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BEIJING (Reuters) - China is close to announcing long-awaited reforms to its pension system, whose assets are estimated to have already fallen $3 trillion behind projected future payouts, as it seeks to create a sustainable safety net for a rapidly ageing population.
The reforms, which may be announced as early as this month, could include merging separate state and private sector employee pension schemes, increasing coverage and broadening the range of assets pension funds are invested in to boost returns and improve efficiency, said sources with knowledge of the discussions.
As China seeks to transform its economy from the export and investment-led model that drove two decades of growth towards a future based on consumer demand, it faces the huge demographic challenge of an already shrinking working-age population.
By 2035, according a report by Qinghua University released in August, every two to three Chinese workers will have to support one dependent.
"There's no way that if the system doesn't change the problems won't get worse," said Dong Keyong, Dean of the School of Public Administration at Renmin University. "The system won't be able to cope, it will change."
The problem of ballooning old-age costs is familiar to many developed countries facing the retirement of the "baby boomer" generation. China is confronting it earlier than most emerging economies due to the one-child policy introduced in 1979.
Experts have been warning for almost a decade that China may get old before it gets rich. The Qinghua report said that China was already 15 years behind in terms of restructuring its pensions.
An unchanged system could face a 68.2 trillion yuan ($11.2 trillion) pension shortfall by 2033, according to a report led by Ma Jun, Deutsche Bank's chief economist for greater China, released in June 2012. The report estimated that by this year projected liabilities would exceed assets by 18.3 trillion yuan.
China's pension system has four main streams, each administered separately and with vastly different payouts. The most generous is reserved for civil servants and workers in state institutions, with employees of private businesses covered under a separate stream administered by local governments.
Pension coverage only began to be rolled out to rural residents under a third scheme in 2009. A further program exists for urban residents who don't fall into either of the first two streams. While significantly increasing overall pension coverage, these two programs offer only basic payouts.
Civil servants and other state sector workers can expect to receive around 70 to 90 percent of their final salary at retirement without making any contributions.
Those covered by the private sector system receive just 50 to 60 percent, despite a combined 28 percent salary contribution made by employee and employer.
Local government officials running the private sector system in some provinces have also taken to emptying the personal accounts of contributors to meet obligations to current retirees. According to a report last year by the Chinese Academy of Social Sciences, more than 2 trillion yuan was missing from individual accounts as of 2011.
"People are quite resentful. This is not a financial issue, this is a political issue," said Zhao Yaohui, an economics professor at Beijing University and a principal investigator in a recent university report into ageing in China.
Two sources with knowledge of the discussions said that plans to begin merging civil servant and private sector pension schemes, and taking the latter out of local government control, could be announced amongst the first round of measures, although this would require overcoming opposition from civil servants.
Centralizing pensions into national funds would improve the efficiency of resource allocation and smooth regional disparities that currently result in some provinces having pension surpluses whilst others have huge shortfalls, analysts say.
Zheng Bingwen, the director of the World Social Security Research Centre at the Chinese Academy of Social Sciences, an influential government think-tank, said merely changing the level of government that administers the system would be the "slackers' option" when deeper structural reform was required.
"Which of these two paths the government ends up taking depends on the determination of policymakers," he said, in a interview with the Beijing News published on Wednesday.
Another contentious area is raising the retirement age, currently 60 for men, 55 for female white-collar workers and 50 for female blue-collar workers.
"The state has been very reluctant to put out any policy or law on the retirement age so far," said Ka Lin, a professor in Zhejiang University's School of Public Administration.
Lin believes raising the retirement age would be seen by many Chinese as the government going back on promises it made to guarantee the welfare of its citizens.
Even amongst the leadership, opinion is divided over the necessity of reforms.
Renmin University's Dong, who was formerly head of the school's social security research institute, said there were some in the leadership who argued that last year's contributions and subsidies had produced enough reserves set aside to fund the system for a year-and-a-half.
"It depends whether you are looking at this issue from a short-term or long-term perspective."
The sources said another possible reform under discussion was changing how the private sector system, the largest pension stream by assets, invests its funds.
Pilot reforms in Guangdong Province have seen the National Social Stability Fund running the investment since March 2012 in place of local governments, who are only permitted to invest in government bonds or park funds in low-interest bearing bank accounts.
This pilot could either be rolled out to other provinces, or policymakers could establish a new centralized system organized along similar lines, the Chinese Academy of Social Sciences' Zheng told state media in July.
"The success of the pilot project is indicated in the better returns of funds managed by the central team in Guangdong," said Tracy Tian, Hong Kong-based Bank of America-Merrill Lynch China strategist. "In 2012 the fund returned 7 percent, dwarfing the less than 1 percent return by the other local funds." ($1 = 6.0995 Chinese yuan)
Reporting By Natalie Thomas, Additional reporting by Umesh Desai in Hong Kong; Editing by Alex Richardson