participation rate (%)
SOURCE: NBS 1995–2011.
Concerns soon began to emerge about the operation of local schemes and the lack
of a sound governance framework; the Asian financial crisis in 1997 underscored the need
to rethink the program (see Chen 2002; Liang 1999; Ma 1999; and Shi 2006 for a dis-
cussion of the shortcomings of previous rural pension schemes). Responsibility for rural
pensions was subsequently switched from MOCA to the Ministry of Labor and Social
Security (now the MHRSS) in the 1998 administrative restructuring.
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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
Contraction and Stagnation: 1999–2002
As a result of concerns about the effectiveness and sustainability of rural pension schemes,
a sharp policy shift took place in the late 1990s to limit their expansion. By 2001, the shift
in policy contributed to a steep decline in coverage to just under 60 million participants,
with the number stabilizing in the low to mid-50 millions through 2007 in roughly 1,900
counties (see figure 11.1). Despite this contraction, new participants continued to enter
the system, and accumulated funds from existing schemes continued to increase, more
than doubling between 2000 and 2007. The number of pension beneficiaries approached
4 million by 2007 as existing schemes matured.
Renewal: 2003–09
Renewed impetus toward a new rural pension system emerged with new guidelines from
the Ministry of Labor and Social Security in 2003 (“Notice on Seriously Improving Work
on Current Rural Pensions”). The new rural pension schemes established during this
period fall broadly into three types: social pooling plus individual accounts, flat universal
pensions in combination with individual accounts, and individual accounts only. The
schemes differed in terms of the financing role of the government at the accumulation
and payout stages. The Chinese government reviewed the local pilots before introducing
the new national pilot.
3
Although no rigorous evaluation was undertaken, a number of
deficiencies in the rural pension system during this phase undermined the achievement of
policy objectives and influenced the design of the local and national pilot programs that
followed.
National Guidelines and Nationwide Coverage: 2009–Present
The introduction of a nationwide framework for the NRPS in 2009 marked a milestone
in the expansion of pension system coverage in rural areas. The framework has rapidly
expanded the participation of rural residents and, for the first time, put all localities on a
more sustainable financial footing through the injection of significant central funding. By
the end of 2010, the number of contributors in the NRPS reached 103 million, account-
ing for 22 percent of rural employment, a significant increase over 2008. Coverage contin-
ued to expand rapidly in 2011 with the addition of 2,343 rural counties and county-level
cities and districts (more than three-quarters of the total), including 258 million contribu-
tors and almost 100 million beneficiaries (Wen 2012).
4
PENSION PROVISION IN URBAN AREAS
Earlier pension reforms targeted urban enterprise workers and employees. Based on pilot
experiments, in 1998 the government set national guidelines for China’s urban social
insurance programs. These guidelines provided for five types of social insurance for urban
formal sector workers: pensions, health care, maternity, unemployment, and workplace
injury. The contributory urban pension insurance program had two components, a basic
redistributive defined benefit pension (“social pooling”) and a state-managed defined con-
tribution funded individual account scheme.
The urban pension program witnessed steady coverage expansion among wage earn-
ers, including within private and foreign enterprises. However, the program excluded the
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
221
vast majority of people working for themselves in the informal sector, or for small private
businesses, as well as the unemployed (collectively known as “urban residents” in the social
insurance system). Civil servants and public service unit workers continued to have dis-
tinct schemes.
Around 1997, local governments—in Beijing, Chengdu, Guangzhou, Shanghai,
and elsewhere—began to establish pilot programs for voluntary contributory and basic
benefits for nonwage urban residents.
5
Shanghai’s program provided old-age poverty pro-
tection for all urban elderly with no other source of income, financed solely by the local
government. Guangzhou also set up an urban pension program for the elderly with no
other fixed sources of income.
6
The design adopted in Beijing in 2009 was similar to that
of the urban old-age insurance scheme for wage-based workers, with a monthly basic pen-
sion of Y 280 financed by the local government.
7
These pilot experiences generated useful
inputs for the design of the 2011 national framework for the pilot URPS.
