the chinese old-age pension plans

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December 9th, 2010

A research on current Old-Age Pension Plans in China | Cindy Yuan

PENSION &

DEVELOPMENT

NETWORK THE CHINESE OLD-AGE PENSION PLANS

www.pensiondevelopment.org - 2 -

Table of Contents

ABSTRACT ······························································································································ - 3 -

1. CHINESE SOCIAL INSURANCE ···························································································· - 4 -

1.1 Old-Age Pensions ········································································································································· - 6 -

2. CHINESE OLD-AGE PENSION PROVISIONS: URABN VERSUS RURAL ·································· - 4 -

2.1 Urban old-age pensions provision ················································································································ - 6 -

2.2 Rural old-age pension provision ·················································································································· - 6 -

3. THE STATE URBAN OLD-AGE PENSION PROVISION - A BREAKDOWN OF THREE PILLARS. - 4 -

3.1 First Pillar - State Pension Provision ············································································································· - 6 -

3.1.1. Distribution of State Pension Provision ··········································································································· - 8 -

3.2 Second Pillar - Enterprise Annuity ················································································································ - 6 -

3.2.1. Potential Risks ···················································································································································· - 8 -

3.3 Third Pillar - Personal Savings & Insurance ··································································································· - 6 -

3.4 Major Problems of the Chinese Old-Age Pension Provisions ········································································ - 6 -

4. THE NEW RURAL OLD-AGE PENSION ················································································ - 4 -

4.1 Setup of the New Rural Pension ··················································································································· - 6 -

4.2 Elements of the New Rural Pension ············································································································· - 6 -

CONCLUSION ······················································································································· - 18 -

REFERENCES ························································································································ - 19 -


Abstract

The worldwide trend of aging populations is a problem that the entire globe is facing. Thus, old-age

pension provisions should become one of the main policy focuses. The following report investigates the

current old-age pension policy in the world’s most densely populated country; China. With half of its

populations living in urban areas, and the other half in rural areas, the Chinese Central Government has

separately established old-age pension plans for both groups. By discussing these plans separately, this

paper will illustrate the role that the different pension pillars play within the Chinese pension provisions

and the population group belonging to it. At the end of this paper, the self-sustainability of the Chinese

old-age pension provisions is questioned.


1. Chinese Social Insurance

There are five social insurance schemes in China:

Old-Age Pensions

Unemployment Insurance

Work injury and occupational Disability Compensation

Medical Insurance

Maternity Benefit

Together, these are called the “five insurances” by the people in China. This paper will only focus on the

Old-Age Pensions.

1.1 Old-Age Pensions

The People’s Republic of China (PRC) has the largest population size of any country in the world, leading

to the largest population size of elderly people. According to National Bureau of Statistics of China, at

the end of 2009, 167 million people were over the age of 60, approximately 12.5% of the whole Chinese

population (1.33 billion). By estimation, the number of people reaching 60 will rise to 248 million in

2020, with an annual growth rate of 7.5 million people. It is estimated that in 2050, approximately one

of four elders in the world will be Chinese (437 million).

Recent research has shown that the average retirement age in China is approximately 51.2 years. As the

quality of living in China is advancing, the life expectancy has increased to 72 years. So who is going to

pay the remaining 20 or more years of living?

In China, the income of a retiree stems from three different sources: state pension, support of children

and individual long term savings. However, due to China’s One Child Policy which was established in the

1970s, most parents are for their old-age support dependant upon their only child, thus limiting the


support that can be offered by the younger generation1. Hence, a form of old-age pension provision is

needed.

2. Chinese old-age pension provisions: urban versus rural

The old-age pension provisions in China are different for both urban and rural areas. In this chapter the

difference between both provisions are explained.

2.1 Urban old-age pension provision

The Chinese old-age pension provision for urban areas consists out of three pillars. The first pillar can be

described as a compulsory contributory State pension plan, called the State Urban Enterprise Pension

Plan, which benefits everybody that has a history of employment in any enterprise. The State Urban

Enterprise Pension Plan is mandatory for whoever works within an urban area (at the end of 2009, the

Chinese urban population was 622 million, whereas the Chinese rural population was 713 million). The

second pillar consists of an Enterprise Annuities Pension Plan, in which companies voluntarily establish

supplementary pensions for their own employees. However, due to strict regulations on establishing

the enterprise pension, very few companies have actually created them. The third pillar consists of

individual arrangements, in which individuals from the commercial sector can invest. This allows

wealthy people to purchase individual or family-oriented insurance plans from insurance companies.

