Problems remain in pension funding

China announced detailed standards of occupational pension for government employees on April 6 as a move to build a multi-level and sustainable pension mechanism. The welfare fund, as a supplementary part of the basic pension system and commercial insurance, will require a government department to pay 8 percent of its total salary amount and a government employee to contribute 4 percent of one's taxation-based salary.

The benchmark of payment base is the same with that of the basic pension and the fund sources also include related investment yield and other legal contributions. The introduction of occupational pension is expected to retain talents as recent reforms in the basic pension system for government institutions might compromise their employees' welfare.

However, there are large, hidden dangers in the payment method of government agencies and institutions.

Under the new policy, government agencies and institutions that are not totally supported by national fiscal revenues should pay into the occupational pension accounts punctually, and the accumulated funds in the accounts can be used to invest in financial products, so employees can earn interest on their investments.

But government agencies and institutions that are totally supported by national finance don't need to provide funds to the occupational pension accounts immediately, and they can appropriate the funds once when staff retires. That is to say the occupational pension accounts will be always "empty accounts" bereft of any real money before an employee retires. Compared with the first model, this kind of interest calculation method has actually reduced staff's income.

We can calculate the paying burdens for the second model: currently, there are mainly 2 types of institutions that are financially funded by the central government, civil servant and teaching and administrative staff in compulsory education. By the end of 2013, the number of civil servants has reached 7.17 million with 5.49 million and 3.93 million staff in primary and middle schools with the total number of the 3 types approaching 16.6 million. In line with the average paying base number of the national occupational payment in 2013, namely ￥2,294 ($374), the part that national finance undertakes for institutions is ￥36.6 billion (nearly $6 billion) for one year.

To lessen current financial pressure, the problem has been left to tomorrow by way of keeping "empty accounts". The transient resolution may result in insoluble situation tomorrow. From the perspective of figures, the payment of ￥36.6 billion every year will only be a little bit over ￥1 billion for every province which can be squeezed out somehow. However, such figure would arrive at $400 billion ten years later, and it would be a difficult task to raise such huge amount of money no matter how affluent the finance may be.

What is worse, the proportion that finance accounts for in GDP has reached historic high so that we can not depend on tomorrow’s fiscal surplus. Therefore, when designing the occupational pension system, I suggest that government shouldn’t choose to operate "empty accounts".

Published in Beijing News | 2015-4-8