context: A shrinking and rapidly ageing population can have far-reaching implications for the country’s pension system, currently built on three pillars: state-run basic pension insurance, annuities sponsored by employers, and commercial pensions. As fewer people contribute to the coffers and more rely on the benefits as a source of income, concerns loom over its sustainability.
Managing the balance sheet and building up reserves will be crucial for the financial sustainability of basic pension insurance, argues Sun Yongyong 孙永勇 Central China Normal University's School of Public Administration professor, Yicai reports. Income management entails
- pension collection
- financial subsidies
- transfer of state-owned assets
- investment funds
Sun advocates cautiously adjusting pension benefits and emphasises strict control over non-pension expenditure.
Currently, the minimum contribution period for basic pension insurance is 15 years, says Sun. Once this requirement is met, many stop paying into the scheme. Maintaining payments became harder over the last two years as household financial stability declined due to the pandemic. The average contribution period, however, is still too short, Sun notes, highlighting the need to raise the minimum threshold and adjust policies on how long people can receive the benefits.
Enterprise annuities form the second pillar of the pension system. Yet the coverage remains notably low, Sun says. Some 29 million employees participated in the scheme by 2021, National Health Commission reveals. That is only seven percent of those signing up for the urban employee basic pension insurance, part of the first pillar.
Sun stresses that the policy framework for annuities should be more flexible and adapt to different types of enterprises. The main reason why many companies are reluctant to set up annuities is that they see few returns from investing in the scheme, Sun explains, adding that showing employers the benefits will help increase the coverage.
The nascent third pillar, commercial pensions, needs more incentives. Apart from tax breaks, more participants will be attracted if funds within the prescribed limit can be guaranteed a higher rate of return than bank deposit interest rates, Sun suggests.