(Ecns.cn)--The 401k plan allows U.S. workers to set aside and invest part of their earnings tax-free until they retire, a move that has boosted the country's capital market in the last two decades with the continued inflow of money from retirement savings. Though somewhat successful in the U.S., would a similar system work in China?
According to state-run media on Friday, China is considering the launch of a new retirement plan along the lines of the 401k to boost the country's capital market.
The 401k has become a hot topic recently, said Liu Yunlong, General Manager of the Asset Management Division of China Life Pension. "The 401k-style plan is a general trend in China."
However, analysts say the plan is unlikely to materialize in the near term. An insider from the China Securities Regulatory Commission (CSRC) also denied such a move, saying, "We do not know when to launch the plan. Nobody knows."
The insider added that the adoption of the Chinese version of the 401k would need a high degree of coordination between various government departments, including the CSRC, the Ministry of Finance, the State Administration of Taxation (SAT) and the Ministry of Human Resources and Social Security.
Some take an even gloomier view, believing that the inflow of retirement savings would be risky as China's capital market and social benefits are still immature.
Savior of the capital market?
After about 200 years of development, the U.S. now has a relatively mature endowment insurance system.
The country's current national pension system is supported by three pillars: the Social Security Program (Public Sector Plans)， Employer-based Pension Plans (Private Pension Plans) and Individual Retirement Accounts, which are voluntary supplementary pensions.
According to the 401k plan of the Internal Revenue Code carried out in 1978, elective salary deferrals are excluded from the employee's taxable income.
"The 401k plan in the U.S. has some tax exemptions, so we need to decide whether China's plan will have similar favorable clauses. Moreover, how will such a plan be implemented?" said Peng Yunliang, an analyst at Shanghai Securities.
Because Social Security can only be used for low-risk investments like government bonds, the 401k plays a more important role in the U.S. capital market by providing significant financial support.
By 2009, private pensions in the U.S. amounted to $16.1 trillion. Shares purchased with retirement savings directly and indirectly took up one-third of the total market value of stocks.
Liu Yunlong analyzed that the increasing pension fund investments have significantly contributed to America's bull market.
From 1964 to 1982, America's GDP saw a three-fold increase, while the Dow Jones Indexes only finished up 1 point. However, from 1982 to 2007, with GDP tripling, the Dow Jones Indexes grew from 1,000 to 15,000.
"The promulgation of the 401k plan in 1981 was the major impetus," explained Liu.
When a research report from the CSRC suggested that China should adopt a 401k-like plan, several financial media projected that a bull market would come when the constant inflow of pension funds were injected into the capital market.
