Efforts to improve people’s retirement security is of course a worldwide challenge, and perhaps nowhere is that challenge more daunting right now than in China—the most populated country on Earth with more than 1.425 billion citizens.
As you may or may not have heard, China is in the process of making major reforms to its pension management and starting to encourage private retirement savings—a development investors are saying could be the most significant news out of China in 2022.
Back on April 21, China’s State Council officially launched a private pension scheme, or new third pillar, after a four-year trial. Until now, both employees and employers have contributed fixed amounts under state pension plans.
This final piece in China’s pension framework … allows the country’s 1.02 billion people covered by the current national basic pension insurance scheme to open private pension accounts and make voluntary contributions of up to 12,000 yuan ($1,813) a year.
The Chinese government is hoping the new scheme will unleash vast household savings and ease the burden on its national pension fund, which is projected to be exhausted by 2035 due to a stagnant work population according to the “China Pension Actuarial Report 2019-2050,” which was released in 2019.
The Chinese Communist Party’s infamous “one child” policy that existed from 1980 to 2015 is largely believed to be the reason behind the country’s declining workforce and rapidly aging population.
As Marketgrader points out in an article about the new scheme, China’s pension system stands on what the government refers to as “three pillars,” designed to help secure retirement income for its citizens. The first (and by far the largest) pillar, known also as the “basic pension,” consists of the central government’s Public Pension Fund (PPF) and National Social Security Fund (NSSF).
The second pillar in China’s pension system dates back to 1981 and could be compared to 401k plans in the U.S., as it is employer-based. It is divided into so-called Enterprise Annuities and Occupational Annuities—but it is a very tiny piece of the puzzle.
At the end of 2021, Chinese Enterprise Annuity participants only accounted for 3.85% of the national employed population, according to a report by the country’s human resources and social security department and the national statistics bureau.
These employer-sponsored schemes cover only approximately 20 million employees from about 105,000 enterprises and are usually limited to the country’s largest companies as most small- and medium-sized businesses lack the resources to cover the administrative costs of running these plans.
Occupational Annuities, the other part of Pillar 2, are set up by government entities and institutions for the benefit of government employees and staff. Employee contribution to OA plans is compulsory, and the program covers roughly 30 million government employees.
That brings us to the new third pillar, which the Chinese government first acknowledged the need for in its 14th “Five-Year Plan,” released in March 2021.
This final piece in China’s pension framework—being rolled out with one-year trials in some cities before being implemented nationwide—allows the country’s 1.02 billion people covered by the current national basic pension insurance scheme to open private pension accounts and make voluntary contributions of up to 12,000 yuan ($1,813) a year.
The State Council’s April 21, 2022 announcement outlined that funds in private pension accounts can be invested in bank wealth management products, savings deposits, commercial pension insurance, and mutual funds, at the discretion of participants.
Marketgrader says the framework to promote widespread investment into private pensions, with the potential to channel billions from bank savings accounts to the country’s capital markets, is a centerpiece of the government’s effort to shift significant responsibility for securing retirement income from the state to employers and individuals.
“In our view it will lead to a significant inflow of assets into managed funds and investment products approved by the state, generating a multi-year tailwind to the country’s equity markets along with much needed long-term focus. This in turn will help millions of Chinese build the required asset reserves needed to generate adequate income during retirement,” the Marketgrader article observes.
From a broader perspective, the new scheme is expected to spur foreign insurers and asset managers to accelerate their expansion into China.
“In the mid to long term, the new policy will benefit the retirement market by helping to accumulate more retirement income, increasing residents’ retirement savings as well as investing awareness,” Leo Shen, Shanghai-based China head of fund management business at Allianz Global Investors, told Reuters.
Some U.S. retirement investors may lag behind, with continued efforts to prohibit U.S. federal employee retirement fund investment in China over concerns of funding a military adversary.
Senator Marco Rubio (R-FL) sent a letter to Michael Gerber, Chairman of the Federal Retirement Thrift Investment Board (FRTIB) that oversees the Thrift Savings Plan, on Aug. 4 as part of his continued push to keep U.S. federal retirement savings from being invested in certain companies in China.
Rubio argues that “American servicemembers’ retirement funds should never be used to finance an adversary of the United States, nor should they bankroll foreign weapons or technology designed to someday harm them.”
The Wall Street Journal also posted an article on Aug. 3 about how U.S. generals and diplomats want Chinese companies out of their retirement plan.
Why China’s changes are needed
Here’s a closer look at a couple of the key factors that have led to China’s retirement crisis:
• Average retirement age: 54
China’s retirement crisis is exacerbated by the country’s very early legal retirement ages. China has been slow to raise its retirement age, which it set back in the 1950s when life expectancies were much lower. Attempts to raise the age in 2008 were nixed by a loud public outcry against the idea, but now the government feels it can wait no longer.
At about 54, China’s average retirement age is among the youngest in the world. Today men in China are eligible to begin collecting retirement benefits at age 60, while women workers can do so at age 55, or 50 if they have worked in blue collar jobs.
Earlier retirements also mean less tax collected on wages and fewer years of contributions from the employer.
According to Gallup’s annual Economy and Personal Finance survey, conducted each April, the average reported retirement age in the U.S. today is 61.
• Rapidly aging population
China’s new private pension scheme was created in response to an urgent need for pension reform as the country faces a massive demographic shift stemming from an extremely low birth rate and a rapidly aging population.
China’s natural population growth rate of 0.034% for 2021 was its lowest since 1960, when the population contracted, according to CNBC, sourcing data accessed through the Wind Information database. For every other year since 1952, the data showed that the natural growth rate has been above 0.1%.
There are now close to 191 million people over the age of 65 in China, or 13.5% of a total 1.41 billion citizens, according to the country’s 2020 census. The World Health Organization defines a country as “aging” once its over-65 population exceeds 7% of the total; and it defines a country as “aged” if the over-65 cohort exceeds 14%. China is at this threshold as the growth in its senior population far outpaces its total population growth. In fact, China’s population grew 7.7% during the decade ended in 2020, whereas the number of people over 65 grew by 60%.
The proportion of over-65s has grown from 9.1% of the population in 2011 to 14.2% in 2021, which means the working-age population is shrinking rapidly.
SEE ALSO:
• AEI’s Andrew Biggs on How the U.S. Retirement System Compares with Other Countries
• Retiring (Much) Later: Average Age Up Big Since 1991
• Trump’s 2020 Block Means No TSP Funds Invested in Russia
• Retirement Security Woes Felt Worldwide
• TSP Still Investing in ‘Shady’ Chinese Companies