Pension Reform Options and Implementation Issues in China

Volume 16, Number 3 Article by Fang Li & David Hatton September, 2004

Pension Reform Options and Implementation Issues in China :

Changing demographic patterns, the high wage replacement rate with benefit levels indexed to increasing wages, an increasing demography dependency ratio, and increasing contribution levels have led China to rethink its predominantly defined-benefit, PAYG pension system. Recognising these imperatives and after considerable experimentation for more than a decade, the old system is to be replaced by a three-pillar system to achieve a better balance of the social obligations between the state and the individual worker's responsibilities.

The World Bank recommends that China must overhaul the present system of fragmented, non-portable and unequal plans and emerge with a system which allows for uniformity and portability of benefits so as to facilitate the mobility of the labour force. The pension plans need to be uniform in scope and plan design, in terms of contribution rates and benefit standards. The benefits should be immediately vested so that once the contributions are made, they are protected forever.

The process of reducing the prevailing replacement rate (80%) to an international standard of 58% will require effective implementation measures and a buy-in from the affected section. Increasing the retirement age, indexing of pensions to the consumer price index, extending the coverage of the pension system and the introduction of market-based pension funds management which would involve money market investments, investments in sovereign and corporate bonds as well as shares, in private equity and real estate, are other reform options that China needs to consider.

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