Americans who fret about the wave of baby-boomer retirements should consider this: Since 2009, when China enacted a nationwide program of rural pensions, some 325 million Chinese have been promised retirement benefits. That’s more than the entire population of the United States.
The change is astounding. When the program was getting started, a Chinese villager told me: “Sixty years after liberation, and finally we get pensions!”
He was noting the fact that the Chinese Communist Party, which “liberated” peasants through land reform in the early 1950s, was at last providing a guaranteed income for those reaching retirement. Most urban dwellers have been eligible for pensions since 1951, but rural pensions weren’t enacted until much later; as in all developing countries, rural families lived off the land and were supported by relatives.
But rapid urbanization and rural land grabs have jeopardized the retirement security of elderly Chinese in the countryside. The share of China’s population over the age of 60 is now 185 million, and will nearly double by 2030. A recent study estimated that over the next 20 years, the government will have accumulated $10.9 trillion in pension liabilities.
In the late 1990s and the early part of the last decade, tens of thousands of residents protested unpaid pensions. Retirement insecurity could become an even greater source of unrest than official corruption and malfeasance are today. Little wonder, then, that propaganda authorities directed media outlets in December not to “sensationalize” a quasi-official annual report on pensions.
Pension spending is growing rapidly, but remains under 3 percent of gross domestic product — well under the levels in mature welfare states. (Social Security represents about 4.9 percent of G.D.P. in the United States.)
The United States has a stake in this. Entitlement programs like retirement benefits will inevitably force China into a trade-off between social expenditures and domestic security and military spending. Policy makers concerned about China’s rising military spending would do well to monitor China’s social spending.
But the obstacles to pension reform are in fact more political than fiscal.
First is the absence of a centralized pension agency like the Social Security Administration in the United States. Instead, China’s safety net for the elderly resembles what Americans had before the New Deal: a patchwork of state-based programs with uneven rules and few provisions for people who crossed state lines for work or retirement. In China, roughly 2,500 county and city governments run pension funds, not just for government employees but for all workers, including temporary migrants.
Second, local governments have been piling on debt. After fierce protests by unpaid pensioners, local governments began “borrowing” from mandatory retirement accounts that had been established for individual workers and were meant to be walled off. A report in December put the size of the empty accounts at 2.2 trillion yuan ($353 billion).
It’s true that China has a National Social Security Fund, often touted as the world’s largest sovereign wealth fund. But it is still small relative to G.D.P. and it does not pay pensioners or collect from current workers. The roughly $140 billion in the fund cannot cover the pension debt being run up by local governments.
Centralization would not replenish empty accounts. But it would at least create a nationwide mechanism to pay benefits from current revenues. It would also prevent local officials from doing what their counterparts do in other countries: create unsustainable benefit levels, often for politically well-connected groups, and then mismanage the money through risky investments.
A third obstacle to reform comes from wealthy cities and powerful state-controlled enterprises. Cities like Shanghai and Shenzhen insist on operating their own pensions. It took a big scandal in 2006 to bring Shanghai authorities to heel after they long flouted prohibitions against investing in stocks and riskier asset classes, like real estate. State-owned enterprises have resisted pressures to convert some of their shares and profits into pension-fund assets, saying that dividends and profits belong to shareholders. A counterargument — made recently, and forcefully, by Dai Xianglong, the head of the National Social Security Fund — is that since the government is a shareholder, state enterprises have some obligation to help finance pensions.
A final obstacle, paradoxically, is the Chinese themselves, who (like Americans) strongly oppose an increase in the age at which retirees become eligible for full benefits. Chinese officials often argue that early retirement helps make room for young workers. But the current retirement age — 55 for women (50 for those in blue-collar jobs) and 60 for men — adds to the demographic burden. The one-child policy means that an ever-shrinking share of workers is paying the taxes that finance pensions and health care — the demographic phenomenon that causes the Chinese to fear “growing old before getting rich.” Beijing could make a deal: phase in later retirement ages while ending the one-child policy.
An enduring source of inequality in China has been the curse of geography: where you were born, lived and worked has largely determined the level and even existence of your retirement benefits. Reducing the urban-rural gap — as China this month announced a plan to do — is essential, as is saving elderly citizens from poverty.
China has the wherewithal to make the bold reforms to meet this basic social obligation. Does it have the will?
Mark W. Frazier, a professor of politics at the New School, is the author of “Socialist Insecurity: Pensions and the Politics of Uneven Development in China.