SHENYANG—Morning breezes turn chilly in late August, signaling fall’s approach in the Tiexi factory district.
For the unemployed men and women standing on sidewalks between a labor bureau office and a park every day at 6 a.m., the change of seasons is a reminder that searching for jobs will grow more desperate as cold weather nears.
Most of these streetside job-hunters in this section of Shenyang, an industrial city in Liaoning province, are more than forty years old and have been jobless for years.
They include some of the estimated 700,000 workers laid off in the late 1990s when state-owned smokestack industries downsized or closed. China was at the time eliminating the last vestiges of its planned economy, cradle-to-grave workforce support system.
In the short run, most of Tiexi’s unemployed would gladly take a temporary job or even a one-day handyman’s project. In the long run, though, they hope to benefit from the government’s ongoing effort to support retirees by improving what’s now a fragmented pension system.
For the system to work, experts say, China will have to take advantage of a demographic window of opportunity. It’s a window that’s expected to close, however, over the next few years as the population rapidly ages.
Some 13 percent of the nation’s population of 1.3 billion is at least sixty years old. That percentage is expected to jump to 30 percent by 2020, according to the Chinese Academy of Social Sciences.
The central government is counting on its three-year-old national social security fund, which held 772.7 billion yuan at the end of last year, to over time effectively buttress its graying citizens. Most of the fund’s money comes from direct central government injections, state-owned company stock, and capital gains from various investments.
Officials such as Yin Chengji, spokesman for Ministry of Human Resources and Social Security, say the fund is financially sustainable.
At a press conference in July, Yin said overall pension contributions by workers and companies already exceed spending levels. The social security fund and the rest of the nation’s public pension accounts had a 2 trillion yuan surplus during the first half 2012, he said.
Yin did not mention, however, that private pension accounts in China are running a combined deficit of around 2.2 trillion yuan. Nor did he acknowledge the looming challenges connected to the rising tide of retirees, or the pension fund gaps separating rich parts of the country from rural areas and the northeastern rust belt.
“The gap” between funds on hand and pension obligations “cannot be resolved by the social security fund alone,” said Zuo Xuejin, deputy director for the China Academy of Social Sciences in Shanghai. “The fund is tiny compared with the potential pension system burden.”
Workers dismissed in Tiexi in the 1990s typically received buyout packages in the tens of thousands of yuan. That money is long gone, and today new jobs are hard if not impossible to find in part because by Chinese company standards most of these ex-workers are considered too old to hire.
Temporary and handyman work keeps food on the table for jobless men such as a fifty-seven-year-old surnamed Wang who stood on the street August 26 with a cardboard sign declaring his availability and skill: “Electrician,” it read.
Wang waited all morning and got no bites. “I’m too old,” he told a reporter. “Employers are not interested.”
Zheng Bingwen, an Academy of Sciences research fellow, is urging the government to switch to an individualistic pay-as-you-go social security system, also known as a notional defined contribution (NDC) scheme. Each worker would contribute to and tap his or her own retirement account. The social pool would be eliminated, and gaps between public and private accounts would be closed.
But Zheng and other NDC proponents face an uphill climb in the face of financial hurdles tied to previous attempts to redesign China’s pension system.
For example, an experimental project approved by the State Council in 2001 for Liaoning and twelve other communities has so far failed to reach its goal. Social pool contributions haven’t matched rising expenditures, forcing the Liaoning government to dip into private accounts to cover obligations.
Now, more than a decade later, “the situation is severe” across the province, said Zhao Wenxiang, deputy chairman of the Labor and Social Security Institution in Liaoning. “We should issue a warning card for the Liaoning program.”
Work on a national pension scheme started in 1997. Emerging from the drafting process was a system with two pillars—a pay-as-you-go social pool providing support for all retirees based on contributions from the active labor pool, and a supplementary system for private, retirement savings.
The social pool is financed by employers who contribute 20 percent of each employee’s wages. Private account funds come from employees who contribute 8 percent of his or her wages.
The system is not without critics. Some question its fairness, since government workers and government-affiliated institution staffers don’t have to pay anything out-of-pocket yet enjoy annuities higher than those for other retired urban workers.
