Retirement Options in China
China, like the United States, has both public and private retirement plan options for its citizens. Traditionally, Chinese citizens have relied on their families and the government for long-term financial stability, but that norm is changing. There is a shift underway towards an increasing level of privatization in this market. More and more businesses are offering retirement options, as both the Chinese government, and families, are unable to keep up with increasing demand because more Chinese citizens come of retirement age. Increasing demand is inevitable, as the majority of Chinese citizens are middle aged (see figure 1).
Government Run Pension System
The Chinese government first created an old age pension fund in 1951. As the country underwent major political and economic shifts so did the pension fund. In its current state, the social security pension system is made up of two components: 1. Enterprise contributions to a social pool and 2. Individual contributions to individual accounts. The enterprise contributions are distributed monthly and based on the city average salary (CAS) and the employee’s indexed contribution salary. The contribution formula (figure 2) results in a gradual increase in monthly payments due to the expected gradual increase of the city average salary. The individual account is converted to a monthly annuity that does not take into account inflation.
The governmental system, while complying with World Bank recommendations (“World Bank Support for Pensions and Social Security”, Dorfman and Palacios), does not result in livable monthly wages for retirees and faces shortfalls due to insufficient funding. However, the government recently announced a plan to expand the pension programs into a universal system. This new plan will increase efficiencies and improve long-term financial stability of retirees. Unfortunately, creating a universal system will require considerable capital, and it is unclear whether or not the Chinese government will be able to follow through with its promises given the current economic landscape.
Employer Based Retirement Assistance
The legal environment in China is complex and ever-changing (“Doing Business in China”, Plafker). Regardless, employers are developing multiple programs to provide retirement and savings assistance to their employees. Plans range from general purpose savings plans to trust models like the Enterprise Annuity system. Generally these plans are available to all employees (81%), regardless of hierarchy.
However, China’s retirement landscape is not as developed as what is seen in highly developed countries, such as the US or Australia. This is in part due to the very low employer adoption of retirement plans. The low adoption rate is probably a result of the weak tax subsidy provided by the Chinese government.
China, like the United States, is currently struggling to create a system that will comprehensively provide financial stability for retirees. The increased reliance on private enterprises seen in the retirement industry is consistent with China’s overall trend towards the free market system and capitalism. However, it is clear that without improved clarity of laws related to privately run savings options, as well as comprehensive government plan reconstruction, many Chinese citizens will be left to rely on their personal and family connections for financial assistance in old-age.
MBA Candidate, 2016