Except for the first pillar, both the second pillar and third pillar are voluntary. Because of the lack of

media attention and knowledge of insurance amongst the general public, many elders have not heard of

enterprise annuities or insurances and do not trust them. Therefore, they only participate in the state

pension plan.

1 For a more detailed description of the problem of this “Sandwich Generation”, see the article by Renee Chiu, ‘Role of Filial Piety in China’s Social Welfare Development’, www.pensiondevelopment.org


2.2 Rural old-age pension provision

For farmers who live in rural regions, the Chinese Central Government has recently created the New

Rural Old-Age Pension Plan. It was officially established in September 2009, and aims to achieve full

(100%) coverage by 2020. Whoever is above the age of 16 and is not participating in the State Urban

Enterprise Pension Plan is eligible to join this plan. The New Rural Pension Plan is similar to the State

Urban Enterprise Pension Plan in some ways. The similarities and differences between both pension

plans will be explained in chapter…

3. The State Urban Old-Age Pension Provision - a Breakdown of Three Pillars

3.1 First pillar – State pension provision

The first pillar in the Chinese old-age pension provision for urban areas consists of the state pension

provision. The state pension in China is benefited to whoever has a history of employment, and consists

out of two elements: a fixed sum element (the social pooling funds) and a variable account element

(individual accumulated account). This is the first (newly created) hybrid social pension system in China,

which combines social pooling funds and individual accounts, which are both set up by the government.

Within this system, the social pooling funds are provided by all groups, including the state government,

enterprises / employers and individual workers. The existence of this social pooling system creates a

balance within the overall society, in which everyone contributes to the funding equally and is rewarded

equally. On the other hand, the individual accounts accumulate funds personally, emphasizing personal

efforts and individual labour contributions.

Currently, the State Urban Pension Provision is financed through a premium of 8%, paid by the

individual employee, and a premium of 20%, paid by the enterprise / employer, resulting in a pension


premium of 28% of the employees’ monthly salary. The 8% paid by the individual employee will be

contributed to his or her individual account. The 20% paid by the enterprise / employer is added to the

social pooling system. In return, a pension premium is paid, on a monthly basis, to individuals at the

time of their retirement, i.e. age 60.

The monthly payments consist of two different portions: the ‘flat sum’ from the social pooling funds,

which is approximately 20% of the average monthly salary of current pension contributors, and another

part stemming from the employee’s individual account. Ideally, retired employees are to be paid 1/120

of the accumulated funds from their individual account at the beginning of each month, up to 10 years.

However, nowadays there is a more precise calculated actuarial factor representing approximately how

many months the retiree is to live at the time of retirement, regardless of gender difference. (Many

retire at the age of 55, or even 50 due to different working circumstances. Female electricians for

example retire at 50.) According to actuarial calculations, a worker retiring at the age of 50 will live for

195 more months. Therefore, the funds in the worker’s individual account will be paid out 1/195th

monthly. In total, about 25% of the average monthly salary will be paid to retirees. As we can see, 25%

of the average monthly salary is not much funding, probably just enough to cover the basic living of an

elder, which again proves that the main burden of supporting retired elderly lies with family or children.


3.1.1 Distribution of the State Pension Provision

In order to receive a personal pension, an elder in China will need to provide his identification card (the

so called citizen card) to his or her own social community centre, along with his / her pension record

booklet. Each individual citizen has an account which is administrated at their designated social

community centre in one’s living neighbourhood.

As an example of the distribution of the State Urban Pension Provision, I take my grandfather, who lives

in Wuhan (the very central city in China). My grandfather started working when he was around 20 years

old. When he retired at the age of 60, his monthly pension benefit was 1200RMB, approximately 120

Euros. Now he is 84 years old, and receives a monthly pension benefit of 1600RMB, approximately 160

Euros. The monthly pension benefit increases according to the increase in inflation and living standards.

In comparison, my grandmother, who has the same age as my grandfather, started working when she

was 20 but retired at the age of 50. She used to receive 700RMB per month, but now she receives

1100RMB, approximately 110 Euros. Huge differences exist in the pension benefits according to the

difference in retirement age.

3.2 Second Pillar - Enterprise Annuity

The second pillar in the Chinese old-age pension provision for urban areas consists of enterprise annuity.

