Inefficiency and Unfairness in China’s Pension System

by Jason Shaw
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Summary/Abstract

Inefficiencies and unfairness have marred the evolution of the pension scheme. The aim of this paper is to examine the various aspects of inefficiency and unfairness in China’s pension system as it develops. China’s commitment to create a partly financed pension scheme is regarded as a positive move towards the right direction. Replacements, the efficiency of the tacit pension debt, and changes in fund legislation and administration will not be sustainable if individual funds are not removed from social pooling.

The expansion of pension funds has always been a difficult job, particularly given the current state of commercial banking. However, there have been advantages of financial sector consolidation and development, which has culminated in improved productivity and liquidity. An successful pension scheme, according to this article, necessitates such pre-conditions as sound commercial banking, price stability, effective financial controls, and commercial insurance plans. In China’s viewpoint, the nation is currently undergoing a critical phase of economic and social change. The thorough overhaul of China’s social care and pension programs is a crucial strategic aspect that will help the country achieve long-term pension growth and a harmonious society. However, the new pension scheme is insufficient in promoting the achievement of the country’s sustainable growth goals, both now and in the future.

Key Words: Pension plan, Evaluation framework, China, social security

Introduction

Presently, china is at an important period with regard to its economic transition. The comprehensive reform of its social security, and pension  systems  is  a critical strategic factor that is  aimed towards  realizing a  sustainable  development  as  well as  an harmonious  society.  The  common  view  by  policy makers in  China  is that the current  approach to pension is inadequate  in  facilitating a realization of the  country’s economic  development objectives  now and  in the  future. According to these policy makers, a reformed pension system will see urban systems being sustainable, multilayered, protects at the basic level and has broad coverage. However, though the relevant authorities have placed the increasing premium on a more balanced development between urban, and rural areas, households and different regions, the pension  system has a per today  only contributed to  divergence (Bleakney, 2013, 78).

Inefficiency and Unfairness in China's Pension System

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The pension system is closely related with the capital market in many ways. This is more apparent in developed countries where pension funds, especially those with large amount of assets are the key element in institutional investment in the capital market. A reform of the pension system has recently been witnessed in the form of pay as you go to funded systems in counties such as those in Latin America and East Europeans nations. In these reforms, the pension benefits for retirees are mainly derived from individual accounts, and not really from the contributions of the next generations. Consequently, there has been a dramatic increase of pension assets, subsequently leading to an increasing level of the general GDP. There has been a significant effect of the investment performance of the pension funds on pension’s benefits for retirees over the past years. Because of this, many nations have now begun to emphasize on the aspect of diversifying their pension investments, subsequently leading to domestic capital investments (Helman et al 2012, 66).

 Background Information

Retirement plans for the public sector, both for the state and government employees have a historical background in the 18th and 19th century. In most cases, these plans were established, and developed by employers in the public sector to offer retirement benefits for employees in the public service. Such programs were provided for making public employment to be competitive in relation to the private sector, which mostly paid higher salaries. The logic behind this reasoning   was that, though employees in the public sector had lesser amount of money for their services, they were guaranteed retirement benefits; hence, this was an advantage to them. Such kind of guarantee could protect employees and members of their family during their retirement period (Mitchell, 2008, 234).

In 1857, the state of New York became the first to provide a retirement benefit for public workers. This law offered a substantial amount of payment to police officers in New York City who were injured while on duty. This plan was revised in 1879 to include a lifetime pension for police officers who had attained the age of 55 years after working for more than 21 years. A similar plan was extended to fire fighters in New York City in 1866 (Helman et al, 2012, 45).

The pension programs in the last century were mostly depicted in the defined benefit (DB) plans. The employees especially in the public sector regarded defined benefit plans as the most significant benefit received for their long career in the public service. Although the history of pay in the public has lagged far behind that of private sector workers, the benefits for pension have been an efficient way for government authorities in attracting and retaining employees who are efficient and effective. In the last decade, the defined benefit plans have consistently come under attack. In an endeavor to reduce costs, partly due to increased global competition, may organizations have either terminated or frozen their Db programs and instead, replaced them with DC programs. Some government authorities have applied this same logic to local and state governments and have sought consistently sought to replace the DB plans with the DC plans.  Although it  has been  anticipated that  this change has a potential of  causing  negative ramifications to  employees in the public sector as well as the general tax payers, such efforts  have  been  successful in  some states (Mitchell, 2008, 244).

