MEETING THE MEETING THE CHALLENGES OF AN CHALLENGES OF AN AGEING SOCIETYAGEING SOCIETY

Asia-Pacific Finance and Asia-Pacific Finance and Development CentreDevelopment Centre

Shanghai, October 17, 2007Shanghai, October 17, 2007

Pension Reform in Pension Reform in China: The Need for a China: The Need for a New ApproachNew Approach

Presentation by Vivek AroraPresentation by Vivek Arora

IMF Senior Resident Representative, Beijing. The views IMF Senior Resident Representative, Beijing. The views expressed in this presentation are those of the author and expressed in this presentation are those of the author and should not be attributed to the IMF, its Executive Board, or should not be attributed to the IMF, its Executive Board, or its management.its management.

Pension reform: Pension reform: outlineoutline Pension reform experience in Pension reform experience in

ChinaChina Remaining problemsRemaining problems Proposal for a new approach Proposal for a new approach

(based on Dunaway and Arora (based on Dunaway and Arora (2007))(2007))

Population is aging Population is aging rapidly…rapidly…

Median age (in years), 1980-2050

15.0

25.0

35.0

45.0

55.0

65.0

1980 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

China

Japan

U.S.India

……increasing the increasing the dependency ratiodependency ratio

China: Demographics, 1980-2050(in percent)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

1980 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Population aged 15-60

Population aged over 60

Age dependency ratio

Ageing comes at relatively Ageing comes at relatively early stage of China’s early stage of China’s development…development…

Per-capita income when median age around 33 years

-

5,000

10,000

15,000

20,000

25,000

U.S

. dol

lars

, PP

P b

asis

China (2005) Japan (1980) Korea (2000) United States (1990)

……so ability of workers to so ability of workers to

finance elderly is limited.finance elderly is limited.

……making pension reform all the making pension reform all the more urgent.more urgent.

Pension reform Pension reform experienceexperience ““Iron rice bowl” until 1990s SOE Iron rice bowl” until 1990s SOE

reforms.reforms. Pilot experiments with employee Pilot experiments with employee

contributions.contributions. 1997 reform: objective to cover 1997 reform: objective to cover

all urban enterprise workers. all urban enterprise workers. 2-pillar system: social pension + 2-pillar system: social pension +

individual accounts.individual accounts.

Pension reform Pension reform experience since 1997experience since 1997 Broad urban Broad urban

coverage not coverage not attained (less attained (less than 50%).than 50%).

Rural coverage Rural coverage very small.very small.

Table 1. Contributors to the pension system

  Employees Enterprise workers

  In millions  

1990 52 52

1997 87 87

2005 131 117

In percent of urban employment

1990 31 31

1997 42 42

2005 48 43

Sources: China Statistical Yearbook (2006);

China Labour Statistical Yearbook (2006).

Remaining problems in Remaining problems in the pension systemthe pension system Reform bogged down over Reform bogged down over

“legacy costs”“legacy costs” of transition from of transition from old system.old system.

Fiscal costs will continue to rise.Fiscal costs will continue to rise. Decentralized, fragmented system Decentralized, fragmented system

prevents effective prevents effective poolingpooling.. Pilot projects: address some of the Pilot projects: address some of the

problems, but experience mixedproblems, but experience mixed

A New ApproachA New Approach

Separate into 2 problems: Separate into 2 problems: (1) set up new pension system for (1) set up new pension system for

allall workers, and workers, and (2) deal with “legacy costs” (2) deal with “legacy costs”

separately (central government, local separately (central government, local government).government).

Unlike the current approach, fiscal costs Unlike the current approach, fiscal costs will will diminishdiminish steadily over time. steadily over time.

A New Approach A New Approach (contd)(contd) Basic structure: 2-pillar system Basic structure: 2-pillar system

already established by State Council.already established by State Council. Finance with payroll tax. Parameters Finance with payroll tax. Parameters

(contribution rate, etc.) in line with (contribution rate, etc.) in line with social objectives and viability.social objectives and viability.

Social pension: fully/largely Social pension: fully/largely fundedfunded; ; individual accounts: individual accounts: fully fundedfully funded..

NationalNational pension administration. pension administration.

A New Approach A New Approach (contd.)(contd.) Assets managed professionally, Assets managed professionally,

managed by central government.managed by central government. Separate social pension and Separate social pension and

individual accounts assets. individual accounts assets. Initially invested offshore.Initially invested offshore.

ConclusionsConclusions

Ageing society urgently needs new Ageing society urgently needs new pension system with broad coverage.pension system with broad coverage.

A way forwardA way forward: separate out legacy : separate out legacy costs, and move quickly to put in costs, and move quickly to put in place new system. place new system.

It is feasible, and the right time is It is feasible, and the right time is now.now.

ReferencesReferences

Based on Based on

Steven Dunaway and Vivek Arora, “Pension Steven Dunaway and Vivek Arora, “Pension Reform in China: The Need for a New Reform in China: The Need for a New Approach” Working Paper (IMF/WP/07/109). Approach” Working Paper (IMF/WP/07/109).

__ and __, “Pension Reform: Cutting the __ and __, “Pension Reform: Cutting the Gordian Knot,” in Gordian Knot,” in China Economic China Economic QuarterlyQuarterly, 2007 Q3, Volume II, Issue 3 (pp. , 2007 Q3, Volume II, Issue 3 (pp. 43-47).43-47).