Social security reform will take more than postponing retirement

When officials at the Ministry of Human Resources and Social Society told the media that it was “inevitable”that China would have to raise the national retirement age in early June, it led to heated public debate.

China’s current retirement age is 60 for men and 55 for women, much earlier than most developed countries. In the State sector, female employees can apply to retire at 50. According to Li Bin, director of the National Population and Family Planning Commission, average life expectancy in China increased from 68 in 1987 to 73.5 in 2011, which makes the raising of the retirement age a necessity.

Actually, measures to postpone the retirement age have been conducted in several major cities. The Shanghai government, for example, issued a decree in October 2010 allowing local residents to postpone their retirement to as late as 65 for men and 60 for women. In a draft law on social security, the Shenzhen government also released plans to postpone the retirement age.

At the core of the issue is the aging population, especially in China’s major cities. In Shanghai, for example, the ratio between those who pay pension premiums and those who receive pensions has halved from 2.82:1 in 1993 to 1.41 in 2009. As China adopts a pay-as-you-go pension system, it is concerned that social security will not meet the demand in the near future if no action is taken. In Shanghai, the city social security fund has started to run on a deficit, which was 3.5 billion yuan (US$550m) in 2010. It is estimated that social security funds of 15 provinces are now running on a deficit, with a total shortage of 67.9 billion yuan (US$10.7bn). Ac- cording to an estimate from the World Bank, if no change is made to China’s social security system, its deficit will reach 9.15 trillion yuan (US$1.43tn) between 2001 and 2075.

However, the proposal has met with strong resistance. More than 450,000 people responded to an online survey conducted by people. , 93.3 percent of whom expressed opposition to the changes.

While opposition to postponing retirement can be expected in any country, it is particularly strong in China, as many people believe the social security system to be inherently unfair. Currently, China’s social security only covers urban residents, and adopts a dual-track approach to the public and private sectors. In the private sector, employees pay a social security rate based on average local income, while government pensions are covered by government revenue, at a level up to 3 times that of the private sector. Moreover, many suspect that much of China’s social security fund may be routinely misappropriated, given the opacity of its management. Therefore, postponing the retirement age without addressing the premium enjoyed by government employees and corruption within the system will only deepen the already strong resentment among the public.

With an aging population and a slowing growth rate, there is no doubt that China needs to reform its social security system. But the government must not take the easy way out by simply postponing the retirement age. Instead, it should take a systematic approach and address some of the inherent problems in China’s pension system.

(The author is a freelance commentator)