The Chinese pension system – first results on assessing the reform options

The Chinese population, totalling 1.3 billion, is ageing fast. The Chinese pension system covers only 55% of urban employees and reaches a very small part of the rural population. 

Previous pension reforms have not succeeded in creating a stable and financially sustainable pension system, and the Chinese authorities and experts have been considering proposals to reform the structure and expand the scope. This paper looks into these various reform proposals and presents model simulations to analyse their implications, offering a template for designing new options and expressing them in terms of key pension system variables.

Observations and reform options:

• the current multi-pillar pension system for urban employees is fragmented, it does not work as intended and compliance with the rules is low. The system established in the 1990s was supposed to introduce individual fully funded accounts to top up the basic pension (20 % of average urban wage), but the accounts are virtually empty as contributions were used to pay the pensions of current pensioners
• extending coverage is a challenge that is recognised by the Chinese authorities - the pension system covers only a very small fraction of  rural area employees, who are still the majority of workers, and provides very low pensions.
  
• there are many linkages between the urban and rural social security systems (especially through the workers from rural areas working in the cities), and various policies will probably enhance convergence
• results for an notional defined contribution (NDC) pillar combined with basic social income supportfor the elderly and moderate defined contribution (DC) pensions, geared to be financially sustainable under the rapid population ageing in China, could be usedfor designing pension reform proposals, covering a wider range ofoptions