In June 2011, the government established nationwide guidelines for the URPS
(“Guiding Opinions on Piloting Social Pension Insurance for Urban Residents, State
Council”), with the objective of extending minimum basic income protection to all urban
elderly, including the unemployed and people without support from social insurance. The
broad design of the scheme mimics the NRPS (table 11.1), which provides a harmonized
policy framework to facilitate subsequent integration of the pension schemes for rural and
urban residents. The program is expected to cover at least 50 million urban residents not
otherwise covered or insufficiently covered by the scheme for urban workers. After only
six months of operation, there were more than 13 million participants, including 6.4 mil-
lion pension recipients (Wen 2012). The authorities have set an ambitious goal of expand-
ing the program to all urban areas by the end of 2012.
Several pilot programs established during the 2000s transcended the urban and rural
distinction by providing an integrated pension scheme for rural and urban citizens within
individual prefectures.
8
In rapidly expanding areas, such schemes have merged urban and
rural schemes to achieve an integrated pension scheme for all residents, in a number of
cases with benefit levels that are equivalent for people with urban and rural hukou. Like
the NRPS and URPS, such initiatives are useful vehicles for expanding pension coverage
to the nonwage sector and promoting the vision laid out by national policy makers of
rural-urban integration. Almost all of these local programs adopted the national NRPS/
URPS guidelines or some close variant, though there were some exceptions. In Chengdu,
for example, the city adjusted its local program broadly in line with the NRPS framework
but retained differences in the details of the scheme design in both the NRPS and the
URPS (Wang, Chen, and Gao 2011).
Design Features of Pension Schemes
The old rural pension scheme was voluntary and financed mainly from individual con-
tributions of Y 2–Y 20 a month, with a matching contribution of Y 2 by the collective.
Retirement ages were to be 60 for both men and women, and elderly farmers were entitled
to receive a monthly pension benefit paid from the bank until death. Administration was
by the local bureau of civil affairs (typically at the county level, resulting in highly frag-
mented scheme management); administrative costs were paid for by contributions (with
222
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
a cap of 3 percent, set subsequently). Oversight and regulation of the scheme sat largely
with the implementing agency itself, subject to the internal controls of the Ministry of
Finance and internal auditing.
Several design problems undermined achievement of the government’s policy
objectives:
• Coverage was highly imbalanced geographically, with four coastal provinces
accounting for about 45 percent of total participation and 64 percent of total
accumulations. Matching contributions from collectives were often not made,
and their incidence was highly skewed toward a small number of richer provinces.
TABLE 11.1 Comparison of old and new pension schemes for rural and urban residents of China
Feature
Old rural pension scheme
NRPS
URPS
Principles
Basic protection
Basic protection, broad
coverage, fl exibility, and
sustainability
Same as NRPS
Coverage
Rural residents age 20
and older
Rural residents age 16
and older, except students
Urban residents age 16
and older, except students
Financing
Individual contribution
plus collective subsidy
Individual contribution plus
government subsidies
and/or subsidy from rural
collectives
Individual contribution
plus government subsidy
Individual
contribution
10 levels, Y 2–Y 20 a
month
5 levels, Y 100–Y 500
a month; family binding
(parents collect benefi ts
only if all adult children
are contributing to pension
scheme)
10 levels, Y 100–Y 1,000
a month
Government
subsidy
Y 2 a month from
collectives; tax reduction
for township and village
enterprises and collective
economy
Y 30 matching to
individual account
annually; Y 55 a month
basic pension benefi ts
Same as NRPS
Qualifying
conditions
Pensionable at age 60;
immediate vesting
Pensionable at age 60;
vesting period: 15 years
Same as NRPS
Benefi ts
Accumulation divided
by 120, but benefi ts
maintained until death
Accumulation divided by
139 plus Y 55 a month
basic pension
Same as NRPS
Fund
management
Specifi c account at county
level
Specifi c account at county
level
Specifi c account at city
level
Portability
Very limited
In theory, portable within
NRPS and between
NRPS and URPS; little
portability to and from
urban workers pension
scheme
Same as NRPS
SOURCE: Authors’ compilation, based on policy documents.
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
223
• Pension benefits were very low, and even those benefits could not be paid in full
in at least 200 counties (Wang 2000). Returns to investment were also low.
• The administrative cost was as high as 3 percent of contributions, and supervi-
sion was weak. By the end of 2000, about 20 percent of accumulations had been
invested in unauthorized assets, including real estate, stocks, enterprise bonds,
and nonbank financial agencies. With county-level management, risk pools were
highly fragmented.
