Abstract: In a cloud session during the 3rd Bund Summit held by the China Finance 40 Forum, experts explored the aging of Chinese population and the construction of a multi-pillar pension system. This article concludes the outcomes of the discussion with three challenges and four policy recommendations for developing a three-pillar pension system.
I. CHALLENGES FACING CHINA'S THREE-PILLAR PENSION SYSTEM IN THE CONTEXT OF POPULATION AGING
The seventh national population census of China shows that the number of people aged 65 or above has risen to 191 million, or 13.5% of the overall population. The country is getting even older.
Experts at the cloud session summarized three characteristics of an aging China. First, China's old population will continue to be the largest in the world for a long time. Second, China's population is aging at the quickest rate among major economies, with the rate predicted to surpass that of developed countries by 2050. Third, China is "growing old before getting rich" – its aging ranking is substantially higher than its per capita income ranking; the GDP per capita of developed countries at the same aging level is 2.3 to 5.9 times higher than that of China.
Population aging will have profound economic and social influences, posing new challenges to the pension system. China's pension balance presently takes up about 12% of GDP, with the first pillar accounting for 62%, the second pillar for 37%, and the third pillar for a relatively modest part; the development is uneven.
According to Cai Fang, Chief Expert of National Think Tank at the Chinese Academy of Social Sciences (CASS), the existing pension system has three flaws.
The first problem is the uneven distribution of benefits under the basic pension plan - this is, the number of recipients and the amount of insurance are not proportional to each other. There are also vast disparities in the amounts received by different types of institutions.
Then, while flexible employment is becoming a more common choice, the lack of stability in employment, pay, and contracts make it hard for enterprise annuities to cover these employees, limiting the development of the second pillar.
Another issue is that the disposable income of Chinese citizens and the size of the middle-income group are insufficient to support the third pillar.
II. POLICY RECOMMENDATIONS FOR CONSTRUCTING A MULTI-PILLAR PENSION SYSTEM
In an aging nation, establishing a multi-pillar pension system will be a long-term effort that will necessitate careful consideration of the economy, finance, environment, technology, and other aspects. Experts advise that China’s pension system be expanded and made more flexible in order to balance equity and sustainability, as well as to balance the development of the three pillars for a benign and orderly long-term pension mechanism.
So, first and foremost, we must fully recognize the fundamental role of the first pillar pension in China. Experts believe that domestic conditions have defined the current poor growth of the second and third pillars, and the uneven proportions of the three pillars can hardly be changed in the short term. However, the first pillar, as well as the fairness-efficiency balance, should be constantly highlighted in order to provide the fundamental pension protection for the citizenry and ensure common prosperity.
The second and third pillars should then be connected through the creation of personal pension accounts. Experts recommend that, given the importance of personal pension accounts in developed countries, we may learn to unite personal pension accounts, management systems, and information platforms. A unified personal account system can better integrate the information and funds of the two pillars, as well as better match account holders' funds and products, improving macro-control and risk management.
Third, improve the third pillar pension system. The third pillar, according to the experts, is a crucial complement to the other two. Therefore, we should draw lessons from the tax-deferred pension insurance pilot program, and study the feasibility and operability of increased policy support, tax incentives and a simpler process, so as to enhance the pilots’ appeal.
Fourth, learn from other countries and improve international communication and collaboration. Experts set great store on international experience for an under-developed Chinese pension system. Some developed countries are experiencing similar difficulties with their pension systems, making it all the more necessary for governments to improve communication and collaboration, as well as jointly explore countermeasures. Furthermore, pension management institutions should be encouraged to exchange with their foreign counterparts to improve investment capability and income of pension assets.
This article first appeared on CF40’s WeChat Official Account on November 24, 2021, compiled according to the discussions at the cloud session “Population Aging and the Construction of a Multi-pillar Pension System” at the 3rd Bund Summit on October 24. The views expressed herein are the participants’ own and do not represent those of CF40 or other organizations.
