China’s pension system: a vision

China is facing a dramatic ageing process and demographic transition as a result of declines in fertility combined with significant increases in longevity. Old-age dependency ratios are therefore projected to almost triple over three decades. Policy makers widely believe that the approach to pension provision and reform efforts piloted over the last 10-15 years is insufficient to enable China's economy and population to realise its development objectives in the years ahead.

This volume proposes a national pension system that no longer distinguishes along urban and rural locational or hukou (household registration)  lines yet takes account of the diverse nature of employment relations and capacity of individuals to make contributions. The document outlines this vision, and summarises the key features of a proposed long-term pension system. It examines key trends motivating the need for reform then outlines the proposed three-pillar design and the rationale behind the design choices, examines financing options, and discusses institutional reform issues.

It concludes by saying that the pension system design can play an important role in supporting or constraining such economic and demographic transitions, highlighting that:

• fragmentation and lack of portability of rights hinder labor market efficiency and contribute to coverage gaps
• multiple schemes for salaried workers, civil servants, and, in some areas, migrants similarly impact labor markets
• legacy costs that are largely financed through current pension contributions weaken incentives for compliance and accurate wage reporting
• very limited risk pooling and interurban resource transfers limit the insurance function of the urban pension system and create spatial disparities in old-age income protection
• low retirement ages affect incentives and benefits and undermine fiscal sustainability
• relatively low returns on individual accounts result in replacement rates significantly less than anticipated while at the macro level, are likely to inhibit wider efforts to stimulate higher domestic consumption