China’s Pension Reform

China’s Pension Reform

On 5 March 2019, the Chinese government announced that the pension contribution rate of employers would be lowered to 16 per cent from 20 per cent, as part of the country’s pension reform to ease the burden of the firms operating in China, especially those of small and medium sizes. China has long been criticised for its high social insurance contribution rate. Currently, employees are required to contribute 8 per cent of their salary while employers are required to contribution 20 per cent. The reduction of 4 per cent in employers’ contribution is expected to save the firms about two trillion yuan of annual payroll cost. You may sign up for economics tuition with a reputable economics tutor to learn more about the various pension systems in different countries. In Singapore, the Central Provident Fund (CPF) serves the multiple functions of pension, medical insurance and housing fund. The multiple functions of CPF are covered in the economics tuition by Mr Edmund Quek, the best economics tutor in Singapore.

Managed by provincial and municipal governments, the pension funds have been running at a surplus so far. However, with lower contribution rate by the employers, experts caution that the pension contributions may not be sufficient to support the outlays in the future. To address this problem, the central government is considering measures such as extending the employees’ retirement age. Currently, the retirement age set for men is 60 while the retirement age set for women is 55. In consultation with your economics tutor in your economics tuition class, discuss the success of extending the retirement age in Singapore.

Pension Fund at Risk of Depletion

According to a report by the World Social security Centre, China’s pension fund will deplete in 2035 due to a shrinking work force. In contrast, the ageing population in China is growing year on year, partly due to the One-Child Policy which has put in place restrictions on births for the past four decades. You may consult your economics tutor in economics tuition for the various economic implications of the One-Child Policy in China. The number of retired citizens reached 249 million in 2018. It is estimated that by 2050, the number of retired citizens will further increase to close to 400 million in 2050. The gap between pension contributions and outlays in 2050 is estimated to be as high as 11 trillion yuan, with only one worker supporting one retired citizen. Analysts urge for bold moves to be made to avoid a critical shortage of fund in the near future. With guidance from your economics tutor in your economics tuition class, propose some possible measures to tackle this problem.

Pension Reform since 1997

China’s pension system was established in 1997 by the then Premier Zhu Rongji as a drastic measure to lighten the burden of many state-owned companies in China. Prior to 1997, state-owned companies provided pensions to their retired employees directly, as part of an encompassing social security system, known as “iron rice bowl”. A social insurance system replaced the company funded pension in 1997. Three years later in 2000, the National Social Security Fund (NSSF) was set up to generate income for the pension fund. In 2004, the enterprise annuity system was introduced. With help from your economics tutor in economics tuition, you may compare the functions of NSSF in China with the Government Investment Corporation in Singapore.

Having undergone the various structural reforms in recent years, the current pension system consists of three pillars, the pay-as-you-go scheme, the enterprise annuities and the voluntary private savings. Companies who adopt the enterprise annuity plans are entitled to a 4 per cent tax exemption. Moving forward, a higher tax relief could be expected to ensure a wider buy-in of the scheme.

Linda Geng

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