Making labor quality a force for growth

In experts' consensus view, the immediate impact of the rapidly aging Chinese society will be labor shortage. The NBS said there were 882.2 million working age population in China last year. But, Zhu Qin, professor from the School of Social Development and Public Policy at Fudan University, estimated that figure will shrink to 743 million in 2035, further contracting to 666 million in 2050.

Worse, the demographic dividend, which helped China's economic growth to gallop over the past four decades, is waning.

So, experts are certain China's aging population will drag down GDP growth rate if nothing is done to offset the effect. Citing global experiences, Yuan Yue, a researcher at Perseverance Asset Management, said that a 1 percentage point rise in the number of people aged 65 and above will translate into a 0.13 percentage point decline in annual GDP growth rate.

China's GDP growth rate, therefore, will likely be pulled down by 0.39 percentage point every year in the next 10 years, given the country's current aging speed, which will exert pressure in terms of elderly care and accentuate the current pension shortage, Yuan said.

Basic pension provided to retirees, considered the first pillar of China's multilayered pension system, has been rising in China for 18 consecutive years, with the growth rate coming in at 4 percent this year. But the related shortage was already as much as 700 billion yuan ($104 billion) last year. The Insurance Association of China estimated the shortage will surge to a staggering 10 trillion yuan in the next 10 years.

In China, the government, the employer and the employee all contribute toward basic pension. Both the employer and the employee submit pension insurance during the employee's working years as per a mandatory ratio set by the government.

But this triangular structure, which was once regarded as strong, has come in for intense scrutiny of late. The Social Insurance Law of the People's Republic of China states that the government fiscal expenditure should fill in the gap when the basic pension is insufficiently paid.

The situation is complicated by employers' lowering of the rate of pension insurance they pay out, after the central government allowed them to do so to lighten their financial burden, in light of China's economic slowdown in the past few years.

As a result, a new regulation introduced in April 2019 stated that the pension contribution rate of employers in China will be reduced from 20 percent to 16 percent of the overall wage bill while employees will pay 8 percent of the salary toward pension insurance. The shortfall burden is transferred to the government or the fiscal budget.

Annuity, or occupational benefits insurance, serves as the second pillar of China's pension system, a practice similar to the one in many other countries. But, according to Sun Jie, deputy head of the School of Insurance and Economics at the University of International Business and Economics in Beijing, the so-called second pillar still develops at a slower-than-expected pace, and covers only a very small portion of the total workforce.

Data from the Ministry of Human Resources and Social Security showed that by the end of 2021, annuity plans were launched at 117,500 employers, up nearly 12 percent year-on-year. However, that was still on a small scale compared to the 48.42 million registered companies by the end of last year. Meanwhile, 28.75 million employees, or just 3.9 percent of all the working population, joined the annuity plans.

Therefore, the State Council, China's Cabinet, announced in mid-April the launch of a personal pension scheme framework in China. In market parlance, this is the "third pillar".Funds held in the personal pension account, which is part of the scheme, are allowed to be invested in banks' wealth management products, deposits, commercial pension insurance and mutual funds.

Independent financial analyst Guo Shiliang said he believes the personal pension account is similar to the 401(k) plan in the US, which is an employer-sponsored, defined-contribution personal pension account.

The 401(k) plan offers clear and reasonable investment choices with which the capital under personal pension accounts can be diversely invested. It has resulted in the higher participation in the 401(k) plan, said En Xuehai, group chief investment officer of asset allocation and retirement fund investment at China International Fund Management Co Ltd.

Xie Jiu, a prominent financial writer, said the development of the second and third pillars is crucial to the wholesomeness and sustainability of China's pension market, 83 percent of which is still dominated by basic pension or the first pillar. In contrast, the contribution of the second and third pillars to the US pension market tops 90 percent, indicating the US government is responsible for only very fundamental support.