China's pension gap is growing

[BEIJING] It's no secret that China is an aging society facing a growing pensions bill. Just how much of that bill is unfunded seems to be one though. It's an increasingly urgent question, as nearly a third of the inhabitants of the world's most populous country will be over 60 years old by 2050, according to United Nations data. By 2015, the pension of each retired resident was borne by the contributions of fewer than three wage-earners, government estimates show.

When China set up the current pension system in early 1990s, a shortfall immediately emerged, as the government began making payments to the already-retired using the current contributions of the working population, without there being any cash pile from the previous generation.

The problem was exacerbated in the late 1990s, when millions of workers at state-owned enterprises were laid off and were offered pensions even though they haven't reached retirement age.

There are a few unofficial estimates of the gap, such as that from Enodo Economics contributor Stuart Leckie, who has advised China's government on the matter. Mr Leckie projects the hole will expand to 1.2 trillion yuan (S$243.7 billion) by 2019, weighing on public debt. No official data is available.

Data on the gap isn't available in the National Council for Social Security Fund's annual report. The Ministry of Human Resources and Social Security used to publish a report on China's social insurance in 2014 and 2015, which offered a glimpse into the nation's pension burden, but stopped doing so since 2016. The ministry didn't respond a request for comment.

"The lack of public information on the issue has made tackling it more difficult," says Yang Yansui, a public governance professor at Tsinghua University in Beijing, adding that the gap continues to widen and is more serious in places such as northeast China where state-led enterprises take up a bigger share in the economy.

The dynamic migration triggered by urbanization has led to a noticeable regional diversification in terms of the pension burden.

Pensioners in Guangdong are supported by more than nine working people, as young Chinese rush into the prosperous coastal province, seeking better opportunities and, when they find them, making contributions to the local pension fund. The ratio of pensioners-to-working is about 1:1.5 in Jilin and Heilongjiang, two provinces in China's northeast rust belt, which has seen population outflows in recent years.

The pension burden adds to the fiscal stress in less-developed provinces and impedes their initiative to catch up with developed areas by improving public services and attracting outside investment. The government appointed reform-minded official Lou Jiwei to head the National Council for Social Security Fund late last year, a sign that it's serious about dealing with the issue. And this year Premier Li Keqianq committed to transferring some of the profit of state-owned companies to the fund to fill the gap, but so far no updates have been released.

Enodo says the main problem is that the pensioner population will grow rapidly as the workforce dwindles, and that a more structural response than just plugging the hole is needed. "The answer is to raise the low retirement age and let pension funds invest in higher yielding assets," the report argues.

BLOOMBERG