Public Basic Pension Sustainability in China

1. 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

2. Contents Current Basic Financial Situation about Public Pension in China Some Future Challenge Projections of Future Financial Status Reform Choice and Discussion

3. 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

4. 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

5. Urban Workers’ Basic Pension: Coverage and Dependency Ratio

6. Average Benefit, Contribution and Replacement rate

7. Contribution Income, Balance and Fiscal Subside

8. Rural and Urban Resident Basic Pension: Participant and Dependency Ratio

9. 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

10. 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

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

12. Possible Future Trend

13. Actuarial Balance and Financial Sustainability 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 • …… Long term actuarial Balance Asset/liability Balance

14. 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

15. 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