In 2009, the State Council issued policy guidelines for the RPPS (now the NRPS);
in July 2011, it issued guidelines for the URPS. The guidelines scaled up multiple local
and provincial pilot programs into a national framework. The diverse experience with
rural pension schemes at the subnational level offered important lessons for policy makers
at the national level that have been reflected in significant measure in the design of the
national guidelines.
The underlying design principles of the guidelines were basic insurance and wide
coverage with flexibility and sustainability. Key features of the URPS design include the
following (table 11.1):
• Participation is voluntary, with incentives. All rural residents over the age of 16
are eligible to participate if they are not already covered by a contributory urban
scheme. Participation incentives include matching subsidies; 15-year vesting
requirements to receive the basic benefit; and family binding provisions, whereby
the pension eligibility of contributors already over retirement age is determined
by whether the contributor’s spouse and all adult children contribute to the new
system (family binding).
• The scheme design has two components: individual pension accounts with
matching contributions and a basic flat pension for workers who have contrib-
uted for 15 years or meet other qualifying conditions. The initial value of the
basic pension under the scheme is Y 55 a month, which can be topped up by local
governments from their own revenues. Individual accounts have a rate of return
equal to the one-year deposit interest rate; benefits will be computed by dividing
the accumulation at age 60 by 139 (as in the urban scheme). Indexation is some-
what vague, to be set in accordance with “economic development and changing
prices.”
9
• Participants become eligible for benefits at age 60. People over 60 at the time
the scheme is introduced can receive the basic pension benefit if their children
are contributing to the scheme (family binding). People with less than 15 years
left before reaching age 60 should contribute during their working lives and then
make lump-sum contributions to make up any shortfall on the vesting period of
15 years of contributions.
• Financing of the scheme comes from a combination of central subsidies to sup-
port the basic pension (in full for central and western regions and 50 percent for
eastern regions); individual contributions (of Y 100–Y 500 a year determined
by the worker); a partial match on the individual contribution by local govern-
ments of at least Y 30 a year (independent of the contribution level chosen by the
224
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
worker) or at a higher rate as locally determined; and collective subsidies, which
are encouraged but not mandated, with no level specified.
• Fund management for individual account accumulations will begin at the county
level, with the aim of shifting responsibility to the provincial level as quickly as
feasible. Supervision of funds would be by the local offices of the MHRSS. The
guidelines suggest the importance of gradually raising the level of management
with the scaling up of the programs and indicate the importance of establishing
systems for accumulating individual account entitlements and facilitating benefit
portability.
The URPS shares almost the same design as the NRPS, with exactly the same basic
pension level (determined by the central government), the same financing design, and the
same matching contribution provided by local authorities. The scheme aims to provide
minimum voluntary pension savings arrangements to cover the unemployed, other urban
workers without employment contracts, and urban retirees without alternative sources
of retirement income. Significantly, the URPS is open only to people with local urban
hukou; migrant workers from rural or other urban areas are eligible to participate, but
only in their area of hukou registration.
10
One characteristic that is distinct for the urban
scheme is that contribution tiers can range up to Y 1,000 a year.
Assessment of Schemes and Initial Experience
COVERAGE
The authorities have set a goal of achieving full geographic coverage for both the rural and
urban resident schemes by the end of 2012.
11
Given the voluntary nature of the scheme,
full geographic coverage does not automatically imply full coverage of all individuals, but
the authorities are committed to maximizing individual participation in the scheme, espe-
cially for workers uncovered by other forms of old-age income protection. Geographic
coverage is ensured largely by offering the schemes throughout China and supporting
registration and contributions with an administrative apparatus.
The authorities appear on track for meeting this geographic coverage target. By the
end of the first quarter of 2012, 376 million people were participating in the rural and
urban resident pension schemes, with 107 million receiving pension benefits. Sixteen
provinces had achieved full geographic coverage, and 10 provinces had integrated their
rural and urban resident schemes ( China Labor and Social Security News 2012). Early
starters—such as Beijing, Hainan, Jiangsu, Ningxia, Qinghai, Shanghai, Tianjin, Tibet,
and Zhejiang—generally have high participation rates. In Jiangsu, for example, which
started to implement the RPPS very early, coverage is reported to have reached 97 percent
(Huang 2010) (table 11.2).