Enterprise annuity is the largest supplemental sector of the old-age pension plan for urban areas in

China. It is a funded defined contribution pension plan, established voluntarily by different enterprises

for their own employees. Under regulations created in 2004, an enterprise can only establish its

enterprise annuity on top of an active participation in the state pension plan. Also, in order to gain the

permission to establish an enterprise annuity, the enterprise report must be reviewed by the Provincial

Labour and Social Security Bureau. The Labour and Social Security Bureau will investigate whether a

company is sufficiently strong (economically) to be able to pay contributions on a continuous basis,


whether it has paid its taxes correctly and whether it has met the regulatory requirements for market

operations.

In enterprise annuity, both employers and employees contribute. Normally, the employer’s

contribution should not exceed 1/12th of the previous year’s gross payroll. In general, the combined

contribution of employers and employees should not exceed 1/6th of the previous year’s gross payroll.

At the age of retirement, benefits are paid either through lump sum or via annuities at the beginning of

the month, as long as the employee lives. The employees’ individual pension accounts are held

separately from the employer’s assets. If the employee transfers to another company during the

employment period, the individual enterprise annuity account will also be transferred to the new

employer. If the new company does not have enterprise annuity, the individual account is kept under

the old employer until retirement.

The Chinese Central Government intentionally set tax relief policies to encourage enterprises on

establishing enterprise annuities. There is a 4% tax relief on the employers’ contribution. However,

there is no tax reduction on employees’ contribution, which removes any incentive for employees to pay

contributions. Furthermore, the 4% relief on employer’s contribution in many cases does not provide

enough incentive for the enterprise to establish an enterprise annuity scheme.

The enterprise annuity is aimed at future consumption, benefitting the future by making investments at

the present. By establishing enterprise annuities, companies will gain better a reputation, since only

enterprises reaching a certain level of prosperity are able to establish such a program, which

subsequently allows them to attract and keep highly qualified personal. In addition, because of the

defined contribution scheme, different employees can contribute different amounts, according to their


level of income. This attribute largely encourages employees at different positions to perform at their

best potential. Basically, the more you contribute at present, the more you receive after retirement, so

employees’ potentials are stimulated to perform at their highest potential.

3.2.1 Potential Risks

Although the enterprise annuity sounds attractive and beneficial, it still holds some potential risks for

both employers and employees.

Both employers and employees face credit and investment risks. Credit risks run automatically when

you are involved in a long chain of money managing processes. The risk involved in these processes

stems from the human factor with regards to investment management, through trustees, account

managers, investment managers and employees. Risks exist in every part of the funds management

chain and its transactions. To minimize this kind of risk and create more credibility, the employers

should be strict on picking trustees and other investment groups. Investment risks are the other type of

risks that are encountered on every investment market. In order to minimize the risks, the employers

could set up strict rules against proposals or projects involving very high market risks. Summarizing the

above risks, selecting the right person would be the most important task.

Looking at the current state in China, enterprise annuity schemes are still immature and incomplete.

The public has not put much attention on enterprise annuity and most people lack knowledge of its

existence. The lack of information, rules, and policies create difficulties for people to further understand

and trust enterprise annuities. Enterprise annuities have not been very widely established yet, because

the Chinese Central Government enforces certain rules on setting up an enterprise annuity. Many

companies simply give up because of the complexity of regulations and processes.


At the end of 2008, there were only 13 million employees participating in the enterprise annuity

schemes, about 5% of the ones that are participating in the Old-Age State Pension Plan (urban and rural).

The Chinese Central Government seeks to encourage the development of enterprise annuities and is

looking at ways to provide incentives to encourage suitable employers to establish them and for

employees to participate.

3.3 Third Pillar - Personal Savings & Insurance

The third pillar in the Chinese old-age pension provision for urban areas consists of personal savings and

insurance provisions.

Personal savings make up a large part of the funds that Chinese elders use after retirement. An old

saying goes: “When a Chinese elder deceases, he will have huge amount of savings left to his children;

when an American elder deceases, he finally paid off his debts!” That is how much difference there is

between the Chinese savings culture and the Western spending culture. For hundreds of years, Chinese

have preferred savings, and savings have made them feel safe!

Except for savings, the knowledge of insurance is still lacking in China’s current society. With a

reasonable coverage rate of the first pillar State Pension Plan, and a considerable amount of savings,

individual insurance plans appear to be less favourable and fairly underdeveloped. Furthermore, there

are no official policies that introduce tax incentives for voluntary individual insurances, as the Chinese

Central Government’s priority is to develop the State Pension Scheme and the Enterprise Annuity

System. The vast media has, up till now, not informed people on how buying insurances is also another

profitable investment.


