Pension reform in China in international perspective

Seminar presentation:

National Pension Research Institute 11 October, 2007, Seoul, Korea

Willem AdemaHead, Asian Social and Health Outreach, OECD

(www.oecd.org/els/social/family)

o A summary of pension trends in OECD countries, and Korea in particular

o Chinese pension policyo The demographic contexto Past pension system developmento The current systemo Key challenges

Presentation outline

Public pension spending increased by 1 per cent of GDP from 1990 to 2003 and will increase further…

Source: OCDE (2006), Base de données des dépenses sociales (SOCX, www.oecd.org/els/social/depenses).

0

2

4

6

8

10

AUS DNK F R A DE U J P N K O R S WE G B R US A O E C D

1990 2003

Public spending on pensions, per cent of GDP, 1990 - 2003

…and spending on health and long-term care has increase even faster over the same period

0

2

4

6

8

10

12

AUS DNK F R A DE U J P N K O R S WE G B R US A O E C D

S ervices for elderly and disabled (2003)Health (2003)S ervices for elderly and disabled (1990)Health (1990)

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)

0 10 20 30 40 50 60

UK

Japan

Germany

France

Sweden

Korea

Italy

Before reform After reform

Employment among older workers in Korea is higher than the OECD average…

Employment population ratios, prime-age and older workers

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

25-54 55-64

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

01020304050607080

female employment rate

…while countries with relatively high female employment also have the highest birth rates.

1980 Female employment rates, and total fertility rates 2005

AUS

AUT

BEL

CHEDEU

ESP

FIN

FRA

GBR

GRC

IRL

ITAJPN

KOR

NLD

NZL

PRT

SWEUSA

1.0

1.5

2.0

2.5

3.0

3.5

20 30 40 50 60 70Employment rates of women

TFR

ISL

1.0

1.5

2.0

2.5

3.0

3.5

40 50 60 70 80 90

AUS

AUT

BEL

CAN

CZE

DNKFIN

FRA

DEU

GRC

HUN

ISL

IRL

ITA JPN

KOR

LUX

MEX

NLD

NZL

NOR

POLPRT

SVK

ESP

SWE

CHE

GBR

USA

OECD

1.0

1.5

2.0

2.5

3.0

3.5

40 50 60 70 80 90Employment rates of women

TFR

(200

4)

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

Source: OECD (2007), Society at a Glance: OECD Social indicators.

0

10

20

30

40

50

60

70

80

SWE JPN FRA UK DEU NL USA AUS KOR

2000 2050 OECD-2000 OECD-2050

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

CHINA

85+80 - 8475 - 7970 - 7465 - 6960 - 6455 - 5950 - 5445 - 4940 - 4435 - 3930 - 3425 - 2920 - 2415 - 1910 - 145 - 90 - 4

in 2005: 1 313.0 Total population (in millions) in 2050: 1 408.8in 2005: 12 Old age dependency ratio (65+ in % 20-64) in 2050: 42

in 2005 in 2050

MEN WOMEN

0 2 4 6 8 10 12024681012

KOREA

85+80 - 8475 - 7970 - 7465 - 6960 - 6455 - 5950 - 5445 - 4940 - 4435 - 3930 - 3425 - 2920 - 2415 - 1910 - 14

5 - 90 - 4

in 2000: 47.0 Total population (in millions) in 2050: 44.3in 2000: 11 Old age dependency ratio (65+ in % 20-64) in 2050: 68

MEN WOMEN

in 2000 in 2050

,0 ,2 ,4 ,6 ,8 ,10,0,2,4,6,8,10

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 1.4 billion in 2050: Ageing will erode China's

demographic dividend

0

10

20

30

40

50

60

70

80

90

De

pe

nd

en

cy

Ra

tio

Total

Child

Old-age

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

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

Pension development in China (contd.)

The three pillar urban pension system

Pillar II

Enterprise Annuity

Pillar ITier I: Tier II:

Social Pool Individual account

National Social Security Fund

Pillar III Individual SavingsVoluntary

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 Contributions 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 (Funded) employees make voluntary contributions

individual account

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

020406080

100120140

Old Age

Insu

ranc

e

Unem

ploym

ent In

sura

nce

Health

Insu

ranc

e

Occup

ation

al In

jury

Mat

ernit

y

mill

ions

of

peop

le

1999

2005

Coverage of pension insurance 1989 to 2005

0

2

4

6

8

10

12

14

16

1989

1991

1993

1995

1997

1999

2001

2003

2005

% o

f to

tal

po

pu

lati

on

Urban coverage of old age pension insurance, 1989 - 2005

0

50

100

150

200

250

300

198919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

05

mill

ions

0

10

20

30

40

50

% o

f ur

ban

empl

oym

ent

Urban Employees (left axis)Participating Employees (left)Coverage of urban employment (right)

Coverage of pensions among ‘silvers’ 1990 to 2005

0

5

10

15

20

25

1990 1995 2000 2005

% o

f p

op

ula

ton

60+

Contributors/Recipients relation in the Pension System

0

20

40

60

80

100

120

140

1989 1991 1993 1995 1997 1999 2001 2003 2005

mil

lio

ns

of

peo

ple

0

1

2

3

4

5

6

Co

ntr

ibu

tors

/ R

ecip

ien

ts

Dependency Ratio (right axis) Contributors (left) Recipients (left)

Trends in retirement insurance revenue/expenditure and cumulative

balance 1989 to 2005

0

0.5

1

1.5

2

2.5

3

1989 1991 1993 1995 1997 1999 2001 2003 2005

% o

f G

DP

Balance at Year-end Revenue Expenditure

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

0100020003000400050006000700080009000

10000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

in 2

005

Yu

an

Trends in relative pensions, 1989 to 2005

40

50

60

70

80

90

10019

89

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

% of GDP per capita % of SOE wage

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

050

100150200250300350400450

China T

otal

Beijin

g

Shan

ghai

Lia

onin

g J

ilin

Heil

ongji

ang

Shan

dong

Hen

an

Gua

ngdo

ng

Sich

uan

1999

2005

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

• 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

Concluding remarks

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