China Faces Devastating Pension Crisis

In the 1970s, China instituted its one-child policy. Since then, the nation has seen a rapid expansion of its elderly population and a quick diminishing of its younger citizens.

The number of working-age Chinese is getting smaller while millions enter retirement -- and it is weighing heavily on pension funding.

China had a funding shortage in 2010 of $2.6 trillion, just short of matching its $3 trillion in onshore savings. But that number is rapidly increasing, so much so that analysts believe it could reach $10.8 trillion within 20 years.

Even now, pension payouts are less than generous. Rural workers like Guo Shuhe, who spoke with Reuters, receive 55 yuan a month – approximately $9 – as their pension.

This payment is just a tenth of last year's average monthly wage for a rural worker. And in order to ensure this payment, people like Guo are required to pay 100 yuan annually for 15 years.

In wealthier areas of the nation, retirees receive much more. For some in cities, pension payments run at an average of 1,531 yuan a month, or $243.

But even those minimum rural payments may not last much longer. The government is struggling to keep up with pension payments, funding 61% of them with state subsidies in 2011.

From Reuters:

"The ageing population in the countryside is rising faster than urban areas, which could pressure the premature rural pension system,” said Cai Fang, a researcher at the Chinese Academy of Social Sciences, a respected government think tank.

Some, like Guo, still have working-age family members to rely on, so all is not totally lost with such a minimal pension payment.

Guo has six children on whom he can rely for finances. But he is one of the last of his kind – the one-child policy is destroying the assurance of familial support.

The worker-to-retiree ratio is growing increasingly smaller, and it will continue to plummet in years to come:

*Chart courtesy of The Economist

And the issue will weigh on future leaders. It's long been a problem, but until the rural pension fund really came into being in the last three years, other financial issues always took precedence.

It will become truly pressing under Xi Jinping, the nation's “president-in-waiting,” who will likely be required to raise the retirement age.

From Reuters:

“This is a very important issue for the next leadership, which does not have a lot of time to get to it,” said Zhao Xijun, an economics professor at Renmin University in Beijing.

There are currently 123 million people in China over the age of 65. The growth of the elderly is more pressing in the countryside, where the elderly remain as their children move to urban areas.

Pension contributions are rising, but not enough to match the growing payouts each year. As you can see in the chart, the pension fund plummets annually:

*Chart courtesy of The McKinsey Quarterly

Workers like Li Mei have decidedly refused to rely on the government. She spoke to Reuters:

“I didn't join the rural pension system and will not in future. It's safest to put my money in my own pocket,” 40-year-old Li said. “I prefer to trust myself over others.”

Many more may do this as the state continues to fail to provide. Already, 40% of the nation's state earnings go to pension – for the U.S. and Japan, this is only about 15%.

And in order to avoid “enormous fiscal stress,” according to Deustche Bank and Bank of China analysts, China would have to divert 80% dividends from state-listed firms to pension by 2050.

There's a pretty good chance that won't happen. The Chinese economy is headed for serious pressure as its working class slims and aging population multiplies.

Add a Comment (Pro Members Only)

More like this...