China's pension system reform has entered a critical stage.

Various officials and experts report that it is very important to model the new system carefully to ensure the success of the social security system.

China's present pay-as-you-go system was adopted in the 1990's in a number of provinces and cities. It consists of social pooling and individual fund accumulation, with money coming from employers and employees. Employers and employees must deposit money into the accounts regularly.

However the social pooling system has always been short of money because some enterprises or government institutions do not have enough money and some funds have been diverted for non-social security uses.

Individually accumulated funds were often transferred to social accounts to pay pensions to retired people, and individual accounts were drained dry, said a top official with the State Commission for Restructuring Economic Systems' Institute on Economic System and Management, who preferred to be unnamed.

The situation is growing more acute because the proportion of China's elderly population to the population as a whole is getting larger by the day.

"China's population is aging at a much higher rate than in most countries of the world," said Zheng Jiaheng, vice-director with the China Institute of Policy Studies.

Statistics reveal there were 128 million people above age 60 at the end of 1999 in China, around 10.16 per cent of the whole population, a much higher rate than in most of the rest of the world, said Zheng.

The implementation of one-child policy during the past 20 years or so has led to a situation where one young man or woman has to shoulder the burden of several elderly people.

In addition to a cash shortage, there are other problems with China's present system, said Norman Sorensen, president of Principal International Inc, one of the largest pension funds management companies in the United States. Sorensen has just completed a study of China's pension system.

Problems include an inability to make contributions, inaccurate records, lack of proper supervision, no developed regulatory framework, and certain industries, reluctance to participate in the system, he said.

"The pay-as-you-go system will become deadlocked considering China's situation," said an anonymous expert.

"How to set up a uniform, standardized and comprehensive national pension fund system in China is an urgent task," said Zheng.

The first step should be working out a pension model and development strategy that fit in with China's own situation, he said.

However, there is no existing social insurance or pension model in existence that can exactly fill China's needs, said Russ Miller, vice-president of Principal International Asia in a pension seminar organized by the company.

Difficulties exist in forming a national system in China which covers provinces and municipalities engaged in differing stages of development with differing short-term needs, he said.

He suggested China could reach a solution by combining the best of the pension models worldwide including that in Australia, Chile, Singapore and the United States.

Unlike China's pay-as-you-go system which uses this generation's money to support the elderly generation, the pension systems in most of these countries are funded accumulation systems where funds can grow and each individual will see to the development of their own account.

One critical issue for China is how to combine the pension fund with the capital market to raise more money.

So far, China's pension funds can only be invested in treasury bonds and bank deposits which cannot render significant returns, which is now counter to international practice.

"Investing pension funds on the capital market can not only boost development of the market, but also help fund State infrastructure construction," said an expert.

China's securities market regulators recently said it will step up the development of the capital market including setting up social insurance funds.

But given the fact that China's securities market is still immature with lots of irregular behaviour, analysts said that it is still unsafe to invest pension funds on the stock market.

Principal's Sorensen also suggested that there are several vital and urgent steps for the Chinese leadership to take at present.

They include: Paying all arrears of outstanding pensions immediately, enforcing participation in the new system and the timely payments of contributions, establishing a pension supervisory body on a par with the central bank, the China Securities Regulatory Commission and the China Insurance Regulatory Commission, and independent of the Ministry of Finance and Ministry of Labour and Social Security, and encouraging both domestic and foreign companies to enter the market.