Pension: From Welfare to Property
Recently, in a reply to net citizen’ questions, Ministry of Human Resources and Social Security of the People’s Republic of China said that it is unavoidable for China to postpone the retirement age. While postponing the retirement age means indirectly pension deduction, thus for a while, pension, retirement age and social security have become hot issues which aroused great concerns of the public.
Why should the retirement age be postponed? A direct reason is the social security deficit. China's social security system is based on the pay-as–you-go method that pensions of the retired are supported by people who are currently employed. As China gradually steps into an aging society, a decrease of young people will contrast with an increase of old people. The original environment for the foundation of the pension system has changed a lot, resulting in a serious increase in pension deficit. It is reported that in Shanghai alone, the annual pension deficit is over 10 billion yuan. With more and more deficit, the authorities begin to consider postponing the retirement age to stave off the possible social security crisis.
It should be noted that the social security deficit is not a unique phenomenon to China. According to “Cato Handbook for Policy Makers”, in 2007 alone, US’s Social Security’s long-term unfunded liabilities have increased by more than $550 billion, and now total $15.3 trillion. With respect to the social security deficit, postponing the retirement age is the most effective way. Taking the United States as an example, under the old rule, workers who started work from 1955 were supposed to get the full benefits after the age of 65. It is in such an expectation that they paid taxes for social security system. However, in 1983, Congress changed this rule--workers must work until the age of 65 and two months in order to get the full benefits. In other words, the government withheld the pension of two months via the postponement.
However, even if many countries are to postpone the retirement age, the proposal of postponing the retirement age in China from 60 to 65 is a leap far beyond the general expectation and affordability. One of the most obvious evidence is that considering the fact that the life expectancy of Chinese population was 73.5 years in 2010, it is rather cruel that the vast majority of Chinese people would die after eight years of retirement.
In fact, The study of Professor Bai Chongen from Tsinghua University has shown that the total fee of the five statutory social insurances accounts for 40% of the wage, in some areas even up to 50%, which is more than the effective tax rate of the majority of countries in the world according to the latest estimates of the World Bank in 2009. China's social insurance fees ranked first among the 181 countries and regions, about twice the average rate of other three “BRIC” countries, three times that of the five Nordic countries, 2.8 times that of the G7 countries, 4.6 times that of the East Asian neighboring states and regions (Hong Kong and Taiwan). Why such a high pay base has led to a huge deficit year after year? The only explanation is the low efficiency in investment. In a fairly long period of time, in order to control the so-called risk, social security funds paid by the people in work were just deposited in a bank account instead of being used for investment, thus unsurprisingly, leading to the low returns and further deficits.
Why is the government entitled to cut pensions by arbitrarily postponing the retirement age? The most fundamental reason is that pension benefits are not a derivative of individual property rights, but "privileges" granted by the government. As it is seen as a kind of welfare that the government gives to you, the government has considerable autonomy in social security payments, determining the scope and methods, unilaterally deciding the amount of payments, or even abolishing particular type of security funds. Meanwhile, due to insufficient estimates of the constraints, social security policies often deviate from the expected target in implementation. Consequently, the government would reduce social security payments from the perspective of reducing the budget, or postpone the initial age of payments.
The Social Insurance Law that came into force in 2010 stipulates that China's social security scheme should be a combination of social pooling and personal accounts. Under this system, personal accounts could be regarded as personal properties, as it is stipulated that "the personal account balances can be inherited posthumously” However, the greater part of personal pension, that is, the social pooling paid by employers is beyond one’s hand.. In China, it has evolved into a problem that the pension of social pooling cannot be transferred provincially, which means that once you move to another province for working, you have no choice but to see the portion contributed by your former employer would be literally contributed to the fund without future return to yourself.
Then, how can we make the pension be their own properties thus to better benefit the payers? In my opinion, at least to 50%, the excessive proportion of the social pooling, with its low efficiency in investment, is nothing but the exploitation for working people. Moreover, the investment in personal accounts should be more transparent, and individuals should be allowed to participate in the management of their accounts. Although one cannot withdraw money from your account, one should be fully informed about the balances of his account. In short, it is crucial to keep increasing the proportion of personal property whilst lower that of welfare.
Why is it so important? One scholar has described the current pension system as following. In fact, the social security turns the elderly Americans into the weak, relying on the political process related to their retirement benefits. If they follow the rules, work hard and pay social security taxes, they can have the access to the government begging politicians to be kind enough to reward them a little retirement benefits to cover their living expenses. In contrast, a pension system which features individual accounts can resolve the troubles brought by the postponement of the retirement age, and also allow laborers to live with dignities.
Published on June 14, 2012, on the Southern Metropolis Daily
