The State Council announced an important change in the pension system yesterday.

By separating individual accounts from basic social accounts from the beginning of next year, the new pension scheme will better protect elderly citizens' future income, at least, the portion guaranteed by their individual accounts.

Small as it may appear, this adjustment in the management of pension funds embodies a needed first step in fixing the country's troubled pension system. A properly functioning pension scheme is central to the welfare of every citizen.

Due to a lack of reserves to pay those who began working before the current insurance system was introduced in the 1990s, contributions to individual accounts have been widely encouraged to meet current pension payment needs.

But for years this has not been enough to ensure the full and timely payment of retiree allowances. In 1998 the pensions shortfall was 7.2 billion yuan (US$890 million). This shrank to 132 million yuan (US$16 million) in 2003 largely through increased fiscal input.

But as life expectancy increases in coming decades, the pension funds deficit will only rise as the number of pensioners soars.

Given the constant pressure exerted by the funding shortage, this policy change to stop dredging individual accounts thus represents a remarkable effort to square up to the pensions challenge.

Currently, the pension scheme has two parts a basic social account indexed to the average salary level and an individual account that is reliant on one's personal income. Together, they will ensure pensioners have an income during their retirement of 58.5 per cent of their average income during their careers.

The contribution rate for individual pension accounts is to be cut from 11 per cent of an employee's salary to 8 per cent. But the target entitlement will amount to 59.2 per cent of their salary.

This change in the management of pension funds is crucial.

Fully funded individual accounts will not only ensure future pension payment but also boost enthusiasm for participating in the scheme.

The State Council decision shows that while stepping up efforts to address immediate problems concerning pension payment, policy-makers have not ignored longer-term reforms.

Without tapping into individual accounts, the government must substantially raise its financial support for the pensions scheme.

Fortunately, swelling national coffers, mainly thanks to the robust growth of the economy in recent years, have made this possible. Fiscal input from the government has increased from 2.4 billion yuan (US$297 million) in 1998 to more than 54 billion yuan (US$6.7 billion) this year.

Even so, it is essential that the pension scheme includes as many citizens as possible. The number of insured workers will reach 173 million this year, but this is far from enough.

The latest reform encourages the participation of self-employed and casual workers.

As the country's urbanization drive proceeds and movement of labour becomes more fluid, a flexible insurance network will be of great importance.

(China Daily December 16, 2005)