Fixing two-track system vital to pension reform
- By Ni Tao
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E-mail Shanghai Daily, October 28, 2013
The element of secrecy has made people edgy.
After all, the lack of transparency is disconcerting since it concerns the interests of 1.3 billion Chinese.
Unpleasant as it is, the near certainty that an extended funding period will be imposed on all Chinese is something we have to live with.
It’s necessitated by the nation’s demographic woes: the baby boomers are retiring in larger numbers and at a faster speed than the young generations are joining the labor force, causing the pension system to creak under tremendous funding pressure.
Currently, the minimum pension funding period is 15 years. After that, there is a 1 percent increase in payments for every year a person remains in the labor force.
But this amount is trivial considering inflation and overall living expenses.
According to Sun Jie, a professor at the University of International Business and Economics in Beijing, the 1 percent rate is too low, and if the funding period were to be extended, the increase would have to be more significant.
Anyway, it doesn’t make sense to stick with the national pension scheme when it pays a retiree only 1 percent more a year while a one-year bank deposit promises a 3 percent return, Sun noted.
Instead, for the proposed funding extension to be taken seriously, she argued for an annual increase of 5 percent in payment, as a way to encourage people to postpone retirement and continue contributing to the overdrawn pension account. Otherwise, those who choose to work longer will actually earn less, as inflation and rising living expenses eat into their pensions.
However, besides all the statistical niceties, the real crux of the problem is how authorities plan to do with the two-track pension system.
Free riders
The system is deeply unfair because at present, some privileged civil servants and employees of state institutions almost never contribute to their individual pension accounts, while corporate employees pay at least 6 percent of their income to the pension scheme.
The irony is that the double-track system entitles the non-paying group to 60 percent to 80 percent of their pre-retirement income, while the latter’s pension averages only 40 percent to 60 percent of their pre-retirement wages.
This means non-paying free-riders have a vested interest in keeping the skewed system and working it to their benefit. In 2009, a proposal was made to pilot the phasing out of double standards in payment, however, this was met with heavy resistance as “relevant personnel” (free-riders) would see their pensions suffer greatly due to the necessity of financial equality, said Sun.
As things stand, policy makers and analysts have come up with multiple ways to ease the pressure on pension payouts while leaving sacred cows untouched.
For instance, some experts suggest transferring the balance in state-owned enterprises’ salary accounts to national or regional pension accounts, or using foreign reserves and stocks of state-owned assets to narrow the deficit.
As if these measures aren’t imaginative enough, some genius not long ago called on some senior citizens to swap the ownership of their houses for the financial security promised by a bank.
This proposal was laughed off as irrelevant as it cruelly ignores the central role a house plays in Chinese life and how much an average Chinese has already sacrificed for it.
Public input
All these measures — except the “house-for-pension” long shot — can help reduce the pension deficit, but since the same fundamental issue of fairness in the two-track system persists, they are not fully applicable yet.
For instance, if national wealth is used to fund the pension scheme, hard questions must be answered, such as why a person paying pittances for up to 15 years toward an individual pension account deserves more alms than one who pays more for a longer period.
Now the state appears to be moving gradually toward a single, unified pension system, by increasing payments due to corporate employees by 10 percent, according to the central government’s budget for 2013.
Although beneficiaries in Professor Sun’s view are those at the very bottom, the large majority still complain about low pension.
Still, the budget increase is at least a right step and would be more meaningful if it closes in on 20 percent.
The good news is that at the conclave it was agreed that the flawed dual-track pension system will go.
The lingering question is “when,” according to the China Times newspaper.
As a matter of fact, compared with extension of the funding period, elimination of the dual-track system is more significant and should be made a priority, because unless free-riders are made to fund the scheme first, the yawning gap of inequity will only widen.
Hopefully, the next time our policy makers get together to discuss ways to plug the holes in the pension system, they will be happy to seek public input, and respect the right of know of would-be retirees — before asking them to make a necessary sacrifice for the nation’s fiscal well-being.
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