China in transition toward a new retirement system

	Although China began development of a system of financial security at retirement in the 1950s, even today it cannot be said that a true national plan covers all Chinese workers. In 2005, the World Bank estimated that less than 25% of working-age Chinese (age 15 to 59) had access to retirement coverage.

An unequal system

In China, the situation of workers varies greatly depending on where they live and work. The retirement system for workers in urban areas is made up of 2 components: a public defined benefits plan and a defined contribution plan (individual accounts). Moreover, a small proportion of rural workers in agricultural regions have access to voluntary individual accounts. In addition, a special plan covers public servants and the employees of cultural, educational and scientific institutions.

Difficult to maintain

The current system in China is not viable for the following reasons:

• Individual funded accounts provide for benefits that are too generous in relation to the contributions made by the workers.
• The Chinese government uses the retirement system largely as social assistance.
• More and more Chinese are retiring early, thus reducing the income from contributions and at the same time increasing the expenses related to benefits.

Consequences of the one-child policy

Over the next decades, China will face accelerated aging of its population. The one-child policy, which has existed in China for 25 years, has slowed its demographic growth, but also contributed to population aging, since the fertility rate is now below the replacement rate. The one-child policy has also resulted in the following:

• the single child of the family must support 2 parents and 4 grandparents
• senior citizens often continue to work as long as they are able.

Recommendations from international organizations

Despite a pilot project begun in 2001, primarily in Liaoning Province , international observers recommend the following measures:

• eliminate the privilege of early retirement and gradually increase the age of retirement to 65
• base the calculation of benefits of individual funded accounts on the real life expectancy at retirement
• index retirement pensions according to the price index
• make benefits more closely related to contributions, increase flexibility and allow the transfer of benefits.

These changes will make the retirement system viable, while at the same time re-establishing workers' confidence and reducing employers' labour costs.

Source : Le Satellite, Direction de l'évaluation et de la révision, Régie des rentes du Québec, Vol. 4, Number 1, April 2006.