The Sustainability of China’s Pension System… or Lack Thereof

According to 2019 survey data, the broader topic of social security represents the #3 area of interest of the average Chinese citizen at this point in time, with the rule of law occupying position #2 and corruption being the #1 culprit. Upon reconciling 2019 data with numbers from previous years, we end up realizing that social security has occupied position #3 for five years in a row.

As can be seen, this topic is perceived by the average citizen as more important than let’s say economic growth and this should come as no surprise to anyone who meaningfully “gets” Chinese culture in general and Confucianism in particular. As mentioned in more detail through the article we have dedicated to Confucianism and which can be accessed by clicking HERE, taking care of the elderly represents a cultural pillar in China arguably more so than in the West, to the extent that a government not able to properly implement a solid pension system might end up with a serious legitimacy perception problem.

Needless to say, the Communist Party of China cannot afford to let this happen. While widespread social unrest with the pension system in the spotlight is not yet a concern, it is worth noting that in 172 distinct cases, workers ended up protesting for reasons in the realm of social security and the pension system in 2018… more than enough to represent a serious cause for concern as far as the CPC is concerned.

Finally, we have a potentially deadly cocktail: growing GDP growth on the one hand and an aging population on the other. For various more than legitimate concerns, Chinese citizens are worried about the sustainability of China’s pension system and insisting that the government find ways to ensure that the elderly aren’t left holding the proverbial bag if or when China experiences hiccups with its growth success story.

Aside from reasons related to the past and reasons that have to do with the future, Chinese citizens are also worried about the present system for reasons that have to do with… of course, the present. It is difficult not to notice how ineffective the current system is due to its fragmented nature and downright awful collection performance.

And in that collection framework, pension funds represent the proverbial elephant in the room, accounting for over 70% of all social security inflows at this point in time. If these pension funds would have been in stellar shape, concerns would have been at the very least alleviated. But that is hardly the case, with pension funds most likely either collapsing or being on the verge of collapse in the absence of government subsidies. The fact that deficits are expected to lie north of 500 billion CNY by the year 2022 speaks for itself.

Furthermore, not only are there clear warning signs with respect to future sustainability, there are also present-day issues which occasionally even cause pension payment delays. This is especially valid for let’s say the Chinese equivalents of Detroit or, if you will, the rust belt of China. One such region, Heilongjiang, ended up having to delay pensions in July of 2018 despite being on the receiving end of (in hindsight obviously insufficient) state subsidies.

The current state of affairs with respect to China’s pension system can be attributed to a wide range of factors, such as:

1. Companies… well, not paying. As per 2018 survey data, barely over a quarter of all Chinese companies paid the appropriate social security contributions for their employees
2. Severe fragmentation, with there being many loopholes which pretty much invite corruption, with local governments frequently ending up in questionable negotiation positions with companies run by individuals who are far more influential (not to mention financially potent) than the officials they are negotiating with
3. The playing field being anything but level, with the most vulnerable categories of workers such as migrant and/or temporary workers having a difficult time navigating the pension landscape due to the difficulties associated with them signing up for an urban pension. At this point in time, only 1 out of 4 to 5 migrant and temporary workers are able to correctly register as urban employees, which generates a bureaucratic mess… to put it mildly
4. Pension gaps being downright ridiculous in some instances, for example the fact that a pensioner who lives in a less developed rural area receiving a monthly payment 45 to 50 times lower than his Beijing or Shanghai counterpart

… the list could go on and on.

The bottom line is that to any realistic outside observer, it becomes strikingly obvious that the Chinese pension system is anything but sustainable in its current form. While the average Chinese citizen has proven to be wiling to tolerate a wide range of adverse conditions (anything from human rights issues to pollution), the pension system risks representing one issue where a line is drawn and the authorities seem aware of that.

Efforts are indeed being made to reform the pension system, even if this comes with increased centralization, as per the 2018 tax reform plan which ended up generating effects on the 1st of January 2019. While China is by no means the only culprit with respect to the sustainability (or lack thereof) of the financial system (from the European Union to Japan or the United States, systemic threats abound), it needs to be especially careful when it comes to issues which affect its most vulnerable citizens because unlike its Western counterparts, it doesn’t have robust enough frameworks in place to ensure they land on their feed in adverse scenarios. As such, our team will continue following pension system-related developments closely and sharing them with ChinaFund.com readers.