China: Pension funding gap poses major economic challenge

| 13 Feb 2018

China's pension shortfall is expected to reach CNY600 billion (US$95 billion) this year and CNY890 billion in 2020 if the system isn't reformed, reported Bloomberg citing Wang Dehua, a researcher at the National Academy of Economic Strategy in Beijing.

However, independent macroeconomic forecasting company Enodo Economics in London, which has advised policymakers on the matter, forecast last year that the shortfall could soar to CNY1.2 trillion by 2019.

The funding gap is emerging as the next big challenge for policymakers as they intensify their years-long campaign to keep rising debt from derailing the economy

Ageing in the world's most populous country means pension contributions by workers no longer cover retiree benefits, forcing the government to fill that gap since at least 2014. Pension expenses rose 11.6% to CNY2.58 trillion in 2016, leaving the government a CNY429.1-billion tab to cover the shortfall, according to the latest available data from the Finance Ministry.

"China's biggest fiscal risk is pension risk," said Mr Wang, whose institute is under the Chinese Academy of Social Sciences, the government's top think tank. "There are big problems in the pension system if it only keeps operating with large fiscal subsidies."

The shortfall adds urgency to President Xi Jinping's quest to stem rampant growth in corporate debt, given the government will need to fund widening deficits of its own in coming years.

The central government said last November that a handful of larger state-owned enterprises and financial institutions would transfer 10% of their state-owned equity to social security funds to help ease pension payment pressure. New details haven't been released.

While government revenue rose 7.4% last year for its first acceleration since 2011, that's unlikely to keep rebounding amid slower economic growth. That would limit Beijing's ability to cover the shortfall, which may push policymakers to issue debt to bridge the gap.

The population is graying quickly. The State Council said last year that about a quarter of China's population will be 60 or older by 2030, up from 13.3% in the 2010 census. Meanwhile, scrapping the one-child policy hasn't raised birth rates as high living costs deter larger families. Births fell to 17.2 million last year from 18.5 million in 2016.

Still, unbalanced demographic and employment trends may help the economy as they support further rebalancing and consumer spending, Enodo's Chief Economist Diana Choyleva says.

"China's graying population is often analysed in the context of a rising old-age dependency ratio and the strain it implies for the public finances," she wrote in a report this month. "But it's worth pointing out that a higher proportion of pensioners, who consume but do not produce, should lead to a structural increase in the share of consumer spending in GDP."

China has been paying retirees with contributions made by the working population since it set up the current pension system in the early 1990s. The gap between money coming in and payments going out has been widening as more people retire and fewer join the workforce.

"China should encourage individuals to invest more for their retirement to reduce the burden on the government, which can't shoulder the responsibility all on its own," said Zhang Bin, a senior researcher at the China Finance 40 Forum, a Beijing-based think tank.

Aggravating the situation, Premier Li Keqiang pledged last year to increase pension allowances. "We will weave a strong safety net to ensure people's well-being," Mr Li said. "We will continue raising basic pension payments and see they are paid on time and in full."However, independent macroeconomic forecasting company Enodo Economics in London, which has advised policymakers on the matter, forecast last year that the shortfall could soar to CNY1.2 trillion by 2019.

The funding gap is emerging as the next big challenge for policymakers as they intensify their years-long campaign to keep rising debt from derailing the economy

Ageing in the world's most populous country means pension contributions by workers no longer cover retiree benefits, forcing the government to fill that gap since at least 2014. Pension expenses rose 11.6% to CNY2.58 trillion in 2016, leaving the government a CNY429.1-billion tab to cover the shortfall, according to the latest available data from the Finance Ministry.

"China's biggest fiscal risk is pension risk," said Mr Wang, whose institute is under the Chinese Academy of Social Sciences, the government's top think tank. "There are big problems in the pension system if it only keeps operating with large fiscal subsidies."

The shortfall adds urgency to President Xi Jinping's quest to stem rampant growth in corporate debt, given the government will need to fund widening deficits of its own in coming years.

The central government said last November that a handful of larger state-owned enterprises and financial institutions would transfer 10% of their state-owned equity to social security funds to help ease pension payment pressure. New details haven't been released.

While government revenue rose 7.4% last year for its first acceleration since 2011, that's unlikely to keep rebounding amid slower economic growth. That would limit Beijing's ability to cover the shortfall, which may push policymakers to issue debt to bridge the gap.

The population is graying quickly. The State Council said last year that about a quarter of China's population will be 60 or older by 2030, up from 13.3% in the 2010 census. Meanwhile, scrapping the one-child policy hasn't raised birth rates as high living costs deter larger families. Births fell to 17.2 million last year from 18.5 million in 2016.

Still, unbalanced demographic and employment trends may help the economy as they support further rebalancing and consumer spending, Enodo's Chief Economist Diana Choyleva says.

"China's graying population is often analysed in the context of a rising old-age dependency ratio and the strain it implies for the public finances," she wrote in a report this month. "But it's worth pointing out that a higher proportion of pensioners, who consume but do not produce, should lead to a structural increase in the share of consumer spending in GDP."

China has been paying retirees with contributions made by the working population since it set up the current pension system in the early 1990s. The gap between money coming in and payments going out has been widening as more people retire and fewer join the workforce.

"China should encourage individuals to invest more for their retirement to reduce the burden on the government, which can't shoulder the responsibility all on its own," said Zhang Bin, a senior researcher at the China Finance 40 Forum, a Beijing-based think tank.

Aggravating the situation, Premier Li Keqiang pledged last year to increase pension allowances. "We will weave a strong safety net to ensure people's well-being," Mr Li said. "We will continue raising basic pension payments and see they are paid on time and in full."

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