The changing structure of China's economy and population is prompting a major
revamping of China's urban old age security system. This paper first looks more closely at the
motivations for reform before turning to a description of the features of the new and emerging
pension system. Next, the paper assesses the program of reform and the suitability of the new
pension system for China's current and fhture economy.
Changes in employment structure, a falling proportion of workers to pensioners, declining
income replacement levels, precarious fhnding, and diminishing coverage of the labor force under
the former system are among the major factors necessitating reform of the old age pension
system. The enterprise-based system, with finding solely from each enterprise's current operating
- budget, was serving as an obstacle to labor mobility and state-owned enterprise competitiveness.
The new old age security system calls for a social basic pillar which is to be financed by
the enterprise, employee, and government through a combination of pooled fhnds and individual
accounts. A regionally-based pension pool system formed along administrative lines (county, city,
prefecture, or province) and, in some cases, along industry lines is replacing the work unit as the
focal point. A combination of pension plans, including defined benefit and defined contribution,
are replacing the former single defined benefit plan. The specifics of each plan, including
indexation for inflation, and the combination of plans available to workers vary across regions.
Under reforms, pools are gradually expanding coverage fiom state-owned enterprises to
other types of urban enterprises and the self-employed. However, by focusing only on the urban
labor force, which presently comprises just 27 percent of China's total labor force, the reformed
old age security system is unlikely to address the issue of growing rural-urban inequality. Rising
rural-urban labor mobility and the increased share of wage earners among the rural labor force
suggest the potential for extending the reformed system to rural wage earners in the near future.
The proliferation of regional and industry-based pools diminishes the potential benefits of
pooling, such as risk sharing, lower administrative costs, and enhanced labor mobility, and also
makes it more difficult to achieve the goal of a national level pool. Regional variation in the
inherited obligations under the former system and in the level of economic development inhibit
unification of contribution rates, benefits, and management at the national level.
One of the key objectives of the new pension system is to move away fkom a pay-as-yougo
system to partial fhnding in preparation for the aging of the population. This will require that
an expansion of coverage andlor a reduction of benefits be considered. Raising contribution rates
from levels already deemed high and which a number of state-owned enterprises and urban
collectives are unable to meet is unlikely to be a viable alternative. In the short run, accumulation
of pension fbnds may be undesirable because regulations on find management are incomplete and
financial markets in China are under-developed, providing few safe and profitable investments