Old age security

Abstract

China's current pension system has two severe problems: the urgent and immediate problem of the pension burden of state-owned enterprises, and the longer-term problem arising from the rapid aging of the population. The current system is incapable of tackling either problem. It also fails to contribute to economic development. This report recommends a unified pension system that includes both mandatory funded individual accounts and a social insurance scheme. In addition, the financial implications for individual pensioners and for the pension system as a whole are simulated, showing how the proposal's financial viability will depend on demographic and macroeconomic developments and pension coverage. The report endorses a sustainable contribution rate that attaches major importance to longer-term financial viability (more than sixty years). Risks associated with low compliance rates and low interest rates, among others, are also examined. Pension reform will fail if the system's coverage cannot be extended, compliance rates decline, or financial sector reform and capital market development do not provide an adequate return on pension reserves.