Revival, Resistance for National Pension Push

Social Security Ministry Favors Nationwide Scheme to Bridge the Wealth Gap

Bridging the “regional divide” that separates affluent and less affluent areas is a main goal as the central government revives a stalled effort to form a nationwide pension system.

The State Council, China’s cabinet, laid the groundwork for a unified public pension system as part of an economic and social development strategy embedded in the 13th Five-Year Plan, which took effect this year.

Beijing wants to put what are now dozens of regional funds run by provincial, city, and even county governments under one roof by 2020.

As a first step, officials with the Ministry of Human Resources and Social Security are now drafting nationwide pension system regulations that should be completed by the end of the year, according to academics involved in the process who asked to remain anonymous.

After the rulebook is written, analysts say, central government authorities will have to fight to get the plan off the ground. In 2011, a similar proposal included in the 12th Five-Year Plan stalled due to resistance from local governments on the rich side of the regional divide. Analysts say overcoming that still-intense resistance today will require firm resolve.

Even central government authorities do not necessarily see eye-to-eye when discussing the best way to structure a national pension fund, according to Yang Yansui, Director of the Social Security Research Center at Tsinghua University in Beijing.

Through regional pension schemes, some 2.7 trillion yuan (U.S.$407 billion) was collected from workers and 2.3 trillion yuan (U.S.$347 billion) paid to retirees last year across the country, according to the Ministry of Human Resources and Social Security. Total savings at the end of last year amounted to 3.4 trillion yuan (U.S.$512 billion), the ministry said.

The ministry’s figures have been questioned in the past by academics who say the data overlooks the unspoken fact that local authorities often dip into pension funds for government project financing.

Nevertheless, a public plan that covers all workers in China would take in funds from a huge swathe of the nation’s working-age population. According to ministry data released last year, pension payments were received from about 255 million workers in 2014, up 5.6 percent from the previous year.

Clashing Views

Social security ministry officials favor a nationwide scheme as a way to promote sustainability and bridge the wealth gap, which principally separates provinces and cities in China’s prosperous east from those in rural central and thinly populated western provinces, Yang said.

But the social security ministry’s counterparts at the Ministry of Finance fear a nationwide system might overburden the central government with financial responsibilities as the nation’s population ages, she said.

Yang said the finance ministry’s position has found few friends in affluent areas such as southeastern Guangdong province, where local officials have shown little interest in a national plan.

Migrant factory workers from poor provinces have for decades paid into the pension system in Guangdong, where the government was sitting on a 77 billion yuan (U.S.$11.6 billion) pension surplus in 2014, according to the social security ministry. But depressed areas such as Heilongjiang province in the country’s northeast and the northwestern Ningxia region have reported local pension fund shortages.

Heilongjiang’s pension system was running a 10.6 billion yuan (U.S.$1.6 billion) deficit at the end of 2014, according to a report by the Chinese Academy of Social Sciences, a government think-tank in Beijing. It was one of the seven regions that have seen pension payouts exceed collections.

One reason for the gap is that migrant workers must pay into the regional systems where they are employed but are only eligible for full retirement benefits through pension plans in their home provinces. Thus, migrant workers may only have a portion of their pension contributions transferred home from provinces where they work.

Moreover, pension fund officials in poor provinces have little incentive to support returning migrant workers who come home to retire.

Li Zheng, a professor of public management at Renmin University in Beijing, said some returnees may not be welcomed at home because they “did not pay much into the local pension fund.” The current pension system thus fails to support China’s labor dynamics, she argued.

“To tie a person’s pension plan to one place undermines the free flow of labor, which is critically important to China,” Li said.

In addition, regional pension fund deficits in some regions have been amplified by the need to pay elderly retirees who contributed little or nothing before China’s pension system was launched in the early 1990s.

No pension plan existed before the State Council in 1991 ordered private sector employers to set aside a portion of each worker’s salary for a government-sanctioned pension plan.

Today’s pension plans vary slightly from one region to another. In the capital Beijing, for example, every non-government employer contributes 20 percent of each worker’s base salary into a general account. And 8 percent of each worker’s pay goes toward the fund through a personal account.

Government employees, including school and hospital workers, were not covered by pension funds before this year, when officials scrapped an old system through which government retirees received payments directly from public coffers. In some cases, retiree support was the responsibility of small government entities, such as counties.

A national pension system should link a worker’s contributions to his or her retirement payments, says Zheng Bingwen, Director of the Chinese Academy of Social Sciences’ World Social Security Institute. Such a connection can serve as an incentive for a worker to support the pension system.

A strong pay in-pay out connection would also prevent pension misuse, according to Zheng. “A pension scheme can be compared to making a bank deposit,” he said. “Do we really need to worry that depositors will take advantage of the bank?” An even more pressing matter for the supervisors of any future national pension system, Zheng said, would be the need to make sure that the fund is financially sound.

The system’s supervisors could protect the fund by, for example, changing the rules that cover the self-employed, Zheng said. Currently, the self-employed have little incentive to contribute past a mandatory 15-year period for inputs, since their subsequent contributions will have little impact on how much they receive during retirement.

In the period before a nationwide system takes effect, though, Zheng thinks China should create a mechanism through which regional governments with surplus funds can transfer some of that money every year into a national fund that regions with deficits can access.

Questions linger over how national authorities intend to address the resistance to change that is common among government officials in wealthy provinces—and bring them on board.

In fact, though, Zheng said the central government could set up a unified pension system in one step and force regional authorities to hand over any surplus cash. Also, he added, they could draw up a nationwide schedule for worker payments and retiree benefits that each region would be required to follow.

In Yang’s opinion, the future of the national pension system plan hangs on Beijing’s political resolve.

“It all comes down to whether authorities have the political will to overcome vested interests and reform the pension system in order to achieve long-term sustainability,” he said.

Rewritten by Li Rongde.