However, economic, and demographic pressures have led some public DB plans to reevaluate their plan strategies, and consider an integration of DB and DC plan characteristics. For instance, the median age of the public sector employees is approximately 45. This translates that about half of the present public employees are likely to go for retirement for the next 20 years.  In replacing such retirees, many states and local governments will require to provide attractive benefits to younger and more mobile employees. Most pension schemes are designed for long-term workers and do not therefore, have the portability required by younger workers (Bleakney, 2013, 111).

Furthermore, the volatility in the stock market over the past decade has raised the awareness level of employers, and employees in the public sector with regard to the potential rewards and risks for the financial markets. While most markets are up, as was realized in the period of 1990s, there has been an increasing pressure on employees to be involved in pension scheme programs. However, the consistent decline of the stock market during 2000-2002 made many employees to devalue the pension scheme accounts. Many of these employees reevaluated the attractiveness of the pension scheme plans. The consistent decline of the stock market subsequently leads to increased pension scheme costs, making the sponsors to find other ways of sharing market risks equitably (Moo, 2014, 7).

Over the past ten years, the retirement benefit systems in public sectors have started to explore means of combining the DB and DC features into a “hybrid” plan design. Hybrid plans combine both the DC and DB plan features.  While a strictly pure DB plan shifts a portion of the risks and potential rewards to employers, the hybrid approach essentially offers a tax advantaged means for worker in contributing towards their retirements and investing the same in diversified investments. When used in the public sector, the hybrid system typically enables workers to convert their direct contributions (DC) accounts to an allowance, contributing to employee’s lifetime benefits.

There are various ways by which most countries undertake their saving plans; this is defined by the World Bank in 3 pillars that is retirement income security, government provided social security, employer provided social security, government provided social security, employer provided supplementary savings programs and individual savings (Moo, 2014, 7).

In essence, the present system of the pension scheme in China is defined as pay as you go system for retirees, and older workers. For younger workers, the pension scheme is designed in such a way that it combines individual accounts and social pooling. The system constitutes a compulsory defined benefit that is paid from the social pooling account, as well as the voluntary supplementary account paid by individuals. In accordance to the World Bank report, the total amount of pension assets that will be accumulated from the new system will reach US$1.9 trillion by 2030. The greatest beneficial however, will be the capital market due to the consistent inflow of capital (Ma, 2013, 56).

The Evolution of the Pension Scheme System in China

In China, retirees have traditionally relied on their family and the government to help them when they get older. Both the family and the government pillars are slowly crumbling to varying degrees. Furthermore, a growing number of employers are dependent on alternative sources of retirement revenue. Many employers have stepped up to further fill the vacuum. In addition, companies have retirement plans and other savings services in a variety of forms (Helman, 2011, 57).

China has undergone significant transformations in the last 100 years. There has also been a revolution of government leadership, from Emperor to Nationalists to Communists, with civil wars thrown in for good measure. There has been a great reorganization and upheavals of culture following the communist takeover in 1949 and the emergence of the new age in China. The big move ahead to reform and opening from the Cultural Revolution. With all of this dynamism, it may be challenging to retain a long-term outlook on some of China’s current problems, such as an ageing population (Moo, 2014, 6).

The reduced number of births (exacerbated by China’s one-child policy) and a longer lifespan are two causes that have led to the ageing population. According to the Demographic Reference Bureau, China’s ageing population is one of the fastest rising in the world. According to the United States, the working-age population to elderly population ratio would decline from 9 to 2.5 by 2050. This would place a significant financial strain on the next generation to help the elderly throughout their retirement years. This necessitates workers beginning to invest as soon as possible. Mitchell, 2008, n.d. (Mitchell, 2008, n.d.)

In 1951, China developed the first old-age pension fund, which was regulated by the state council’s labor insurance regulations. Since then, China’s pension scheme has experienced a number of reforms prompted by changes in the country’s fiscal, political, and social environments. Employer donations from local and national pools supported the initial scheme, which was offered on a pay-as-you-go basis. Social security was modified to become a responsibility of businesses during the Cultural Evolution era, 1966-1976. Any company using existing income to fund the retirement of its own retiring workers. The inclusive pension pooling scheme was abolished, and the national pool’s accrued pension assets were put to other uses. Supervisory responsibilities were delegated to local labor bureaus (Ma, 2013, 44).