3.4 Major Problems of the Chinese old-age pension provisions

Limited Coverage

By the end of 2009, there were 235 million participants in the State Pension Provision, both urban and

rural, with 177 million contributors and 58 million pensioners (compared to a total population of 1.33

billion). The number of people who are above the age of 60 is rounded to be 167 million, thus, only

about 34% of the elders participated in the State Pension Provision. Eliminating the 50% elders in rural

areas, there are still approximately 16% uncovered elders in urban area. Comparing with the almost

100% coverage rate of developed countries, such as the Netherlands and Canada, the Chinese State

Pension Provision has a very low rate of coverage.

Retirement Age

With an average age of 51.2, the retirement age in China is almost 10 years earlier than the world’s

average. Early retirement age and longer life expectancy cause longer living periods after retirement,

and obviously a need for more funds. Recently, debates on whether to postpone the retirement age

have risen in China. However, many fear that when the retirement age increases, the unemployment

rate will also increase. The Chinese Central Government is putting thoughts into this idea and might

apply some changes, such as setting different retirement ages for people born in different years. By

creating this policy, the overall pension-employment market will be balanced.

Portability of pension entitlements

As for now, although the structure of the old age pension schemes in China is specified by central

regulations, pension entitlements are not fully portable. Fragmented financing and scheme

management has been the principal barrier, as the data sources cannot be transferred to other


municipals. Also, local governments fear that relocated migrants might decide to stay in the city, taking

pension advantages without previous contributions. Furthermore, there are no online individual

account records which make transfers to another location very difficult.

Political stability

One of the major advantages of old-age pension plans is to stabilize and unite people. Due to China’s

lack of proper old-age pension system in the past 10 or more years, farmers were not aware of the

whole country’s situations and might not have confidence in government. However, now as former

pension plans are laid out, the Chinese Central Government have definitely gained confidence and have

politically and economically stabilized Chinese people.

From here on, this paper will focus on the New Rural Old-Age Pension System, set up in 2009 by Central

State Council.2

2 Chief administrative authority of the People’s Republic of China


4. The New Rural Old-Age Pension

By the end of 2009, there were 712.8 million people living in rural areas in China. Because farmers

operate under heavy working conditions (e.g. long exposure to the sun, seasonal harvest), they face a

variety of risks, such as diseases, working injuries and even disabilities. Their incomes are low and

unstable; in a typical Chinese farmer family, the male is the only labour force supporting the family,

which makes him very important and means he cannot get injured. Farmers are a very special group of

the population, so accordingly they need special insurance products in response for the special

conditions in which they operate. Luckily, after piloting for over 10 years, the Chinese Central

Government studied the mistakes and amended policies that were not suitable. In late 2009, a New

Rural Old-Age Pension system was introduced with the intension of adopting full coverage by 2020. This

system is voluntary, but the Chinese Central Government highly promotes all farmers to participate.

4.1 Setup of the New Rural Pension

The main themes of the New Rural Pension are basic security, large coverage, flexibility and duration.

This plan will provide basic security to farmers, including a minimum premium of 55RMB (approximately

5.50 euro) per month. Also, the Chinese Central Government ideally wants this plan to have a high

coverage rate, benefiting all the farmers in the country, while in the meantime it establishes confidence

of the people in the government. Furthermore, this plan is designed to be very flexible in the way in

which the premium is paid out and the benefits are collected. After piloting in rural regions in the West

China for almost a decade, the Chinese Central Government has set up many different offices in rural

regions, which are very close to the farmers so that it is easier for them to negotiate with local

government officers, with regards to the rural pension provision. In the end, the plan is aimed at the

long run, hoping to achieve the best for all generations.


4.2 Elements of the New Rural Pension

The New Rural Pension consists of two elements: social pooling element and individual accounts, and is

similar to the current State Urban Old-Age Pension System.

People of 16 years and above living in rural regions, who do not follow an education and who are not

participating in the State Urban Pension Plan, can voluntarily participate in the New Rural Old-Age

Pension.

The social pooling fund comes from three different sources:

1. Individual payments

Currently, there are five levels of payments, 100RMB, 200RMB, 300RMB, 400RMB, and 500RMB

per year. The insured can choose which category they want to join. The more you pay, the

more you accumulate, hence the more you receive later.

2. Local community subsidies

Rural communities that have enough surpluses are obliged to help farmers with the payment of

premiums. Meanwhile, the Chinese Central Government also advocates for other economic or

social non-profitable organizations to help poor farmers pay their premiums.


