Abstract
In the context of the aging population, the debt risk and solvency situation of China’s pension plan are of major concern for government and individuals. The aim of this paper is to project public pension liabilities and evaluate the solvency sustainability of China’s pension reform during transition periods. By using cohort component and actuarial models, transition debt and solvency sustainability are projected under the existing policy scenario and several sets of hypothetical policy scenarios. We find that the transition liabilities will peak in 2035 and the pension plan will become unsustainable in 2048 under existing policies. In the proposed scenario, postponing retirement age helps to maintain pension plan sustainability until 2083, but this option can’t solve the financial distress in the long run. Further, the transition pension debt will double in the peak moment if the retirement age is postponed for five years, which would pose a risk to the liquidity of the fund. Moreover, an increase to invest return can only improve the baseline solvency in short term. Sustainable options should be designed as composite reform measures, including retirement and investment adjustment.
Highlights
The issue of pension liability in China has aroused widespread concerns from research institutions and scholars at home and abroad
After the 1997 structural reform, attention has been focused on the problems related to public pension liability and solvency sustainability during the transition period [1,2,3]
Implicit pension debt is the committed payment of the pension system, while explicit pension debt arises from the aging population and structural reform
Summary
The issue of pension liability in China has aroused widespread concerns from research institutions and scholars at home and abroad. With respect to an UF-PFF shift, the transition pension liability is not relevant to Franco’s definitions as it represents only the compensation for retirees who do not have individual pension accounts in the new system. The structure of this paper is organized as follows: Section 2 introduces the feature and system reform of China’s pension plan; Section 3 introduces the assumptions and data sources of actuarial evaluations; Section 4 describes the mathematical population model and summarizes the baseline results of the projections; the modelling of the transition pension debt and solvency sustainability are presented in Section 5; Section 6 analyses the transition debt and solvency sustainability from the perspective of alternative policy scenarios; and Section 7 concludes the contents of the previous six sections
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