h i di id l

2. Rebalance burdens between the central and the local government
−Increasing the fairness through the central government assuming bigger portion of  financial burdens to support the rural pension system fi i lb d t t th l i t −The central government can either increase the BP benefits or share the IA subsidies

3. Deal with different groups of rural workers
−Farmers: best fit for the rural pension system F b t fit f th l i t −Migrant workers: separate scheme launched → integrated into the urban pension system  when it has higher transferability −TVE workers: fit for the system more similar to the urban pension system y p y −Farmers losing lands: separate compensation for lands + pension ‘by the book’
20

Thank you

21

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