The Chinese government started redeveloping the social security scheme in 1978, including the reintroduction of pooling in 1986. However, the pension scheme was represented in turmoil in the first decade of the new millennium owing to certain government measures such as the one-child rule, and lavish retirement packages intended to create job options for young people, as well as the shift from a planned economy to a capitalist economy. State-owned companies have substantial pension liabilities at a period when jobs in these businesses is dwindling and the amount of workers in comparison to workers is growing. In recent years, several state-owned companies have started to accept responsibility for their profits and losses. Many citizens, though, are unwilling to fulfill their pension commitments. The country has now realized that it cannot continue to shoulder any of the pension obligations on its own (Ma, 2013, 5)

In 1991, an overhaul of the country’s pension system was initiated. This included a request for specific donations from all employees, as well as personal account experiments. The need for the traditional three-pillar structure was established by this amendment. Experiments with personal accounts and the social security framework, as well as various pooling levels, were performed throughout the 1990s. However, these schemes were marred by ambiguity over who had jurisdiction over whom in this scheme, as well as how the various services might be unified. The ministry of social protection and labor (since renamed the ministry of Social Security and Human Resources) was created in 1998 with the aim of bringing together the various agencies responsible for various facets of pension reform and social security. Despite the MOHRSS’s centralization of power, several MOLSS offices, as well as the ministries of National Tax Bureau and Finance, have managed to control the fundamental pension system’s evolution (Hozzo, 2009, 277).

In an effort to strengthen the basic pension system, the Chinese government established a reserve fund in 2000 that was identified as the National Pension Fund (NPF). The main aim for this fund was to act as a fund of “last resort” when the age wave in China began to wave began to increase the cost of pension. This fund is funded through a combination of subsidies from the main government that acquired from the sale of shares of enterprises that are owned by the state and the profits of the national lottery. Originally, the assets of the NPF were entirely invested as bank deposits and government bonds. In recent perspectives, the investment guideline for the fund has been slowly liberalized. This can be attributed to the government’s view as a valuable and significant instrument for bolstering the strategic organizations, and improving the capital markets. As at 2012, 48 percent of the NPF assets were outsourced to external managers who were bestowed with the obligation of handling the funds rising investment in both local and international securities (Bleakney,  2013, 334).

The Present Framework of the Pension Plan

China’s government has taken a series of measures in the last two years to improve the country’s pension scheme. In 1997, one of the main changes of the pension system was implemented, and it was refined in 2009. In 2009, the government developed a national system for rural pensions, accompanied by the Rural Pension Pilot Programmes, which resulted in the Current Rural Pension Scheme (NRPS) in 2011. The authorities have introduced the National Pilot Urban Resident Pension Scheme (ERPS) in the middle of 2011, which was intended to cover a compulsory pension (Bleakney, 2014, 237).

China is now going through a critical phase of its economic transformation. Comprehensive overhaul of the social care and pension schemes is a key strategic consideration for achieving long-term development and a harmonious community. Policymakers in China are of the belief that the new solution to pensions is unsuccessful in promoting the accomplishment of the country’s economic growth targets, both now and in the future. According to these policymakers, a new pension scheme would result in competitive urban schemes that are multilayered, have basic protection, and provide wide coverage. Despite the fact that the relevant authorities have put a greater emphasis on a more inclusive growth between urban and rural areas, families, and various countries, the pension scheme has only added to the divergence as of today (Holzmann, 2013, 79).

Though substantial reforms to the pension scheme system have been undertaken, there have been suggestions from various stakeholders who have given suggestions on the necessity of more reforms. According to policy makers, more reforms are required in order to meet the needs of the increasingly changing society and economic conditions of China. Costs associated with legacy, reduced coverage, and device heterogeneity are some of the problems that need to be addressed. Similarly, there are also many challenges that are consistently cropping in including increasing rate of urbanization, rural-urban disparities, income inequality, and alteration of the family structure, in formalization of the labor force as well as the impact of increased globalization.

