Pension reform in China - a case study

Abstract

China is a relatively young country now, but about to undergo a remarkable demographic transformation in the near future. Despite foreseeable dramatic demographic changes, the current retirement system in China is badly structured, and not able to cope with the rapid ageing population in this century. The purpose of this study is threefold. First, we seek to provide a comprehensive historical review and detailed analysis of the Chinese pension system with an ultimate ambition of finding solutions to China’s pension crisis. Second, we place the analysis of pension reform in the broader economic context, in order to identify the interaction between pension reform, economic growth and financial development. One purpose is to assess the reform conditions in China. Third, with particular reference to a simulation model, policy alternatives are proposed that could help make the Chinese pension system sustainable in the long run. Based on our critical analysis and empirical work, we find that first, China meet the basic requirement to start pension reform, second, in order to improve the current Chinese pension system, a range of institutional and practical changes need to be undertaken. They include unifying the system across the country to reduce the transaction costs, redesigning the system so it is fair to the current working population, diversifying pension fund portfolios to achieve a high and stable return, preserving traditional family support to serve as an income provision cushion in the short and medium term, and maintaining a stable macro-economy to protect the real value of pension assets.