Public Basic Pension Sustainability in China Xiaojun Wang Center for Risk Management and Actuarial Studies School of Statistics, Renmin University of China Email: xiaojun_wang@ruc.edu.cn 2018-09-19

Contents Current Basic Financial Situation about Public Pension in China Some Future Challenge Projections of Future Financial Status Reform Choice and Discussion 2018-09-19

Basic Situation PAYGO, Pooling fund + IA For workers, employer 20%(pooling fund)+ Employee 8%(individual account) For self-employment, 20% social average salary (8% IA+12% pooling) Ceiling: 300% of social average salary, floor: 60% of average salary Defined benefit with redistribution Benefit linked to contribution years and, ½ contribution base+ ½ average salary Benefit adjustment: irregularly with wage and inflation index 2018-09-19

Basic Situation-cont1 Basic pension including three different schemes Workers: different contribution level for formal and unformal employment Civil servant and other public employee Rural and urban resident Public employee: cover about 40 million in 2016 Urban worker: cover about 403 million, active 293 million, cover about 69% of urban employment in 2017 Resident: cover about 513 million in 2017 Average benefit 1521 Yuan/ Per Person 2018-09-19

Urban Workers’ Basic Pension: Coverage and Dependency Ratio 2018-09-19

Average Benefit, Contribution and Replacement rate 2018-09-19

Contribution Income, Balance and Fiscal Subside 2018-09-19

Rural and Urban Resident Basic Pension: Participant and Dependency Ratio 2018-09-19

Future Challenge Population ageing People live longer, longevity risk, old age poverty Life Expectation: 68.55 in 1990, 76.34 in 2015, Beijing 80.18, Shanghai 80.26 in 2010 Investment risk and low Investment return 2018-09-19

Financial Sustainable Basic pension expenditure is about 4.6% GDP in 2016 Average pension/GDP per employee is about 32% in 2016 With population ageing, full employment, full social insurance coverage assumption, pension expenditure will increase to 21%(retirement age 60) or 13%(if retirement age 65) of GDP in 2050s 2018-09-19

2015-2090年人口结构 （left：International right：retirement age in China） Future Population Projection 2015-2090年人口结构 （left：International right：retirement age in China） 2018-01-09

Possible Future Trend 2018-09-19

Actuarial Balance and Financial Sustainability Long term actuarial Balance Asset/liability Balance Future Income cash flow Fertility, Mortality Employment Salary Increase Coverage Contribution base, rate Fiscal subsidy Investment return …… Future cost cash flow Risk rate Retirement age Benefit level Benefit adjustment Life expectation ……

Current Reform Choice National social pooling: redistribution between pooling region Increase retirement age: Female 55, Male 60 to age 65 Postponing retirement can delay the appearance of the financial gap and improve the balance in the short run, but not obvious in the long run under current system Tax Bureau collect contribution: Check contribution base and increase compliance rate current contribution base /salary, 51% in 2015 Social pension fund balance investment: interest income and investment risk Encouraging more private pension plans to supply more benefit 2018-09-19

Discussion How to keep the financial sustainable of PAYG-financing public pension? Clarify fiscal subsidy and government responsibility Transparent and annual financial report Encourage more and longer contribution, less and shorter benefit. Auto-enrollment and auto contribution levy mechanism Delay pensionable age, link pensionable age to life expectation to protect longevity risk Separate insurance and redistribution 2018-09-19