In 1997, China’s state council developed the new pension scheme. The last time this was revised was in 2005. The plan’s key goal was to convert the defined benefit, pay-as-you-go scheme to a three-pillar model, but still including self-employed people and small businesses in both urban and rural areas. Businesses are required to pay a tax-deductible 20% of their total payroll bill in this scheme. The amounts of these donations are set by municipalities and provinces. In each of these scenarios, the salaries used to calculate contributions are subject to a maximum of 300 percent and a minimum of 60 percent of the local average income. Employees, on the other side, have a right to add to their own accounts. In general, the contribution rate is 8% of salaries (subject to a cap of 300 percent of average maximum wages). These accounts are set up in such a manner that they are entirely financed from the outset. In essence, the funds have been used to help social pooling and non-pensionable commitments in the majority of provinces. As a result, human accounts are simply fictitious. The accounts are paid with interest per year (at a rate determined by the local government) (Bleakney, 2013, 114).

The new pension scheme requires men to be 60 years old, 55 years old for specialized dangerous professions, 55 years old for female cadres, and 50 years old for general female employees. In addition, employees would have applied to the scheme for at least 15 years. The following factors make up the social security income retirement benefit: benefits from the social pool, where the monthly pension is calculated as a proportion of the total wage in urban areas, depending on the average of workers, and CAS indexed contribution salary, compounded by the accurate figure for each year’s payment (Helman, 2010, 112).

Effectiveness of the Current Pension Plan in China

Most Chinese employees consider their bosses and the government to be liable for their social welfare, focused on the legacy of the old mindset of “iron rice cup.” Nonetheless, China’s current mandated pension scheme provides insufficient retirement income, especially for employees earning more than 300 percent of the urban average salary. This implies that as Chinese employees leave, they would need to supplement their salaries. Before dwelling on employer-sponsored services, it’s a smart idea to ask about family and individual investments.

It is obvious that the new social security scheme is incomplete, necessitating the development of further saving services. Many Chinese workers are likely to appreciate the chance to save more money for social and cultural purposes. This is only effective if they believe the boss is providing a greater opportunity than they will have on their own. Many non-governmental organizations (NGOs) from the business sector, the government, and the World Bank are working hard to unify pension policies and regulations around the country. One of the hopes is that the long-term social insurance mechanism will be included, as well as a collective tax framework for EA schemes in the short term. Many organisations could be encouraged by the development of a nationwide, uniform program. In order to draw as many businesses as practicable, the specifics of such a strategy should be fair. The most important motivation for most businesses is usually linked to how the government handles taxes. Many more organisations would be able to redirect money from cash compensations for this purpose if they reduce, waive, or delay (for both workers and employees), and which may be given by a savings scheme (Keith, 2008).

In essence, an effective public pension plan ought to offer an efficient protection avenue against the risk of longevity, and as a protection floor against old age for Chinese citizens. However, the  deteriorating ratio of  replacements alongside the consistent decline  in income class by a large number of retirees as time goes by  have instigated serious concerns  on the effectiveness  and fairness of  the Chinese public pension plan on its basic function  where the impact of inflation have taken  an implicit but  crucial role. The general perspective of the  urban  workforce  and retirees scheme  have resulted into concern that  there is no efficient mechanism  that has been  established in the country to tackle the issue of  post inflation  adjustment problem which has been consistently  been deteriorating. Additionally, the current pension plan is still not effective with regard to protection against inflation up to the retirement period especially for specific calibers of population such as migrants and urban residents (Mitchell, 2008, 112).

The aging society in the present day China is undergoing a rapid process. Specifically, there are challenges in the country that are in relation to the aging issue. Some of these issues include low benefits awarded to beneficiaries, and inadequate coverage. This will significantly jeopardize the goal of reducing poverty and smoothing consumption. With the increased rate of  retirees  who basically depend  on their retirement benefits  as their major source  of income , it is  expected  that the effect of inflation  will make the public pension plan to be in a  dilemma. Moreover, the dynamic nature of the public pension plan and the integration process of the regional will result into negative ramifications that may not have been intended on the funding status, and plan liability. This will significantly jeopardize particular welfare of the urban population and population transition. The risk of inflation, which is essentially one of the most crucial financial risks in public pension scheme, requires to be seriously taken into consideration in a well-structured perspective (Munnell, 2011).

The 1997 and 2001 pension plans introduced by the Chinese government have not positively contributed to the resident consumption especially in the time of the high rate of swift income rising cycle. Further, the public pension plan has not been effective with regard to consumption smoothing. Taking an example from Shangai, the lowest income class has regularly crossed over the poverty line despite their reliance on retirement benefit. This is just but an indication the benefit plan’s function of poverty reduction from the public pension plan has not worked well even in the highly developed regions in China. Among other effects, the impact of inflation, as a significant benchmark for different parameters, and features has played an irreplaceable function with regard to those distortions.

