Pension gap exerts severe pressure

China's colossal pension gap is expected to greatly increase its fiscal pressure and government debt risk because it faces an ever-increasing aging population.

If the country doesn't undertake necessary reforms, the shortage in pension for urban employees over the next 38 years would be an estimated 83 percent of its 2011 GDP. If rural residents are counted in, the government will face much greater fiscal pressure to bridge the big pension gap. Under the current pension system, three working people support one retiree, but this ratio is likely to change to 1:1 by 2050.

The drastic increase in medical expenses for outpatients, hospitalization, epidemic prevention, medical management and long-term nursing services provided for senior citizens will be another source of fiscal pressure and government debt risk for the government.

It is estimated that such medical expenses now account for 5 percent of China's GDP, but the percentage will rise to 10, of which one-third has to be borne by the government. The increased medical expenditures in these fields over the next 38 years are expected to be 45 percent of the country's 2011 GDP.

The ever-rising medical expenses, together with the enormous pension payment, the cost of environmental protection and the huge debts held by local governments, will push listed government debt to more than 100 percent of China's GDP by 2050 if no reform is undertaken. This should be a reminder to the government that, in the absence of precautionary reforms, the possibility of a Europe- and United States-style debt crisis in China cannot be ruled out.

Therefore, to avoid a long-term debt crisis, the government has to carry out a series of reforms in the coming years, for which the following decade offers a golden opportunity.

With the acceleration of urbanization and the participation of an increasing number of people in the national social security network, China's pension shortage in the following years will not increase at a swift pace and thus the government will not face too heavy a fiscal pressure. That should offer the government some space to press forward sweeping reforms.

However, with the gradual decline in the number of people being added to the national security network, China's pension gap and fiscal pressure will rise rapidly, which will undermine the government's fiscal capability to push ahead some powerful reformatory measures.