Target loopholes in pension system first

A stitch in time saves nine is an adage that should be borne in mind when it comes to China's cash-hungry pension system.

By 2011, China had a gap of 2.2 trillion yuan ($355 billion) in its pension accounts, according to a report by the Chinese Academy of Social Sciences. Dai Xianglong, Party chief of the National Social Security Fund, has mentioned a similar figure in interviews with the Chinese media.

The gap is largely a result of China's pension reform in 1997, when it started to establish a unified national pension system. A large number of retirees at that time began to receive pensions from their accounts, which were actually empty. The country has had to use the pension accounts of young working adults to pay for them, which has resulted in the gap.

China has failed to fill that gap in recent years, partly because the level of pension payouts has been continually rising, which means the government has been financially unable to put money in the accounts of young working people.

But it's no use making your cloak when it starts to rain, and time is not on China's side.

By 2012, the ratio of people aged 60 and above in China to its overall population was about 14 percent. The ratio could rise to as high as 25 percent by the 2030s and to more than 30 percent by 2050. Pensions will become an increasingly heavy burden for the country.

If it fails to fill the pension gap as soon as possible, the gap could grow to an unaffordable level.

The authorities have a few options to tackle the problem. One is to extend the retirement age so that workers pay more contributions to the pension fund and receive their own pensions at a later age. Researchers estimate that in this way, an additional 20 billion yuan a year can be added to the pension account, which will help ease the pension pressure.

The current retirement age is 60 for men and 55 for women, but as early as 2008, some officials put forward the possibility that the country might extend the retirement age to ease the upcoming pension pressure. The past year has seen more officials voicing the possibility, and a detailed roadmap has already been drawn up.

Dai Xianglong, for example, has repeatedly claimed in the past months that the pension gap must be filled soon and the extension of retirement age can be considered. According to the blueprint outlined by government officials, the retirement age could be extended by one year every three years beginning in 2015, so that by 2030, it will be 65 for men and 60 for women.

Although these changes are being voiced to gauge the public's response, the high frequency of such comments indicates that such changes are inevitable.

However, policymakers should proceed with caution, as pensions are a controversial issue, not simply because Chinese workers, like those in many other countries, want to work less and retire early, but also because China's pension reform is far from complete and many workers feel the pension system is unfair.

For example, the pensions for civil servants and workers in State-owned enterprises are considerably higher than those of non-government employees.

The average pension for retirees from government agencies is 4,000 yuan a month, although the level varies from region to region. The average pension for retirees that aren't employed by the government is less than 2,000 yuan, according to Li Shi, an income distribution expert from Beijing Normal University.

Many people have argued that such a pension gap must be first bridged before any changes to the retirement age are introduced.

Moreover, the management of the pension fund is deemed flawed since it is sometimes used for irregular purposes. In 2006, for example, Zhu Junyi, the former head of the labor and social security bureau of Shanghai, was found to have lent 3.2 billion yuan of the city's social security fund to a private company, arousing widespread concerns about the integrity of pension funds.

Lou Jiwei, minister of finance, said in March that China's social security regime has many loopholes and "no matter how much money is put in it, it will be used up if those loopholes are not filled".

Policymakers, therefore, must accelerate systematic reforms to cater to the public demand for fairness and improve management of the pension fund before they try to persuade the public to accept a longer working life.

The author is a senior writer of China Daily. E-mail: xinzhiming@chinadaily.com.cn