The increasing rate of aging population coupled with   a rapid development surely needs a retirement plan that consists of broad coverage with sufficient and affordable benefit schemes. The system’s framework should be based on a universal protection floor against poverty in old age. This should be able to cover all elderly individuals in China, irrespective of their participation in the contributory pension plans. Concerning this basic, China should be able to depend fully on retirement savings that are fully funded.

I do recommend that  the present basic  pension plan for urban employees, that constitute of the first tier of pay as you go type of benefits  and the second tier that mostly constitute of the “notional” individual   retirement accounts, into a state system of properly funded individual accounts that will be regulated publicly but invested  and managed privately. It would also be important to expound the supplementary retirement coverage under the newly established private enterprise annuity system in China.

The government’s  recent initiatives of reforming  the pension plan such as setting  the goal of achieving a  universal coverage by 2020, increasing funded savings  have however, fallen short of providing  a complete  solution to the issues facing  the national pension plan. This is because as at the present, the coverage for the public pension plan has remained far from being universal, even in urban areas. The government has until recently not taken serious measures to extend the program rural areas. The basic system of the pension plan labors under huge liabilities that are unfunded especially for the large number of retirees from China’s state owned sector that is already downsized. This translates that the rates of contributions, and subsequently evasions are already high. Since the existing social benefits are fully portable, employees have in most cases faced a tradeoff between retirement security, and job mobility. Although individual accounts are now partially funded, they are significantly earning quite a low return rate which they may not possible generate a promised rate of replacement.

As in 2012, only about 65% of employees in urban areas were contributing to and earning a benefit under the basic pension plan or specific systems for civil workers. This pension plan coverage has only been focused on state employees, and enterprises that are collectively owned. These groups of employees only account for a low share of the general employment. Most of the workforce from the highly growing private sector including rural migrants has not been covered. Alongside this low and partial coverage, the existing pension plan has significantly suffered from structural issues that constitute its basis for building a future retirement security (Roeder, 2012, 5).

There have been complains from members of the national pension plan of being required to pay high rates, and which are increasing on regular basis. This has imposed a huge burden on employees. Although it can be construed that the  present day retirees are receiving a generous benefit,  the low return rate on contributions,  the small  base of  coverage, and lack of portability  have translated that it may not  possibly offer  a sufficient benefit to future retirees. It is quite unfair that residents in rural areas, including those employed in manufacturing plants and enterprises have not been able to access pension benefits. The government has not provided an adequate response regarding the exclusion of a large number of workers in rural areas from the pension plan. Although there exists a special rural pension plan, which mainly constitute of personal accounts, the benefits in this plan are tiny. Furthermore, participation is voluntary. For instance, as at present, only a mere 11 percent of rural employees are involved in the system. This share has been consistently fallen and not risen. On average, beneficiaries in this system receive an average of 12 dollars on a monthly basis.

The newly established enterprise annuity system may be meeting a crucial need. However, it is currently facing a considerable number of obstacles in its development process. Some of the notable challenges include but not limited to high set up costs since custodian, trustee, fund manager, and administrator functions ought to be performed by different financial institutions. Other obstacles include first obtaining an approval from the supervisory agency, insurance approval, and the investment security approval. As we also noted earlier on, there have no clear guideline from the government with regard to the issue of tax treatment on aspects such as investment earnings, employee contributions as well as the basic pension plan itself. Hence, this assumes a burden to some portion of its unfunded liabilities (Roeder, 2012, 22).

Individual accounts for the basic pension plan are still earning a far lesser amount of market rate of return, despite being partly funded. The increment of subsidies by the central government though moving in a good direction have been inadequate to effectively  enable  the government to reduce the pension system’s  rate of contribution that is prohibitive. In comparison to some years back, for instance in 1997, the membership contribution rate as per today is much higher than it was in 1997. In spite of the progression towards a provincial level type of pooling, there are very many employees today who are stilling facing a stark tradeoff between retirement security, and job mobility. Pension coverage have until now remained to be far from universal or nationwide not only in rural areas, but also in some sections of urban regions. Despite the government issuing promises of covering all in pension plans, it has not really taken serious measures towards achieving these objectives. As a consequence, a more comprehensive reform of the whole retirement structure is expected.

