Title: Pension Reform in China: A Question of Property Rights
Abstract: China's aging population will sharply increase the number of retirees who have to be supported by each worker in the next several decades. That demographic problem combined with the inability of state-owned enterprises (SOEs) to cover even the pensions of current retirees makes reform of the pay-as-you-go (PAYG) a top priority. The State Council has issued a number of decrees calling for moving to a multi-pillar system, incorporating both a defined benefit PAYG plan and a defined contribution plan with fully funded individual accounts, but little progress has been made (Wang et al. 2004). Today China has a highly fragmented social security system confined primarily to workers in urban SOEs and some collectives. The high payroll tax rates and precarious nature of the have led to noncompliance and evasion, and workers in the nonstate sector have little incentive to join (Zhao and Xu 2002). To solve China's pension crisis, one must also address the loss-ridden SOEs and the weak condition of the four large state-owned banks. Pension reform cannot be successful without a broad-based change in China's ownership structure. The lack of well-defined property rights to pensions, enterprise assets, and bank capital means that China's financial sector needs radical reform. This article focuses on China's pension crisis from the perspective of property rights theory. The issue of pension reform is essentially a question of property rights: Should pension funds be fully funded and individually owned or should the state socialize assets by taking wealth from the younger working generation and redistributing it to the older retired generation? In the privatized system, individuals will have an incentive to act responsibly and to save and invest for the future. In the PAYG system, there is no saving and investment. Individuals look to the state for their future welfare, retirement becomes politicized, and property plundered. I shall argue that the best way for China to put its pension on a sound footing is by large-scale privatization. Implicit pension debt must be made explicit and the current hybrid must be fully privatized along with SOEs and state-owned banks. Trying to revitalize SOEs and recapitalize state banks will not do the job as long as majority ownership remains in the hands of government officials. Investment decisions will be politicized and capital will not go to its highest valued uses. Corruption will continue and wealth will be squandered as special interests vie for political favors. Although the pace of economic reform will depend to a large extent on political reform, a sound understanding of the importance of private property rights for the future of capital markets in China is an essential first step toward reform. China's Pension Crisis Table 1 summarizes the key data illustrating the problems confronting China's PAYG pension system. The old-age dependency ratio (i.e., the number of people who are age 65 or older relative to those age 15 to 64) will increase from 11 percent in 2005 to 25 percent in 2030 and 39 percent by midcentury. Meanwhile, the dependency ratio (that is, the number of pensioners supported by each worker paying into the system) will increase from 35 percent in 2005 to 53 percent in 2030 and 69 percent by 2050 (Figure 1). In other words, less than 3 workers will be supporting each retiree in 2005, less than 2 by 2030, and less than 1.5 by midcentury. [FIGURE 1 OMITTED] The more immediate problem is that there is a negative cash flow in the pension that will increase significantly over the next several decades (Figure 2). In 2005 the deficit is expected to be nearly RMB 50 billion (in constant 2000 yuan) or nearly $6 billion ($1 = RMB 8.28). By 2030 the deficit will reach RMB 630 billion ($76 billion), and by 2050 nearly RMB 1.5 trillion ($181 billion). Without reform the accumulated reserves in the current pension will be--RMB 123 billion in 2005 (in constant 2000 yuan), increasing to --RMB 8. …
Publication Year: 2004
Publication Date: 2004-01-01
Language: en
Type: article
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Cited By Count: 8
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