Ge Yanfeng, Dong Keyong, Yang Yansui, Ding Ningning

Research Report, No.116, 2000 (Total 1294)

I. Selection of the Basic Target Mode for Future Pension Security System

There are a lot of problems in the current pension security system. These problems have produced negative influences on the reform drive, development and social stability. Therefore, it is imperative to reform the current pension security system. This has become a common understanding of all circles of society. The problem at the moment is: what kind of a system should be established, and can it be established given the present conditions of China? This serious problem has been discussed for many years but there hasn’t been a consensus while differences still exit. Therefore, it is necessary to conduct discussions on the relevant issues.

(I) Major Points of View on this Issue

There are various opinions in academic circles on what kind of mode to be chosen for China's urban pension security system in the future. Summed up, they fall into three categories as stated below.

First, a complete pay-as-you-go (PAYG) system for pension fund should be established. The main argument is that pay-as-you-go system is easy to practice and manage; that it can meet the need of mutual complement and will not be influenced by inflation. Those who oppose this opinion argue that the practice of pay-as-you-go involves no incentive and may incur considerable financial crisis when the nation’s population becomes aged and a high proportion of the population has to be provided for.

The second group of opinions advocates a complete pension accumulation system though personal accounts. The main argument is that such a system contains an obvious incentive mechanism to individuals; that the practice of deciding payment according to income can avoid the risk of having to pay unbearably high pensions when the population gets aged; and that a large sum of compulsory long-term savings thus accumulated will provide a strong financial support for the nation's economic development. Opponents argue that this mode is incapable of mutual complement, susceptible to inflation and involves too many risks in the operation of the fund.

The third group of opinions advocates a system of "partial accumulation". This concept has been very popular in recent years but involves obvious differences in its interpretation. Different interpretations have given rise to two dimensionally different ideas in designing the pension security system. The first thought is that both the collection and payment of pension fund should be divided into two parts. The first part shall be done through pay-as-you-go system so as to provide the minimum pension security and facilitate the need for mutual complement; the second part shall be channeled into personal account to become substantial fund accumulation. This idea is basically consistent with the internationally popular "multi-pillar mode". An other idea is totally different. Its interpretation of "partial accumulation" is that in the near term, to decide the amount of collection based on future expenditure. At the same time, to collect as much as possible money so as to make up for the deficit that will turn up during the peak period of aging population and that pay-as-you-go system will eventually be adopted. People who hold this opinion also support the idea of setting up personal account but define the function of personal account as "nominal account", which serves as the basis for calculating the pension rather than a substantial account.

Arguments between the modes of pay-as-you-go and fund accumulation have not only lasted for many years in China but also remained unsettled in the world1. There isn’t a "unified" form of pension security system in the world. Pension security system in different countries differ immensely in concept, organizational frame and management method, each of which has its own advantages and defects. In fact, nearly every country is constantly reforming its pension security system as well as learning and drawing experience and lessons from each other. Different modes also have kept changing all the time. As different countries have different historical and cultural traditions and are in different stages of economic development, there is no ready model for China to follow in designing its pension security system. Therefore, on the target mode, we should fully consider China’s conditions and situation while paying attention to international experience and lessons. Only in this way can we make a wise choice.

(II) Factors to be Seriously Considered When Choosing the Basic Target Mode

The pension security system is the essential part of the social security system as well as one of national basic systems concerned with economic development and societal stability. Therefore, it has to be prudent to choose the target mode of pension security system. We think that the following factors should be considered seriously when making the choice.

First, China is a developing country with a large population and a low level of economic development; there is an apparent gap between cities and countryside; a considerable portion of the population is in poverty. Therefore, pension security system organized by the Chinese government can be no more than an elementary security system with low standard and high coverage so that the majority of population can enjoy the security. This is necessary for social stability and also a major target of social development.

Second, promoting the economic growth and raising the economic efficiency are the prime task for China in its development at present and over a fairly long period of time in the future. Therefore, social stabilizer is not the only function of pension security system, which should also provide incentives in favour of economic growth, including encouraging citizens to work hard and adjusting the accumulation structure of the national economy.

Third, because of the rapid growth of population during the 1950s and 1960s and the strict implementation of the family planning policy since the beginning of the 1970s, China will soon witness a fast aging of its population. This is a prominent problem that makes China different from other countries. Therefore, our pension security system must be sustainable to the pressure brought along by the aging of population during the period from 2020 till 2030 and remain stable and sustainable systematically.

Fourth, China's present pension security system covers only the urban regions. However, as China is in the stage of rapid industrialization and urbanization, there will inevitably emerge a great number of new cities. In old cities, there are already a large population of migrants. Therefore, the new pension security system should be institutionally open and demonstrative.

Fifth, as China is progressing towards a new system of socialist market economy, attention should be given to separating the roles of the government and market in designing the pension security system. We should find out what the government should do and on what issues the market mechanism should play its role. Only in this way can there be a proper definition of the role the government should play and can there be fewer political risks.

Sixth, the economic restructuring with the development of various forms of economic ownership and adjustment of economic strategies as the main content is underway in China. The reform of the pension security system and reforms in other fields should coordinate with and promote each other. A well-designed pension security system should be able to help relieve the heavy burdens of state-owned enterprises and facilitate fair competition between enterprises of different ownerships.

Sufficient attention and serious consideration should be given to the above-mentioned six issues in the effort to choose the target mode during the reform of the pension security system.

(III) Suggested Mode of Pension Security System and Its Institutional Frame

Given the aforementioned conditions of China, even if the issues such as incentive are ignored, the pressure of population aging alone would make it difficult for the complete pay-as-you-go system to be practiced smoothly. Both Chinese and foreign experts have made large amounts of simulated computing on that question and have reached basically similar conclusions. If we admit that the pay-as-you-go system won’t work, the practice of "operating on blank account", which is not substantially different from the practice of pay-as-you-go system in terms of the way of fund operation, won't last long. The practical operation of China's pension security system in recent years has justified this understanding.

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