China requires a deeper, and broader capital markets in effectively establishing a funded pension system in order to successfully tackling the issue of the increased aging population. However, it as well needs a system of pension plan in building a deeper and broader capital markets which is highly depended upon by the economic development agenda. An effective retirement reform could play a positive and profound role in facilitating the development of China’s development markets.  It can be agreed that later or sooner,  there would be  a need for a developing economy to establish a deep and broad  capital markets  in efficiently allocating capital  to the merging companies and  enterprises  that could propel its economy  up  the global value  scale in future  years. The nation of China is presently at a crossroad, mainly due to the fast approaching age wave, alongside the high upward spiral with regard to dependency costs, this aspect tends to hamper economic development. Apparently, this is the time when China needs to take up serious measures towards achieving a universal pension plan objective.

The Fairness of the Pension Plans in China

A pension scheme that will offer a minimum level of income security for the elderly in both urban and rural areas that are unable to fulfill their basic needs from contributory pension sources is required. It is unjust to exclude those individuals from pension schemes and it is unlikely that they will want to be without these simple necessities. Such a profit can be structured in such a manner that it reflects the national context as well as regional variations. Furthermore, the compensation amount should be based on a percentage of the regional average pay in metropolitan regions and a percentage of the regional average per capital revenue in rural areas. Furthermore, it can have a basic wage support that is greater than the social welfare threshold. Persons above the age of 65 may be entitled to a certain degree of social security insurance, due to the implementation of a pension test that can limit the volume of benefit by a percentage of all pension benefits earned by those aged 65-74. The size of the loss can be determined by the relative importance of retirement incentives, incentives, and final expenses. Both incentives can be indexed on the same level as all possible contributory benefits, and is a combination of incomes in metropolitan regions or per capita revenue in rural areas.

In the premise that health plan changes need not be carried out so often, the policy vision should meet all immediate and long-term needs. Policies on insurance policies should be based on uniform requirements with some versatility to meet China’s varied economic characteristics and regional needs. They must also represent the current policies’ and administration’s decentralized existence when seeking to achieve long-term risk pooling. Risk control and financial risk burdens must be shared at various levels, including the national government, prefecture governments, nation levels, regional and regional management.

In essence, the rationale behind creating a common system for all people but still allowing for local flexibility is to balance the diversity of economic contexts and the decentralized administration structure. It also aims to close coverage gaps and fragmentation, include portable instruments for labor mobility, and ensure that all workers are satisfied with the elderly poverty security strategy target. Person and workplace investment savings plans should be expanded to include financial coverage. Employers and contractors who wish to supplement the incentives given by the contributory pillar should utilize Investment Avenue.

citizens  in China have been critical that  the government authorities do not really  require to input the nation’s pension pool  but will enjoy higher rate of annuities after their retirement in comparison to their peers from farming or enterprises owing to the different plans that are in pace. China’s adoption of   divergent pension plans for urban dwellers, rural residents, enterprise employees, government employees and institutions that are sponsored by the government. The differences of these pension plans have caused a gap in the payment of pension benefits to different groups of people. The lack of centralized and uniformed pension plan system has resulted into imbalanced payments in various regions. Apparently, the divergence has hampered the sustainability, and fairness of the countries’ pension system.

Why the Current Pension System Requires a Further Reform and Change

China is currently undergoing a significant economic and demographic change. For example, due to decreased fertility and a substantial rise in mortality, the nation is currently undergoing a population change and aging phase. As a result, within the next three decades, dependence rates for old age are expected to skyrocket. The high rate of economic transition and development in this nation has increased demand for a diverse and mobile work force that can keep up with the fast speed of change. Similarly, the middle class community is projected to shrink as a result of dramatic demographic transition. Any of the obstacles to labour mobility include reduced portability and fragmented pension terms of vested benefits. Furthermore, the lower ages of metropolitan retirement have exacerbated the labour shortage triggered by the high pace of labor demand (Roeder, 2009).

Despite the fact that government officials and initiatives have put an increasing emphasis on a more balanced development between rural and urban areas, families, and various countries, the pension scheme has added to the divergence as it stands today. The ambiguity and lack of coverage with regard to financial security secured with the new pension scheme has only promoted a high degree of precautionary savings as the government and policymakers pursue ways to rebalance the development paradigm toward a greater dependence on domestic demand.

