Pension reform in China in international perspective Seminar presentation: National Pension Research Institute 11 October, 2007, Seoul, Korea Willem Adema Head, Asian Social and Health Outreach, OECD (www.oecd.org/els/social/family)

Presentation outline A summary of pension trends in OECD countries, and Korea in particular Chinese pension policy The demographic context Past pension system development The current system Key challenges

Public spending on pensions, per cent of GDP, 1990 - 2003 Public pension spending increased by 1 per cent of GDP from 1990 to 2003 and will increase further… Public spending on pensions, per cent of GDP, 1990 - 2003 3

…and spending on health and long-term care has increase even faster over the same period Public spending on health and services for the elderly and disabled, per cent of GDP, 1990 - 2003

For low-income workers with a full contributory record Korean public pensions are significant Net relative pension levels before and after reform (since 1990) for low-income workers (50% of avg. earnings)

Employment population ratios, prime-age and older workers Employment among older workers in Korea is higher than the OECD average… Employment population ratios, prime-age and older workers

..but female employment in Korea is relatively low...

1980 Female employment rates, and total fertility rates 2005 …while countries with relatively high female employment also have the highest birth rates. 1980 Female employment rates, and total fertility rates 2005 NB Different scales on the horizontal axis of the panels; female employment has increased everywhere

As a result Korea is projected to age more rapidly than most other OECD countries… Population aged 65 and over, relative to the population aged 20-64, 2000 and 2050

…as well as China. Population by age group, gender, in 2000 and 2050, in percentage of total population in each group

China in 2005 GDP per capita: US$ 1944 (IMF estimate) Poor People (urban): 26 million (NBS) Urbanization: 45 % (UN Population Database) Life expectancy at birth: 74.5 / 70.8 years (female/male; UN Population Database) Fertility rate: 1.3 – 1.8 (Chinese census/UN est.) Median Age: 32.6 years (UN Pop. Database)

From 550 million people in 1950 to 1 From 550 million people in 1950 to 1.4 billion in 2050: Ageing will erode China's demographic dividend

Pension development in China 1951: Communist Government introduced Regulations on Labour Insurance 1966: Cultural Revolution brings organized Old Age protection to an end 1978: SOEs bear responsibility for labour insurance (including pensions) 1986: Changing pensioner/workers ratio initiates creation of collective funds, managed by county-level Social Insurance Agencies

Pension development in China (contd.) 1990s: SOE/COE-workers and employees from other enterprises are covered by some sort of three-pillar system (various state/employer/ employee-based contribution and benefit schemes are established) 1997: State Council Document 1997 - Decision of the State Council on Establishment of Unified Basic Old Age Insurance System for Enterprise Staff and Workers

The three pillar urban pension system Voluntary Private Sector Statutory Public Sector

National Social Security Fund (NSSF) Established in 2000 as fund of “last resort” Purpose: Develop a national long-term strategic reserve to finance future social security expenses Managed by NCSSF; representatives from MOF, MOLSS, State Council and others Funding comes from fiscal allocation, sales of state-owned shares, lottery profits, invest. returns

Contributions and benefits Pillar I Tier I (PAYG) Employer 20% of employee's wages (max 300% min 60% of prov. wages) 35% of average monthly wages in province (if >15 years of service) Tier II (Funded) Employee 8% of his or her wages individual account divided by 120 (expected to equal 24.2% of average monthly wages in prov.) Pillar II (Funded) employers’ + employees’ voluntary contributions individual account Pillar III employees make voluntary contributions TOTAL 28% of employee’s wages + voluntary contributions 59.2% of aver. monthly wages + voluntary pensions’ benefits

Other Sources of Retirement Income Private Saving: High saving rate is not reflected in household saving rate (~50% of 55+ hold less than half of annual earnings in financial assets) Family-related old age provision: Long tradition in Confucian China; 45% of elderly live with children Rural pension system: 85% rely on family-support; around 54 million receive pension benefits; differing concepts between MOCA, MOLSS, etc impede a consistent approach. “Minimum Living Guarantee” and “Five Guarantees”: Combined coverage of 22 million (urban) + 19 million (rural)

Contributors to Social Insurance Programmes 1999 and 2005

Coverage of pension insurance 1989 to 2005

Urban coverage of old age pension insurance, 1989 - 2005

Coverage of pensions among ‘silvers’ 1990 to 2005

Contributors/Recipients relation in the Pension System

Trends in retirement insurance revenue/expenditure and cumulative balance 1989 to 2005

Trends in real value of average annual pension, 1989 to 2005

Trends in relative pensions, 1989 to 2005

Social Security Subsidies per capita selected provinces (in constant 2005 CNY)

Low Coverage / High Contribution Rate Low coverage: - incentive problem - limited public trust - administrative procedure - exclusion of migrants - decline of SOEs High contribution rate: - former generous replacement rate - low effective retirement age - limited risk-pooling due to low coverage

Portability / Administrative issues Portability: - legal/administrative barriers - insufficient protection of migrants - creates labour market rigidities Administrative issues: - changing responsibility between government units - financial responsibilities are unclear - incremental/experimental approach creates market distortions

Encourage private participation / Low return on investment Private participation: - few enterprises have created EAs for workers - family-related old age care needs to be state-supported - third pillar is still negligible Return on investment: - narrow investment restrictions - immature financial markets - fraud is a serious problem

Concluding remarks Will China grow rich before it grows old “Demographic Window” until around 2015 Low coverage, even without accounting for rural areas Relatively high replacement rates; financial capacity at local level Institutional issues

More information OECD (2007), Facing the Future, Korea’s Health, Family and Pension Policy Challenges. OECD (2007), Pensions at a Glance. www.oecd.org/els/social/pensions Salditt, F, P. Whiteford, and W. Adema (2007), “Pension Reform in China: Progress and Prospects”, OECD, Social, Employment and Migration Working Papers, No. 53, www.oecd.org/els/workingpapers