Incentive Problems in China's Urban Pension Reform

The urban pension system of China has undergone a series of re- forms, but reforms so far have ignored the crucial problem of incentive of participa- tion. As a result, deficits in the pension system have been rising, the expansion of coverage has made little progress, and the enforcement of payments by existing par- ticipants has been ineffective. The fundamental reason for the lack of participation incentives is the redistributive nature of the existing system- Most contributions go to the public pillar instead of individual accounts, individual accounts are notional. rates of return to investment in individual accounts are too low, etc. This paper analyzes the evolution of urban pension system in China, rationales for the current arrangements, and inevitableness and ramifications of non-payment and resistance to participation in the existing system. We further demonstrate that given proper incentives, the required pension contribution can be drastically reduced from the current level.