Population Aging and Pension Systems: Reform Options for China

Using an integrated simulation model, the authors estimate the scope and speed of population-aging in China, the cost of supporting the old, and the impact of different reform options and pension arrangements. Among their conclusions: The scope and speed of population-aging in China make the present pension system financially unsustainable, even assuming that GDP grows steadily in the long term. Moving the retirement age back would provide a temporary fix for the current pay-as-you-go pension system but would be politically viable only where there is great demand for labor. Pension funds could be made more sustainable by increasing GDP growth, raising contribution rates, or gradually reducing benefit rates. But the financial costs and social obstacles of those reform options must be carefully assessed. Fully funded, privately managed pension schemes might be feasible, but require a sound regulatory framework and institutional infrastructure, including financial markets that provide adequate savings instruments and insurance options. Pension reform is a long-term, multidimensional problem involving economic, social, political, and cultural factors. Governments should not focus only on taxes and transfers to redistribute income to and among the elderly. Real income growth is needed to cope with poverty among the elderly, especially in developing countries. To establish an adequate, efficient, and equitable social security system, China must maintain long-term socioeco nomic stability and sustainable growth. China could improve the labor market by removing management rigidities, facilitating human resource development, making labor markets more competitive, improving the household registration system, improving incentives, and rewarding hard and innovative work. To reduce unemployment, China can create more job opportunities in nontraditional sectors, especially its underdeveloped service industries. To shift jobs to the nonagricultural sector, it can develop medium-size cities. And to cushion the impact of demographic shocks, China should preserve traditional values and maintain family-community support. Drawing on experience in Europe and Latin America, China should move toward a transparent and decentralized system with 1) a fully funded, portable, defined-benefit pension plan, designed to meet basic needs, and 2) occupational pension plans or personal savings accounts to satisfy demand for maintaining or improving living standards.