A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
• https://expatpensionholland.nl/china-expat-pensions
• https://expatpensionholland.nl/global-pillars-systems
• https://expatpensionholland.nl/global-investments-risks-0
• https://expatpensionholland.nl/global-social-security-coverage
For even more information about this topic feel free to visit the following external sites:
• https://www.cfr.org/articles/what-chinese-pension-system-and-why-are-its-problems-hard-fix
• https://www.oecd.org/en/publications/pensions-at-a-glance-asia-pacific-2024_d4146d12-en/full-report/china_59a40147.html
B] The Issue
Mainland China’s pension system has again become an issue of debate after the Supreme People’s Court ruled that any private agreement between employers and employees to evade payment of retirement funds was invalid. While the legal interpretation reiterated existing laws and regulations, it struck a nerve with the population and triggered doubts about the pension system’s fairness and sustainability.
C] The Details
China’s pay-as-you-go system, which requires workers to contribute funds into a state-managed pool to pay for their retirement, essentially serves as a “social security tax” levied on both employers and employees.
An employer must pay an amount equivalent to about 19% of an employee’s salary to the pool, while the employee pays an additional 8% to an individual account. That is often collected on a monthly basis, along with other payments for healthcare and unemployment social insurance.
The levy has been deemed so high that many private employers attempt to evade it. One way they do so is to set an artificially low taxable wage. An employer, for example, may report to the Ministry of Human Resources and Social Security that an employee only makes 3,000 yuan (US$418) as a monthly salary even though the worker actually earns 5,000 yuan.
That loophole, however, was blocked in 2020 when the collection of social security payments became the responsibility of the State Taxation Administration, which has the database and technology to ascertain an employer’s wage payments and other details.
D] ‘We saw this coming’
That is often how citizens react to China increasing its retirement age.
In the services sector, such as the restaurant business, fixed-term employment is rare. So an employer often enters into a tacit agreement with employees to avoid social security payments. As compensation, the employer agrees to pay part of that uncollected levy to employees.
For a 45-year-old migrant worker, it would be nearly impossible to get a Shanghai pension. Therefore, it is a fool’s errand to make social security payments to the city.
While it was a great achievement for China to build a rudimentary nationwide welfare system that cover urban and rural residents in the past two decades, the country’s pension system has become unsustainable because of the shrinking labour force and ageing society.
E] Funding & Balance
A 2019 report by the Chinese Academy of Social Sciences concluded that the mainland’s state pension funds would be depleted by 2035 because there would be more retirees across the country. That prompted the government to raise the retirement age by up to five years, while enhancing collection to sustain the system for a longer period.
Still, the biggest problem with China’s pension system remains its lack of fairness, which is why the public opposes mandatory collection. In many ways, China’s pension system is operating against Beijing’s agenda of common prosperity and social harmony.
The system has widened the income gap among regions and the economic divide between urban and rural areas. It creates benefits for certain social groups, while undermining the interests of the nation’s hard-working young population.
That unbalanced and fragmented pension system has caused harm to China’s economic growth and societal equality, while bringing about a long list of social problems. These problems have obstructed Beijing’s strategic efforts in boosting domestic consumption, population and regional balance.
F] Finally
At present, the happiest societal group in China is said to be pensioners in the urban areas, where they are entitled to a monthly pension that is often much larger than a young worker’s average salary.
Meanwhile, the most miserable people are young workers in the private sector, who bear the brunt of low wages amid fierce competition, high levies and more working years ahead of them. So it is no wonder that China’s birth rate has been falling off a cliff.
The solution to China’s pension problem is not about forcing the working population to pay more. What the country needs is an overhaul of the system to make it more sustainable, inclusive and fair.