Pension payment reform has challenges ahead

New system needed for equitable approach to support for retirees

The Standing Committee of China's National People's Congress examined a report Tuesday looking at restructuring the country's social security system, and in particular the system through which pensions are funded.

There have been calls for reform because under the current pension system, public employees don't have to pay anything to the scheme, but receive more at the end, compared to workers at State-owned and private enterprises.

The report said the central government will vigorously promote reform of the system through government bodies and public institutions, and will establish a national unified pension system.

It is imperative that the central government abolish the dual-track pension system and implement a national unified one, so that retirement benefits are distributed fairly.

China's split-system for pensions started life in the early 1990s. Under it, people working at government agencies and public institutions are not required to pay into any pension policy, but upon retirement they can still draw a full pension. However, staff at State-owned and private enterprises have to pay 8 percent of their salary, but on retirement draw a lower pension.

On the one hand, workers at government agencies and public institutions can usually get a pension amounting to nearly 70 percent of their salary, which goes up to 80 percent for senior professionals. In contrast, the level for enterprise staff is usually around 45 percent of their pay, according to estimates by Chu Fuling, a professor at the Central University of Finance and Economics.

This system has been criticized by many for a long time due to its apparent unfairness.

However, there are many difficulties in reforming the current system, not least the fact that there are underlying problems that will still plague it, even if the proposed reforms go ahead.

First is the huge gap in funding for the pension system. This gap amounted to some 18.3 trillion yuan ($2.95 trillion) in 2013. This is being exacerbated by a slowdown in government revenue growth due to the slowing economy, and the increasing demand for pensions as the population ages.

Second, China's basic pension fund is being mismanaged, receiving low yields as most of it is either deposited in banks or used to buy Chinese government bonds, both of which return yields lower than the growth of the Consumer Price Index. Therefore, it is necessary for the government to widen investment channels to preserve and increase the value of the basic pension fund.

The biggest difficulty specific to these proposed reforms lies in obstacles from those with a vested interest in maintaining the current system: employees with government agencies and public institutions. Once the pension system is reformed, they will see their salaries effectively drop as they will be required to make regular payments toward their pensions, and may even face lower pension payments after retirement than they originally expected.

This means some of those who stand to lose the most - government officials - will be charged with promoting the policy. There have already been signs of how this may drag on the progress of the reform. In 2008, trial reforms of the system in Shanxi, Zhejiang and Guangdong provinces and Shanghai and Chongqing municipalities were ineffective.

It is very likely that, when the government requires public employees to pay into their retirement accounts, the government will raise their salaries. There is also a supplementary pension system in government agencies and public institutions that is fully subsidized by national funds. This may end up being used to compensate for the reductions brought about by the reforms.

Meanwhile, this supplementary pension scheme will be unavailable to most enterprise staff, as it is an "opt-in" system that most enterprises eschew due to the extra costs involved.

It will be a challenge for the government to push forward with the reform in such a way that it has the intended outcome of bringing about a fair pension system for all.