3. Governmental subsidies

The Chinese Central Government is providing full funds to individual farmers in poor conditions

that qualify for full coverage of their premium. Specifically, the Chinese Central Treasury is

providing full coverage for individual farmers in Central-West regions and 50% coverage for

individual farmers in East regions.

The other part consists of the life-long individual account. Everyone participating in the New Rural Old-

Age Pension Plan has an individual account. This account records and accumulates funds provided to

individuals from non-profitable organizations, government subsidies, and premiums paid by the insured.

This plan is very flexible in terms of premiums payments. There are three options for the payment of

the insurance premium:

1. Premiums are paid periodically, either monthly, quarterly, semi-annually, or annually. This

option is for those farmers who are slightly wealthier and have a more stable income than

others. The amount of premium paid can either be a portion of the income or a fixed amount,

but there are the same.

2. Premiums are paid flexible throughout time. When there is harvest, farmers can pay more;

when natural disasters ruin the crops, payments can be deferred to the next year.

3. Premiums are paid once. This is the option that most farmers would use since farmers might

not be able to pay premiums regularly.

The Chinese Central Government recently issued a new Social Insurance Card to farmers who are

participating in the new Rural Old-Age Pension, which simplifies the process of paying premiums and


collecting benefits. When reaching the age of 60, farmers can start receiving benefits on a monthly basis.

This starts one month after turning 60. The monthly benefits consist of funds stemming from the two

components: the social pooling fund and the individual account. The Chinese Central Government has

set the standard benefits per person per month at 55RMB (approximately 5.50 euro). Here, local

governments are allowed to increase the monthly benefits to those in need, but the local governments

will have to pay this increase out of their own budget. In an individual account, the accumulated value

will be divided by 139 (which is 11 years and 7 months). This number is calculated by Statistics China on

the average life expectancy of 71.09 years in the rural areas of China. If the insured deceases within

these 139 months, the accumulated amounts in the individual account will continue to be distributed to

family dependents, excluding the funds and subsidies provided by different organization (the funds and

subsidies provided by organizations might be put into social pooling again).


5. Conclusion

In conclusion, the Chinese Old-Age Pension Plans have the following pillars:

3

In urban areas, the first pillar is the State Urban Enterprise Pension, which is accessible to whoever is

employed. The second pillar is the Enterprise Annuity, which is an extra measurement on top of the

State Urban Enterprise Pension. The third pillar consists of personal savings and individual pension

investments. Unlike in China’s urban areas, there is only one kind of Pension Plan China’s rural areas. It

is called the New Rural Old-Age Pension Plan, and was established by the Chinese Central Government

in 2009. It targets full coverage by 2020.

Upon introducing all the different old-age pension plans in China, we see that the Chinese Central

Government is putting much effort on the New Rural Old-Age Pension System, and hopefully this system

will have a full coverage by 2020 or even earlier. Meanwhile, we observe another problem as that there

are less young people entering the old-age pension system to afford the more populated middle ages

turning old. The key to succeed in any pension plan is that the existing assets must always be sufficient

to cover the liabilities, i.e., the discounted present value of the benefits earned to date by participants.

In China, because of the One-Child Policy, there will be fewer pension contributors than pension

receivers in the following years. Nonetheless, this population problem can never be resolved. The

Chinese Central Government will have to find a solution to balance the assets and liabilities of future

pensions. 3 The New Rural Old-Age Pension Plan only has one pillar.


References

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"2009 Chinese Population, Economy and Social Development Statistics Report." 2009 年国民经济和社会发展统计公报. National Bureau of Statistics of China, 25 Feb. 2010. Web. 29 Feb. 2010. <http://www.stats.gov.cn/tjgb/ndtjgb/qgndtjgb/t20100225_402622945.htm>.

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国务院关于开展新型农村社会养老保险试点的指导意见. Xinhua News Agency, 7 Sept. 2009. Web. 22 Feb. 2010. <http://www.gov.cn/jrzg/2009-09/07/content_1411208.htm>.

"Chinese Population Aging Crisis. " 中国人口老龄化危与机. iFeng.com, Web. 19 Apr. 2010. <http://finance.ifeng.com/topic/news/laolinghua/>.

"Chinese State Urban Pension Plan." 基本养老保险. Baidu, 25 Dec. 2009. Web. 22 Feb. 2010. <http://baike.baidu.com/view/101766.htm>.

"Enterprise Annuities." 企业年金. Baidu, 10 Mar. 2010. Web. 17 Mar. 2010. <http://baike.baidu.com/view/90463.htm>.

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