Plugging the Gap in China's Pension Fund
   2012-07-10 15:03:02      Web Editor: yangyang66

By Stuart Wiggin

A proposal to gradually raise the age of retirement in China has grabbed headlines in Chinese newspapers and media websites and has led to many Chinese citizens criticizing the approach. However, the most pressing issue for the government at present is not the prospect of raising the retirement age over the course of a drawn-out period, but rather addressing the possible shortfall in the country's national pension fund. According to statistics from the China National Committee on Ageing, last year, the number of Chinese citizens aged over 60 stood at 185 million; accounting for 13.7 percent of the total population. The predicted rise in this ageing portion of the Chinese population poses a significant problem for the government, as highlighted by a joint study carried out by the Bank of China and Deutsche Bank, which suggested that the government will be left with a shortfall of 18.3 trillion yuan by 2013.

China's pension funds suffer from a poor rate of return on investment, with only 2.04 percent of revenue for the basic pension fund coming from interest. Over the past ten years, investments made using local pension funds have yielded returns of less than 2 percent; well below the rate of inflation, and much lower than the returns seen on pension fund investments in developed countries. These local pension funds, managed by local authorities, are only allowed to make banking deposits and purchase treasury bills; meaning that the majority of China's pension funds are placed in fixed income investment products which have not kept pace with the rapid rise in inflation.

Compounding this issue is a lack of information concerning how the government plans to invest these funds, which ultimately curtails competition within the pension fund market. Meanwhile, a fractured system sees local governments controlling basic pension funds without a system of unified management; the total amount of which has been estimated to stand at 2 trillion yuan by Guo Shuqing, chairman of the China Securities Regulatory Commission.

In 2000, the National Council of the Social Security Fund (NCSSF) was established to manage the social security fund on behalf of the government and plug the hole in the pension fund balance. The NCSFF is not restricted in terms of its investment strategy in the same way that local pension funds are. As a result, in 2011, the fund's total investment income stood at 43.1 billion yuan, with a yield of 5.58 percent. Dai Xianglong, chairman of the NCSSF, stated at a forum on June 22 that, "the current size of the social security fund fails to match China's gross economic scale and is far from the level that can fill the gap in the pension fund balance." Increasing the social security fund's level of investment in equity markets is therefore imperative in order to plug a capital gap which is set to increase as the elderly population grows larger.

At the beginning of June, the Shanghai Securities Journal quoted Dai Xianglong, chairman of the NCSSF, as saying that the level of investment in private equity funds will be increased by more than 50 percent by the end of this year. Dai also stated that the amount of such investment will increase from 19.5 billion yuan in 2011 to 30 billion yuan in 2012. Zheng Bingwen, a research fellow on social security at the Chinese Academy of Social Sciences (CASS), told CRI that the NCSSF's current approach in investing in equity markets is sufficient for the time being, "but in the long run, (the level of investment) should be enlarged slightly."

Enlarging the amount of investment in equity markets would help to protect the fund from rising inflation. As for the question of what kind of pressure the current pension funds will face in the future, Zheng stated, "over the next 20 years, the most difficult task we will face is the financing problem arising from a change in the dependency ratio." With an aim for expanded coverage, alongside the news that the new old-age pension system for rural residents and the old-age pension system for non-working urban residents will achieve full coverage by the end of this year, it's clear to see that the dependency ratio will shoot up dramatically as the elderly population increases in proportion. In this context, Zheng added that the issue of increasing the revenue of the national pension fund "should be addressed and financed right now."

The NCSSF's current investment portfolio includes fixed income products, industrial equities, stocks, cash and cash equivalents; with roughly one-third of funds invested in stocks. According to Xinhua, several pilot provinces that have fully funded the individual accounts of their pension funds can have part of the funds invested through the NCSFF.However, given the current restrictions on most local pension funds, Zheng Bingwen of the CASS believes that the local pension funds should be raised together in "social pooling levels" and then invested jointly in order to escape losing value against the rate of inflation.

Given the fledgling nature of the Chinese stock market, any pension fund losses sustained from investments could seriously dent public sector finances and deprive other areas of society of much-needed funds. As stated in a report by Reuters, according to the U.S. Census Bureau, the stocks, bonds and other investments held by U.S. public pension systems had losses totaling 692.5 billion dollars over 2008 and 2009; a sign of what can happen when the investment scheme for pension funds is diversified in an effort to maximize returns.

It is clear that the government needs to address the possibility of a shortfall, and increasing the level of pension fund investments in the stock market is a natural progression. However, in order to safeguard pension funds, market conditions must be improved by decreasing the difficulties associated with the Chinese business environment and improving the level of openness. But balancing the two priorities of improving the market and increasing the return on pensions could take a long time, which is a luxury the government may not have.

These views do not reflect the views of CRI.


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