Government retirees in Liaoning receive an average of 3,800 yuan per month, according to Feng Youwei, a former provincial congress member in Liaoning. But company retirees average 1,800 yuan monthly.
The dual-track system has run into trouble financially, too. In fact, fourteen provinces, including Liaoning and the Xinjiang Production and Construction Corps, reported their social accounts were running in red now, forcing them to borrow from private accounts.
Exacerbating the problem is the system’s fragmented oversight. Major policies are handed down by the central government, but planning is handled at provincial and municipality levels, and actual everyday operations are carried out by cities.
Any city or other government entity that can’t cover its obligations has to beg the central government for money. Rich cities, on the other hand, enjoy surpluses but sometimes struggle to manage their pension accounts.
The Liaoning government, for example, asked Beijing for help and got it in 2009 when the central government started pumping the province’s social pool with 1.63 billion yuan a year, up from the earlier subsidy of 1.44 billion yuan.
Beijing also gave the nod for the provincial government to borrow from the private accounts, tapping up to 30 percent of the input from worker contributions.
The province has yet to spell out plans or a possible timetable for repaying private accounts.
Other provinces and municipalities followed Liaoning’s lead by tapping their own private accounts, but none dipped as deeply and instead created reserve funds that can be tapped as needed to meet costs.
With a strong and relatively young workforce, Liaoning—like most parts of China—has enjoyed a demographic dividend since the 1980s. But it’s disappearing quickly. And by 2017, more than 14 percent of the province’s population will be age sixty-five or older.
Even now, pension expenditures weigh on local government budgets. Shenyang’s social pool in 2010 posted a deficit of 3.1 billion yuan, equal to 6.75 percent of the city government’s budget.
Fushun, a Liaoning city once nicknamed China’s “capital of coal,” has run out of mining resources and has been stuck with an even heavier burden: More than 15 percent of the government’s budget went toward retiree payments in 2011.
“In developed countries, social spending takes usually 20 percent of a government’s budget,” said Liu Haining, a professor at the School of Economics and Management at Shenyang Aerospace University. “It’s mostly put toward education, medical care and subsidies to disadvantaged families.
“If pension spending alone comprises up to 15 percent of a government budget, as in Fushun, the burden is really too high,” Liu said.
Liaoning officials vowed to adjust the system to make the public account sustainable and repay the private account. They followed up by expanding pension coverage to generate higher contributions between 2006 and 2011 to supplement central government transfers.
But it was not enough to relieve headaches linked to Liaoning’s modern history and demographics.
In the 1950s and early 1960s, women were encouraged to bear as many children as possible. As a result some 1 million people retired in Liaoning between 2006 and 2011. But the working-age labor pool increased much less during that time.
Liaoning’s pension system is also designed to support people who retired before 1997 but never contributed to the pension system, as well as those who retired in the late 1990s after contributing relatively little.
Local governments such as those in Tiexi and Fushun were ordered to cover the pensions for people laid off during the state-owned company shutdowns in the late 1990s.
Companies affiliated with Fushun’s state-owned coal bureau, for example, burdened the city with what grew by 2011 to about 1 billion yuan in pension obligations for 360,000 ex-workers.
Experts expect these historical costs to saddle the province’s government budgets until around 2040. If not for these former state workers, though, officials say Liaoning’s social pool would have had a 55 billion yuan surplus in 2010.
Meanwhile, employees and employers who pay into the system have complained about the high costs they bear. Many companies say they’re already squeezed by rising labor costs.
A 2011 survey conducted by the Shenyang government found 41 percent of local residents think they can’t afford pension payments. And many of the estimated 300,000 people in Shenyang who stopped contributing to private accounts in 2011 were college graduates who chose to delay payments until they feel they can better afford it.
The pension rules say a worker who contributes for fifteen years continuously can receive benefits at retirement.
Wang the electrician says he finds the payments impossibly high. He earns about 500 yuan a month by taking on temporary jobs and fishing in trash cans for empty plastic bottles. The local pension plan’s minimum, out-of-pocket payment for a man like Wang is 457 yuan a year.