February 27, 2014 / 8:53 AM / 5 years ago

Tentative China pension reforms tackle inequality, but financing issues remain

BEIJING (Reuters) - China’s latest step to overhaul its pension system to even out payments between urban and rural residents is a move experts say is more symbolic than sweeping.

People rest next to a red wall near Tiananmen Square in Beijing November 22, 2010. REUTERS/Petar Kujundzic

After years of robust growth, China is confronting a growing income gap and unhappiness over economic disadvantages, especially those endured by its millions of migrant workers.

The current system offers vastly different payouts depending on which scheme workers are covered by, a source of much rancor to employees increasingly aware of the unequal nature of development in the world’s second-largest economy.

The country’s fragmented pension system is loosely divided into four categories: civil servants and state officials, private sector workers, non-employed urban residents and rural residents.

The latest reforms, details of which were given on Wednesday, will merge the final two of the four streams. The new fund will be made up of annually paid pension insurance, government subsidies and other contributions, and will pay pensions to residents from the age of 60, the State Council said.

Monthly pensions will only begin after 15 years of payments, and will offer payouts ranging from 100 yuan ($16.32) a year to 2,000 yuan ($330).

Experts cautiously welcomed details of the reform, which is particularly aimed at migrant workers, who were previously unable to transfer money accumulated in one region to another.

“Merging the systems is absolutely essential. But getting so many people under one scheme needs time,” said Lu Xuejing, head of the Labour and Social Security department at the Capital University of Finance and Economics.

Lu also noted that this step would prove relatively easy.

“Even though the names are different, when the system created these two separate (pension schemes) they were already basically the same.”

In October, Reuters reported that China was close to announcing long-awaited pension reforms as it seeks to create a sustainable safety net for a rapidly ageing population.

Economists pointed out that funding issues, which were not mentioned in the reforms, are of greater concern when it comes to how sustainable the pension system is.

Deutsche Bank’s chief economist Ma Jun estimated that China could face a 68 trillion yuan ($11.1 trillion) funding shortage by 2033.

“The No. 1 source of China’s fiscal and debt risk is the financing gap in the pension system,” said Ma, who authored an 80-page report that came up with the figures.

Ma said that if the government transferred 80 percent of listed state-owned enterprise shares to the pension system and raised the retirement age, then the funding deficit problems could largely be addressed.

But these two issues face some opposition, especially from a public that has spoken out strongly against previous proposals to raise the retirement age.

“You have to raise (the retirement age) gradually, not overnight, this is something to do over several years,” Ma said.

The two streams covered by this round of reforms were originally introduced as part of a drive to extend basic social security coverage to all citizens. Both streams offer similar payouts, but they are much lower than other pension streams.

Experts, however, doubt the changes will make a big difference to payouts.

“In terms of the amount of money paid out, this new integration plan won’t really have much difference at all,” said Ka Lin, a professor in Zhejiang University’s School of Public Administration.

China first announced plans to merge the two streams earlier this month, saying the change would improve social security, allow workers to more easily move for the best job prospects and support domestic consumption.

($1 = 6.1266 Chinese yuan)

Editing by Jacqueline Wong

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