context: The aggregate surplus of UE-BPI’s provincial pools has reached 500 million, enough for 17 months of payouts. But regional inequality is substantial, and the oldest Northeastern provinces are already unable to finance the pay-as-you-go scheme. The state introduced a central adjustment system in mid 2018. Some provinces’ pension shortfalls can be made up by inter-provincial transfer payments.

Jia Kang 贾康 Society of Public Finance of China vice president made a controversial proposal to cut high financial burdens for individuals and firms by reducing employee and employer pension contribution rates. Less premium does not mean less retirement benefits, Jia argues, if the state can merge each province’s pension social pool account into a national account. This also enables adequate pension payouts for provinces experiencing population ageing and outflow, by transferring pension fund surplus from wealthier provinces.

Some worry Jia’s proposal would damage the equity and sustainability of urban employees’ basic pension insurance (UE-BPI) scheme. Rejecting this view, Zheng Bingwen 郑秉文 Chinese Academy of Social Sciences (CASS) Social Security Lab director argues that a central pension adjustment system is not aimed at ‘unconditional communist equality’ among individuals in resource allocation. Instead, it means the state will play the role of ‘financier of last resort’ for provincial pension insurance funds.

Under this regime

  • a province’s disbursements = 90 percent of the average wage of its work force * number of full-time employees * a fixed contribution rate
  • a province’s payouts = number of retirees * national average pension benefits

Relatively developed provinces pay more but receive less because they have higher wage levels and employment, and lower dependency ratios. Less developed provinces receive more in transfer payments than they contribute.

Because of rural-urban and inland-coastal migrant flows, destination provinces enjoy the benefits of cheap labour but do not undertake the burden of left-behind children and the elderly, who live mostly on their family’s remittances. Zheng thus argues the regime, despite seeming unfair, does not discriminate against wealthier coastal provinces.

The ultimate solution is to create China’s own sovereign wealth fund through transfers of assets from official foreign exchange reserves, says Zheng. US$300 bn initial investment may yield a high enough return to keep pension funds in balance, he estimates.