Sixty-nine-year-old Li Qingyuan has it pretty good. He and his wife live in a cozy apartment in Beijing. Since he retired in 2003 from a state-owned textile machinery factory, his pension has grown by about 10 percent a year, well above inflation. His monthly 2,800 yuan ($440) check is more than enough to get by. With the extra cash, he buys high-end cameras and lenses. “Our life is not bad at all after retirement. I am very satisfied,” he says.
Despite happy retirees like Li—and partly because of them—China’s pension program is becoming unsustainable. According to a recent report by economists at Deutsche Bank (DB) and the Bank of China, the projected shortfall for future pension payments will reach 18.3 trillion yuan by next year. People older than 60 already make up 13 percent of China’s population, and by 2050, the World Bank estimates that they will account for 34 percent. “They are trying to expand coverage rapidly at the same time they are aging rapidly,” says Philip O’Keefe, Human Development sector coordinator at the World Bank in Beijing.
About half of China’s 31 provinces are unable to pay their retiree costs and rely instead on financial transfers from the central government. The central government says it has enough money to cover its pension liabilities for now, but there’s a debate about how long that will last. “Many say it will become a real problem within 10 years,” says Hu Yuwei, who works for Spanish bank BBVA and who is exploring possible partnerships with local pension managers. “For now, the government can use central funds or transfer money between provinces. But in the next 10 years, the amounts will become too big to simply move money around.”
Inequality is an issue. The average monthly payout in cities is around 1,500 yuan, while those in rural areas get as little as 55 yuan. The benefits enjoyed by China’s 40 million civil servants, teachers, and state-employed doctors are particularly divisive. Their pension typically amounts to as much as 90 percent of their salary, without ever having to contribute to any funds before they retire. Those working for nongovernment institutions must contribute 8 percent of every paycheck to an individual account. On average their pension is 42 percent of their salary.
Young Chinese in particular say that they are being asked to support government retirees even though there might not be any funds for them to retire on. And they are angry at the possibility that they’ll have to work longer, since they see it as simply prolonging the time during which they have to fund current retirees.
The obvious solutions are unpopular. A system firmly controlled by the central government and the provinces would make for easier supervision, allowing for investments in higher-return stocks and state-run infrastructure projects. The trouble is, local governments are loath to hand over the cash. Raising the retirement age to 65 from 60 for men and from 50 for women would help, but according to a recent online survey by the official People’s Daily, 93 percent of Chinese oppose doing so. “This is a very big liability for the future,” says Yang Yansui, director of the Center for Employment and Social Security at Tsinghua University. “More and more young people understand this today. They don’t believe the government.”