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The Pain of a Pension Deficit (3)

(Beijing Review)

08:53, August 24, 2012

What deficit?

China currently operates a multiple-track pension system. Pensions of people working for government agencies and public institutions are granted by government funds; employees of urban enterprises are subject to the pension fund system composed of individual accounts and social collected funds; and farmers participate in the new-type social endowment insurance system that was established in 2009. The basic social pension for farmers set by the Central Government is 55 yuan ($8.66) per person per month, and local governments can increase the standard in accordance with local conditions.

At present, the deficit is in the pension fund system for urban employees set up in 1996. At that time, China was deep into the market-oriented reform of state-owned enterprises, allowing for a market-oriented endowment insurance system to be adopted.

At that time, there were more than 30 million retirees from enterprises. Before the establishment of the endowment insurance system, enterprise employees did not need to pay for their endowment insurance. Therefore in the pension fund system, there are no individual accounts for these retirees, and their pensions all come from social collected funds. However, social collected funds are not enough to distribute pensions, so many local governments have to divert funds from individual accounts.

China tried to solve its pension problem by diverting funds from individual accounts, but to little effect. At the end of 2011, only 300 billion yuan in the individual accounts were payable, a shortfall of 2.2 trillion yuan ($349.2 billion) compared with 2.5 trillion yuan ($396.8 billion) paid by employees to their individual accounts. The shortfall hasn't been made up for. Instead, it has been expanding. According to CASS figures, from 2008 to 2010, the shortfall expanded from 1.4 trillion yuan ($220.47 billion) to 1.7 trillion yuan ($267.72 billion), and from 2010 to 2011, the shortfall rose by 500 billion yuan ($78.74 billion).

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