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First Step Taken in Crucial Pension Reform

The Chinese Government's decision to replenish individual pension accounts with employees' contributions is a bold step at resolving the country's ballooning pension fund deficit.

The Minister of Labour and Social Security recently announced that, from the beginning of next year, the contribution rate of individual pension accounts will be cut down from 11 percent to 8 per cent of employees' salaries, but all will be paid for by the employees themselves.

On the surface, this change points to reduced benefits for the workers. Since individual accounts make up the major source of retirees' pensions, the withdrawal of what working units used to pay into these accounts will shrink their entitlement in the future.

However, a second look at the reform shows that it is a much-needed step, if not a blessing in disguise, towards fixing China's plagued pension system.

An increasingly aging population has led to alarming projections for China's severely under-funded pension insurance system.

The current pension insurance system was introduced in the 1990s when the country began to accelerate its transformation from a planned economy to a market economy. Before that, Chinese enterprises generated pension payments for retirees by collecting a certain sum from the salaries of the working staff.

According to the present pension insurance system, the government, enterprises and workers all pay a fixed percentage into a government-managed social security fund under individual pension accounts and basic accounts.

Yet, many retirees and workers who began work before the new funding scheme was adopted have to depend on the State to contribute retroactively to their pension accounts. Such transitional problems had added a lot to the difficulties of making ends meet.

As a result, many provinces have transferred money from individual accounts to pay pensions, causing a huge shortfall in funds that requires immediate corrective action.

By separating individual accounts from enterprises' contributions and government allocations, the new pension reform ensures that the individual account will be left untouched until it is paid to the retiree.

Technically, this arrangement will help improve management of the pension insurance system and gradually replenish individual accounts to prevent any epic repayment crisis.

Nevertheless, as the country ages at an increasing rate, the underlying shortage of pension reserves will by no means be tackled through such management reforms.

Currently, China has 134 million people aged 60 or above, accounting for 10 percent of the total population. By 2050, it is estimated that one in three Chinese people will have reached retirement age.

The operating pension insurance system currently covers only a fairly small portion of the population, and is surely not enough to cope with such a rapid and massive aging problem.

Statistics indicate that only 160 million people have taken part in the pension insurance system, accounting for less than 15 per cent of the country's labour force. This rate is less than half of the world average.

Still a developing country, China lacks the wealth that developed countries have to fill up its pension funds. But robust growth of the Chinese economy might more or less resolve the issue.

The more pressing problem is the low penetration rate. It is reported that since 2001 the increase in the number of pension receivers has outpaced that of new payers.

Clearly, a fully funded individual account can help boost workers' confidence in and enthusiasm for participating in the pension insurance system. But to sustain it, the government must invest more, and quickly.

(China Daily November 17, 2005)

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