Given the government’s important changes, a detailed long-term roadmap is needed to successfully direct potential policies. The new insurance pension scheme has a variety of positive points, but it must be revised to address the demands of China’s highly flexible and diverse work force. A long-term vision would   take into consideration both the urban and rural economies. Further, an effective framework is required that can effectively serve all the workers both outside, and inside the formal sector. It should consider workers who until recently have not been served including, migrant and rural workers, self employed, informal employees, and non-salaried workers. Although the Enterprise Annuity (EA) offers supplementary pension plans, it is main focus is on the formal sector enterprise. The supervisory and regulatory framework, similar to incentive framework requires a substantial reform. This includes a tax treatment that needs to be broadened in providing a supplementary pension plan for small organizations, self-employed individuals and other groups of individuals.

The aging society in the present day China is undergoing a rapid process. Specifically, there are challenges in the country that are in relation to the aging issue. Some of these issues include low benefits awarded to beneficiaries, and inadequate coverage. This will significantly jeopardize the goal of reducing poverty and smoothing consumption. With the increased rate of  retirees  who basically depend  on their retirement benefits  as their major source  of income , it is  expected  that the effect of inflation  will make the public pension plan to be in a  dilemma. Moreover, the dynamic nature of the public pension plan and the integration process of the regional will result into negative ramifications that may not have been intended on the funding status, and plan liability. This will significantly jeopardize particular welfare of the urban population, and population transition. The risk of inflation, which is essentially one of the most crucial financial risks in public pension scheme, requires to be seriously taken into consideration in a well-structured perspective (Robalino, 2013, 78).

Conclusion

This paper looks at how China’s pension system has developed, as well as its effectiveness and fairness in different fields. Despite the fact that the government has made significant changes to the pension scheme structure, including those that put a greater emphasis on a reasonably balanced development between rural and urban areas, families, and different regions, China’s pension system has led to divergence as of today.

There have been complains from members of the national pension plan of being required to pay high rates, and which are increasing on regular basis. This has imposed a huge burden on employees. Although it can be construed that the  present day retirees are receiving a generous benefit,  the low return rate on contributions,  the small  base of  coverage, and lack of portability  have translated that it may not  possibly offer  a sufficient benefit to future retirees.

China’s adoption of   divergent pension plans for urban dwellers, rural residents, enterprise employees, government employees and institutions that are sponsored by the government. The differences of these pension plans have caused a gap in the payment of pension benefits to different groups of people. The lack of centralized and uniformed pension plan system has resulted into imbalanced payments in various regions. Apparently, the divergence has hampered the sustainability, and fairness of the countries’ pension system.

There have been suggestions from various stakeholders who have given ideas on the necessity of more reforms. According to policy makers, more reforms are required in order to meet the needs of the increasingly changing society and economic conditions of  China.  Costs associated with legacy, for example, are some of the problems that may be addressed, limited coverage, and system fragmentation. Similarly, there are also many challenges that are consistently cropping in including increasing rate of urbanization, rural-urban disparities, income inequality, and alteration of the family structure, in formalization of the labor force as well as the impact of increased globalization.

The author suggests incorporating a shared mechanism for a simple citizens social pension for all citizens in order to render the scheme effective from a Chinese viewpoint. Furthermore, the author contends that the old-age insurance scheme should be strengthened to involve the inclusion of all working persons, including PSU workers, civil servants, refugees, and others. It will also be appropriate to provide a public individual retirement insurance program capable of offering state subsidies as rewards for individuals to prepare for their retirements in comparison to what is already offered.

To address policy concerns that the current framework does not effectively address, an effective change vision is needed. In China’s diverse and evolving society, policymakers must recognize the emerging needs of the pension fund sector as well as predict and consider potential needs in general. Despite the government’s important changes, a comprehensive long-term roadmap is needed to successfully direct potential policies. The new insurance pension scheme has a variety of positive points, but it must be revised to address the demands of China’s highly flexible and diverse work force. Both the developed and agricultural markets must be viewed in a long-term view. Furthermore, an appropriate structure is needed to represent all staff, both within and outside the formal field. Jobs who have not previously been served, such as migrant and rural staff, self-employed, unpaid staff, and non-salaried personnel, should be considered.

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