China’s short-term goal of pulling its economy out of the trouble created by the coronavirus pandemic is in danger of exacerbating the existing pressure on its national pension system already strained by an ageing population.
Beijing announced in February that businesses could reduce or even stop contributions to provincial pension funds amid the outbreak in an effort to help them weather the current economic storm.
This is part of a concentrated effort by governments at all levels with China’s economy set to contract in the first quarter of 2020 for the first time since 1976. The outlook for the world’s second largest economy is heavily clouded by the sharp downturns in the US and European economies as the pandemic continues to spread.
The move to reduce contributions, though, will only worsen the already acute problem of paying the rapidly rising number of Chinese retirees, underlining issues faced by local government with their already overstretched budgets.
Last year, the Chinese Academy of Social Sciences forecast that the value of China’s national pension fund would peak at 6.99 trillion yuan (US$985 billion) in 2027 before gradually running out by 2035. The number of elderly in China is expected to rise from around 200 million to 300 million in 2030 and 460 million in 2050.
But for now, local government are focused on getting the economy back on track as weak growth will only make the pension problem worse.
China’s social security regulations traditionally require employers to pay up to 20 per cent of their employees’ salary into government pension funds, while employees are required to contribute an additional 8 per cent.
But amid the outbreak and subsequent economic slowdown, micro, small and medium-sized firms are exempt from paying mandatory contributions to provincial funds for pensions, unemployment and work-related injuries between February and June. Large enterprises were allowed to halve their payments between February and April.
In Hubei province, the original epicentre of the pandemic, all enterprises were exempted from the fees, while they were also allowed to defer payments to the government housing subsidy fund between February and June.
Even before the outbreak, many local governments were battling financial deficits as Beijing-mandated personal and business tax cuts to boost growth sapped their revenues, while spending on infrastructure and subsidies increased.
Dong Dengxin, a founding member of the China Pension Finance 50 Forum, said in February that the move would help the economy by reducing labour costs and giving companies confidence that could help stabilise the country’s employment situation.
“However, from a macro economic perspective, it is difficult to make a comprehensive assessment of the effectiveness of such policies,” added Dong, the director of the Institute of Finance and Securities of Wuhan University of Science and Technology.
The temporary exemptions of social security payments will cause a clear decline in social pension fund income this year, the payment gap will ultimately pressure fiscal finances at a time that taxes are also being reduced
“The temporary exemptions of social security payments will cause a clear decline in social pension fund income this year, the payment gap will ultimately pressure fiscal finances at a time that taxes are also being reduced.
“Therefore, this year’s fiscal situation in China will become very tight.”
The need for money for both local government operations and for pension and insurance funds is especially worrying due to China’s already high debt levels. Total debt is fast approaching 310 per cent of gross domestic product (GDP), according to the Institute of International Finance. Total debt for households, the financial sector, companies and governments rose to around US$43 trillion in 2019 from US$10 trillion in 2009.
To free up money to support growth amid the outbreak, the Politburo, China’s main decision-making body, announced plans to roll out a series of measures, including raising the fiscal deficit as a share of GDP, issuing special treasury bonds and increasing special bonds for local governments.
Robin Xing Ziqiang, chief China economist at Morgan Stanley, estimated that China’s total economic stimulus so far amounted to around US$344 billion. It is expected to reach US$785 billion via a wider fiscal deficit of US$385 billion, along with US$400 billion in other measures, including targeted support for small businesses in the form of low-cost lending from the central bank to small banks and additional lending from Beijing’s policy banks.
None of the additional fiscal spending, though, is currently earmarked for shoring up the pension fund.
Increased health and retirement insurance coverage is urgently needed given the rapid ageing of China’s population as government social security funds are reporting a deterioration of their finances.
More and more provincial pension plans are in deficit – meaning payouts to retirees are greater than contributions from wage earners – with worsening disparities across provinces. The most notable example is in the northernmost Heilongjiang province, which reported a net 56 billion yuan (US$7.9 billion) deficit in 2019.
At the same time, retirees and the sick will increasingly draw money from their pension accounts and health insurance schemes, raising the burden on the younger generation of taxpayers and contributors to social security funds.
Zhuang Bo, chief China economist at TS Lombard, said the deficits within provincial pensions are due to a mismatch between where wage earners make contributions and where retirees receive their payouts. Migrant workers are obliged to make contributions to the social security funds for the province in which they work, but are only eligible for pension payouts in the province where their hometown is located.
Some provincial funds have also appropriated contributions for uses other than on pension payouts, including infrastructure, Zhuang added.
Global consultancy KPMG said in a report last month that many provincial pension funds require subsidies and have been asking for help from the National Council for Social Security Fund (NCSSF) to better manage risk and improve returns.
To prepare for the likelihood that major transfers would be needed to plug the gaps between contributions and outlays in most provincial funds, the Ministry of Finance last year transferred 10 per cent of the shares in some of the country’s biggest listed companies, including China Life, the Agricultural Bank of China, The People's Insurance Company of China, and the Bank of Communications, to the NCSSF, KPMG said.
Even though the NCSSF is large enough to finance one or two provinces, it does not have enough money to finance all the provinces
“Even though the NCSSF is large enough to finance one or two provinces, it does not have enough money to finance all the provinces,” Zhuang said. “China’s overall social security pension funds are underfinanced. There is a massive gap which is unsustainable.”
However, Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said that while China’s demographic problem was indeed challenging, it was not insurmountable because of the vast amount of accumulated savings by the private sector and Chinese households that could help finance government borrowings.
“The long-term outlook for the pension system is still dependent on the speed and scale of the ageing of [China’s] population, the collective savings of the public and private sectors, as well as government policies,” Yao said.
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