Answer to Social Security Dilemma: a Review on the Policy
On June 5, the Ministry of Human Resources and Social Security of the People's Republic of China (MOHRSS) announced that the postponement of retirement age in China would be inevitable, and it would in due time propose to flexibly postpone the age for retirement. It is reported that the Ministry had planned to begin surveys on relevant policy adjustments in second half of this year, and the announcement above was in fact a measure for feeling out the response of the society. However, it aroused strong social angry. In a vote launched by the People’s Daily Online, in which 450,000 participated, over 90% of the voters opposed the suggestion. Recently, there are rumors circulating that the Ministry has delayed the scheduled survey timetable.
Why the retirement ages should be postponed? The Ministry pointed out, “it is an inevitable trend to postpone the retirement age in accordance with the increasing life expectancy.” However, the direct pressure derives from the pension payment crisis resulting from the change of population structure. According to the estimates of Cao Yuanzheng et al, without further reforms, fiscal subsidies for the social pooling part of Chinese pension system will soar from 2017, and it will finally occupy more than 20% of public finance expenditure in 2050. From the perspective of GDP, the funding gap in pension payment will reach 0.2% of GDP in 2020, and 5.5% of GDP in 2050 if without further reforms. The estimated sum of the funding gap in next 38 years equals 75% of the current GDP. The problem has already appeared in Shanghai and is still worsening. In a few years, we believe, other cities will have to face the same problem.
Adding to the crisis above, residents in rural areas and migrant workers will also demand pensions from the government. It is true that since they have never paid a penny for social insurances, they should not be benefited from the pension system like urban workers. However it should be noted that they are the generation, like those laid-off workers of state-owned enterprises, that has been sacrificed in the name of national transition. Now that the government is making efforts on people’s livelihood in recent years, their rising demands for pensions will compel the future government to include them into the social security system, which will incur huge pressures on the current system.
The former is to enlarge the groups who contribute and raise the rates of their contribution while postponing the retirement age is a method for the latter. Postponing one year for retirement will immediately lead to an increase in people who pay and a decrease in people who are paid. The manifest gap of the social security system indicates that the policy of postponement is merely a matter of time.
Yet one may doubt that why a worker should be retired one year later? Adding together the average individual payment, 8% of the salary, and another 20% paid by one’s employer, the total payment rate is 28% under the current pension system of China, which outnumbers the average, 18.5%, of the G7. On the other hand, in the 20th century, after the policy of postponing retirement age was unveiled in various countries, years for receiving pensions in US, Japan and Germany may still exceed 15 years. By contrast, in China even now (with no postponement policy) they are less than 15 years. More money out due to higher rates, less pension in due to fewer years, it is of no surprise that the policy is unpopular.
The policy of postponing retirement may reduce the funding gap, but the side effects will be more complaints towards the government and less motivation to contribute, which is detrimental to the long-term stability of the social security system. Fundamentally, the funding gap should be viewed as gap in stock and gap in increment respectively. In a pay-as-you-go-based system as China is, the people receiving pensions from the stock now are mostly those who retired from state-owned enterprises and institutions.
We shall realize that a high payment rate relieves the payment pressure temporarily, but inevitably resulting in a widening gap in future. To some degree, the accumulated pension gap is a cost of China’s economic transition, and should be alleviated by gains from transition. Such policies as increasing the payment rate are not proper solutions. Given that the state-owned enterprises and other assets possessed by government gain most from transition, it is time to transfer their shares into the social security funds to offset the gap.
For the solution of the increment gap, there is one prerequisite question that how much a government should provide. It is unpractical, as the debt crises in Europe and America have already shown, to establish a system in which pensions remain the same as salaries at work. The funding gap in our system, as well, reminds us that the government is merely responsible for essential pensions. Accordingly, the government should first try to lower the workers’ expectation on pensions, the prerequisite of which should be a cut in the payment rate in order to make workers feed on themselves. If so, the postponement of retirement age would be easier to understand.
In addition, it should be noted that a more fundamental reason for criticisms lies in the inequality of the social security system. People, who work in government agencies and institutions, in particular civil servants, pay less or even nothing for the social security system, but enjoy higher pensions compared with ordinaries with the support of fiscal expenditure. For example, in Beijing, at the end of 2007, the average pension of enterprise retirees was around 1380 yuan while that of government officials was more than 4000 yuan. Therefore, if a bunch of policies such as postponement of retirement age are to be supported by workers, the fairness of the social security system is at the root of the dilemma.
Published on June 14, 2012, on the issue 185 of the Time Weekly
