- China’s current pension system is dominated by a public pension scheme (“1st pillar”) covering nearly 1 billion population. However, even with the current far-from-satisfactory assurance level, funding reserves are already facing the risks of running out by 2035, according to the estimate by Chinese Academy of Social Science (CASS).
- The challenging demographic situation is increasing the pressure on the public pension system, with a dependency ratio estimated to increase from 2:1 now to 1:1 by 2050.
- To avoid a growing funding gap, the Chinese government is centralizing the management of public pension using professional asset managers and is injecting new funding with assets from state-owned-enterprises (SOEs).
- Both the enterprise-supported pension schemes (“2nd pillar”) and the private pension schemes (“3rd pillar”) are less well-developed, compared with comparable pension plans for example in the United States like 401K and Individual Retirement Accounts (IRA).
- To establish a sustainable and effective pension system, multiple government ministries have pushed trials for new private pension plans starting from 2018, including deferred-tax retirement accounts, target funds and pension finance products. The official target for the 3rd pillar reserves is set at RMB 6 trillion by 2025, ten times the size as of end 2020.
- Strong policy support and incentives for private pension plans are needed to achieve this ambitious goal, including but not limited to deferred tax treatment, broadened access to financial institutions and differentiated tax on interest income.
- If China can build up a more resilient pension system as planned, this will boost consumption in the long term and support the growth of a “silver-hair” economy.
Sinolytics is a European consulting and analysis company specializing in China. It advises European companies on their strategic orientation and concrete business activities in the People’s Republic.