How To Reform China’s Pension System Under Aging Population To Solve Its Funding Gap

With the development of the economy and society, China confronts with more and more changes and challenges. Among them, the aging population, which means that the number of the people aged over65years old amounts to over7%of the overall population, is one of the most influenced challenges that China has to deal with. What’s more, the funding gap in the public pension system, which is caused by the aging population, is a problem that cannot be ignored and needs to be solved. Meanwhile, the family endowment function weakens, which indicates that the importance of the public pension system is increasing dramatically.Thus, in order to solve the financial risk of the public pension system to guarantee the life standard of the old. the reform of the current pension system is a necessary choice. In this way. the aging population has not only changed the demographic structure in China, but also forces China to build a reliable public pension system that can guarantee the basic life standard of the elders. That is the meaning of this piece of thesis as well. At the very beginning of the establishment of the public pension system, the Pay-As-You-Go system is the most acceptable institution that is implemented in most countries. The pension system, therefore, is founded on the intergenerational support, in which the benefit paid to the elders comes from the contribution paid by the young workers. So, the number of the young workers and the relation between the benefit and contribution are the key points to determine the stability, adequacy and the sustainability of the pension system. With the coming of the aging population, the change of the old-age dependency rate and the shortage of the young labor force supply break the financial balance of the public pension system.The aging population problem in China has its character and affects the society in a different way than in other countries. In China, the original base number of the elders is already fairly huge. With the rapid increase of the number of the old, China enters its era of aging population at an incredible fast pace. However, China has not become rich enough before it grows old. It means that China lacks capacity and money to cope with the problems that are caused by aging population.It is said that if the status quo is maintained, the deficit will reach18.3trillion RMB in2013and the amount of the empty individual account, which shows that the capital in the individual account is diverted to cover the shortage in the social pooling part in the public pension system, reaches2.21trillion RMB.Apparently, with the current public pension system in China, which consists of basic pension plan, mandatory individual account, enterprise annuity program and the individual savings, the funding gap cannot be covered. In China, the financial sustainability of the pension system is challenged by the empty individual account in short term and the demographic transition from the long term. These are also the perspectives to analyze the measures to reform the pension system. In this piece of thesis, the author will analyze, compare and summarize the reforms in Japan, South Korea, Sweden and Chile. Thereafter, the political proposal will be provided to solve the funding problem in China’s pension system.As the countries with similar culture, demographic transition process and idea to China, Japan and South Korea can provide instructive experience and lessons. In both countries, most of the measures are parametric, which aim at the existing arrangement, to keep the financial situation of the pension system controllable by expanding the coverage to attract more people to pay for the pension, increasing the pensionable age and the contribution rate, reducing the replacement rate, and gaining higher investment returns on reserve funds and so on. In brief, the parametric reforms in both countries maintain the existing public pension system, but adjust various indicators to a more reasonable level.In Chile and Sweden, the structural reforms are preferred. Although they choose different paths to reform, the government has played a vital role during the period of the transition by providing minimum guarantee, undertaking transition cost and enhancing supervision, which can be regarded as models to provide lessons for Chinese government to deal with the empty individual account. Besides, both countries increase the funded part of the pension, which increases the profit of the investment. The automatic adjustment mechanism in Sweden, which links the benefit to the life expectancy, is a useful measure under aging population as well.After learning from the cases of Japan. South Korea. Chile and Sweden. China needs to make a series of measures to reform the current pension system, because the trouble won’t be solved relying on one simple measure.In order to relieve the financial pressure, be adapted to the new demographic character and comply with the trend of the social development, several measures may be effective. Increasing the pensionable age may quickly ease the financial pressure in short run. However, because of the demographic transition, the institution that may adjust to the demographic trend automatically will be a more reliable mechanism to balance the pension system in a long term. This automatic adjustment mechanism should link the retirement age and the benefit level to the life expectancy and the economic development. Thus, the sustainability of the pension system can be realized in a more efficient way.The government has to play a leading role in the pension issue. No matter the reserve fund, the investment, the minimum guarantee or the policy making, the government has to undertake its responsibility to support the development of the pension.The reserve fund, which the government has to pay more attention to. is the key point and the last resort to deal with the financial problem of the public pension system under aging population. China has to extend the sources of the reserve fund and expand the financial market to acquire more investment options. Pooling at higher level can integrate the resources to benefit more from the investment by making more rational investment strategy.What’s more, the development of the private pension may act as supplementary to increase the benefit level of the elders as well.The minimum guarantee, which can be regarded as the promise provided by the government, will protect the elders from poor life and encourage people to consume more to increase their purchasing power.With the approach above, more profit can be created in a more effective way. But the supervision, under which can make sure that participants can enjoy the profit of the pension system, must be a part that the policy makers have to focus on. With the supervision from different actors, the management and the operation of the pension system can run in a more transparent environment to avoid the waste and the corruption.In conclusion, the problem in current China’s pension system cannot be ignored but needs more attention. The government, the participants and the society have to make efforts to guarantee the financial balance of the pension system, in order to make sure that no one will live poor life at their old age.