Rapid aging process has brought to the forefront the issue of a social welfare
system. At present, there is no nationwide pension system in place in China.
After two decades of reform, the current pension system still suffers from various
shortcomings and faces tremendous difficulties, especially in the old industrial
regions where the extent of population aging is greater. Even the coverage of
the urban pension system is limited. By the middle of 2005, China’s urban pen-
sion system covered a total population of 168.68 million only, including about
42 million pensioners and 125 million employees who contributed to the pension
fund. This means that only 30 percent of all urban residents, and 15 percent of all
employees, were covered by the program.
On the whole, the Chinese pension system is still a pay-as-you-go system,
though a partly funded multi-pillar system has been introduced in the 1990s.
Under this system, individual pension accounts were set up, but their scope and
impact have still remained very nominal. Also, the current system is burdened by
unfunded liabilities from the old system, called the Legacy Debt. It is reported
that the total annual net inflow from China’s Government revenue into the pen-
sion fund to balance the system amounted to 52.4 billion Yuan in 2004, and the
accumulated inflow reached 170 billion between 1998 and 2005. Nevertheless,
there is still a total deficit of 2.5 trillion Yuan in China’s urban pension system.
The estimated ratio of Implicit Pension Debt (IPD) to national GDP ranges from
80.8 percent to 145.4 percent, based on different assumptions of the discount rate
used in the simulations.
Such a huge pension burden will inevitably affect the investment capacity of
Chinese economy in future, as any effort to tackle the great deficit will involve
funds in stock market, banking operation, and enterprise financing. The future
demographic changes (with relatively fewer workers relative to the population)
will put significant downward pressure on household saving. The ratio of pen-
sioners to contributors in urban China has reached 33 percent in 2003 compared
to 19 percent in 1989, and is expected to rise further in the near future if no sig-
nificant change occurs in the system (Wang and Mason, 2007).
China’s current state-supported pension system and other social welfare pro-
visions are highly urban biased. There is very limited social welfare provision
for the rural elderly. A few exceptions are the “five-guarantee system” and pov-
erty relief subsidies. In some rich rural areas, a community-based old-age sup-
port system has been set up. However, children remain the almost only source
of support for many elderly in the rural areas. The fertility transition is facilitat-
ing the decline of the average family size and nuclearization of the family struc-
ture. The reductions in economic returns from cultivated land, out-migration of
rural youngsters, and the weakening of family support have made the elderly in
the countryside more vulnerable. It is an extremely difficult task for China to
establish a pension system that will cover the entire rural population, given the
fact that there is already a 2.5 trillion Yuan deficit in China’s urban pension sys-
tem, as mentioned earlier.
We already noticed that due mainly to different paths to demographic transi-
tion, the aged dependency ratio, defined as the number of retirees (60 and over
for men and 55 for women) as a percentage of the working age population, varies
across regions. This regional variation in the aging process will certainly affect the
regions’ economic burden for old-age support. As already observed China’s pre-
sent pension system is a highly fragmented and decentralized one. Contribution
rate, coverage, and scale of pooling are quite different across regions, so is the
management. The administrative infrastructure relative to the demands on it is
seriously deficient. The lack of a national pool of pension funds leads to huge dis-
parities and inequalities within the system.
Overall China’s pension system is facing a serious challenge. At present, the
government is insufficiently prepared, and is still exploring proper ways to cope
with the problem. Efforts have been made by both scholars and officials to search
for possible solutions. The issues investigated include rural-urban division and
possible options for its abolition, decentralized financing and administration
and its advantages and disadvantages, inclusion of immigrants in urban pension
schemes, and reform of the pension administration structure. Debates continue
on whether the rural system should be established independent of the urban pen-
sion system, or whether it should be an extension of the urban system. No matter
what the final strategic decision turns out to be, it is certain that developing a
pension system covering all the elderly in China will require a huge amount of
resources, thereby reducing resources for investment. On the other hand, further
economic growth may prepare China better to bear the burden of an increasingly
aged society.
