China’s state pension plan needs retooling as slowdown, ageing population hit retirement pot

China’s ageing population is increasing the pressure on the state pension deficit at the same time employers are falling behind on their contributions. A deeper economic slowdown could burn a bigger hole in the retirement pot, experts say.

The cumulative balance in the pool stood at about 5 trillion yuan (US$712 billion) at the end of 2019, and the employers’ contributions were expected to fall short by 417.4 billion yuan due to measures to ease their burden, vice finance minister Yu Weiping said. The government will raise its subsidies so that payment can be disbursed to retirees in full on a timely basis, Yu added last week.

Premier Li Keqiang last year cut the employers’ contribution rate to 16 per cent from 20 per cent to cope with challenges as the economy grew at the slowest pace in 20 years. The shortfall suggests the retirement system is unsustainable as the ageing demographic worsens in the coming decades, according to Renee McGowan at Mercer.

China’s ageing population prompts plan to deal with looming silver shock

“The government does have to look at raising the retirement age” despite it being a globally unpopular topic, she said. “You can’t have a retirement system that is for half of your life.”

China’s statutory retirement age starts from as early as 50 for women and 60 for men. While the average life expectancy is about 77 in China based on United Nations statistics, McGowan said many Chinese are living through through 100.

China is ageing much faster than other low- and middle-income countries, and the proportion of the population aged 60 years and above will increase to 28 per cent by 2040 from 12.4 per cent in 2010, she said, citing a World Health Organization report.

China acknowledged the problem late last year by outlining a five-point strategy for managing its ageing population, through the first policy paper jointly issued by the Communist Party’s Central Committee and the State Council. Though short on solutions, it plans to resolve the dilemma “with Chinese characteristics.”

Worse than Japan: how China’s looming demographic crisis will doom its economic dream

China’s pension deficit could balloon to US$119 trillion by 2050 from US$11 trillion in 2015, according to one projection published by the World Economic Forum. A lot of Chinese provinces are underfunded in their retirement pool, despite state subsidies, according to Wina Appleton of JPMorgan Asset Management.

China’s pay-as-you-go state pension model means that more of the younger generation will be burdened with supporting the retirees, said Appleton, Asia-Pacific retirement strategist at JPMAM. The current ratio of five working employees supporting each retiree could worsen to two-to-one by 2050, she added.

China’s population of people aged 65 and above will overtake those in the 10-25 age group by 2032, according to a Credit Suisse report published in January.

To be sure, China’s regulators have in recent years introduced some reforms. Since 2018 the China Securities Regulatory Commission has started approving investment funds to support a voluntary, private individual retirement savings system.

About 64 funds had been launched by the end of 2019, according to Appleton, allowing individuals to save for their own retirement needs through private schemes that invest in stock and bond markets for diversification and higher returns.

“The growing ageing population makes it increasingly difficult for China to prepare enough cash to pay retired workers,” said Wan Qin, 59, owner of a Shanghai-based laundromat. “The shortage of pension might be one of the biggest issues for the central government to tackle” in the coming years, he added.