Shrinking funds, growing pains

A new tax is on the drawing board to solve China's complex problem of enterprises failing to contribute to the country's central pension fund pool.

A mainland newspaper, Business Weekly, has quoted an unnamed source from the Ministry of Labour and Social Security that a decision had been made to introduce a social security tax. The tax will be used to fill the ever-deepening hole in the state's pensions coffers to help pay retirees and retrenched workers.

Some experts working closely with the Chinese government on pension reform believe the news is nothing more than a test on the level of objection to a new tax from investors.

Nevertheless it accentuates the monolithic problem that China faces: a rapidly ageing population that is entitled to a huge amount of retirement benefits that the state simply cannot afford.

New system

Stuart Leckie, a China pension expert with consultancy firm Woodrow Millman in Hong Kong, says an accurate figure on China's pension debt is hard to obtain because of the many variables involved. But the World Bank estimates that as of 1994, China's pension debt was in the range of 46% to 69% of GDP, or about RMB5000 billion.

The official estimate is RMB2000-3000 billion.

The World Bank has forecast that by 2050 China will have an elderly population of 300 million. If China is to levy a tax to sustain its retirement system, three workers will have to support one retiree. The present ratio is about 10 to 1. The sheer burden on future taxpayers will make the scheme completely unworkable.

Since the mid-80s, China has been reforming its pension system from one characterized by purely state-funded benefits to one requiring contributions from employers and employees.

Under the present system, a total of 11% of workers' wages are remitted into their own retirement accounts, of which the workers have to contribute a minimum of 4% and gradually increase that to 8%. The rest is topped up by employers.

That means employers are paying 20% on their payroll to the state's pension system. After a portion of their contribution is deducted for their workers' individual accounts, the rest will go to a pooled social insurance fund administered by their provincial government.

The younger workforce finds the new scheme beneficial because they will have a long working life to save for retirement. On top of the benefits from individual accounts, they will also receive 20% of the average wage in their municipalities when they retire.

For existing retirees, however, it is a different story.

Old problems

One of the purposes of setting up social insurance funds at a provincial level is to release the central government from the responsibility of paying benefits to retirees.

As the existing retirees and those soon to retire have not had a chance to accumulate benefits for their retirement under the old scheme, the already meagre social insurance funds are sinking into deficit.

Adding to the problem is that many state-owned enterprises are either delaying or defaulting their payments to the funds. The Ministry of Labour and Social Security says Chinese enterprises owe the funds RMB38 billion in overdue pension payments so far this year.

The consequence is that some retirees are not receiving their pensions. If left unchecked, Leckie believes the problem has the potential to deteriorate into social unrest.

Within the government there is constant debate about how the problem can be solved. Some suggest a tax, others favour selling state assets. But Leckie says one thing is certain: the central government is determined not to take the baggage on.