Notable differences are evident in the participation rates in pilot counties between
rates reported in administrative data and rates estimated on the basis of survey data, with
estimated rates usually lower. Reported local coverage or participation rates therefore need
to be interpreted with some caution. Fieldwork by the authors reveals that local officials
are prone to calculate coverage in nonstandard ways—including only people over 45 in the
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
225
denominator (due to the 15-year vesting rule), for example, or including people receiving
pensions in the total program coverage figure, potentially blurring the line between cur-
rent contributors and pension recipients. In figure 11.1, the coverage rate calculation uses
total rural employment as the denominator.
PARTICIPATION INCENTIVES
Incentives for participation of the elderly reflected the existence of earlier pilot programs,
the policy design, financing structure, and pressure on local social security authorities to
offer the schemes. The age profile of participants and the choices of the contribution level
have also been affected by the scheme design.
Both the 15-year contribution requirement for vesting into the basic benefit pension
and the low rate of return on individual contributions would suggest that workers would
begin contributing to the scheme at about age 45 (somewhat earlier if they expected peri-
ods of unemployment). Limited empirical studies from several provinces of the new rural
scheme provide initial evidence of this effect. For example, a 2010 survey of Chengdu in
the early stages of the rural pension pilot suggested that people age 50–59 had the highest
participation rate and that participation across the life cycle rose (figure 11.2). A survey of
rural Guangdong in 2011 finds a similar pattern, though neither survey reveals a spike in
TABLE 11.2 Participation rates in selected local rural and urban schemes
Location
Participation rate (from surveys or
administrative data) (%)
Source
Rural schemes
Jiangsu Province
97.0
Huang (2010)
Jiangxi (11 pilot counties/districts)
73.6 among enrollees in local RPPS
Mu and Lu (2010)
Shenmu and Yao Counties,
Shaanxi Province, Jimo District of
Qingdao City
75.0 Wu
(2011)
Guqiao Town, Henan Province
96.5
Li (2011)
Urban schemes
Chengdu
27.8
Wang, Chen, and
Gao (2011)
Pilot counties, Anhui Province
Average just above 50; lowest 20.1
Luo (2011)
1,942 rural households in 68
villages in 68 pilot counties in 20
provinces
Average 57.6
Rural Research
Center of the
Central China
Normal University
(2010)
Pilot counties, Xian City, Shaanxi
Province
54.9 among rural migrants
Liu (2011)
SOURCE: Cheng 2012.
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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
participation at exactly age 45 (perhaps because of family binding considerations) (Wang,
Chen, and Gao 2011; Wang, O’Keefe, and Thompson 2011). A survey of pilot coun-
ties in Anhui Province suggests that 49 percent of participants are age 45–49, with only
6.7 percent under age 29 (Luo 2011). The survey of pilot counties in Zhejiang suggests
that in some counties, 85 percent of participants were over age 45 and only about 1 per-
cent were under age 35 (Feng 2010).
Contributors need to contribute only at the lowest level of Y 100 a year in order
to satisfy the vesting requirements for the basic benefit pension, and matching subsidies
are generally limited to the lowest contribution level. In this way, the rates of return on
contributions above the lowest contribution level are limited to the rate of return on pen-
sion assets, which is specified as the one-year bank deposit rate (Li 2011). There is thus
a strong incentive to choose the lowest contribution level (Y 100). Overall returns on
contributions made at the mandated minimum for the 15-year vesting period (including
matching subsidies) make for a very high 16 percent internal rate of return on contri-
butions (Wang, O’Keefe, and Thompson 2012). If family binding is also in play, the
internal rate of return for the pensioner is even higher. Almost 75 percent of benefits
(93 percent of the subsidy) is provided through the basic benefit of Y 55 a month after 15
years of contributions, suggesting that unless the parameters of the scheme are adjusted,
the incentives for workers to contribute more than 15 years or more than Y 100 a year
will be very low.
The matching subsidy of Y 30 for annual contributions of Y 100 may be too low to
incentivize workers to contribute beyond the 15-year vesting period for the basic benefit.
It is lower than in other developing countries, such as India, where a 1:1 match is more
common. The flat match and absence of a match above the threshold also act as a weak
incentive for making contributions above the Y 100 minimum, although it has merit from
an equity perspective. It will be important to monitor participation to see whether the
FIGURE 11.2 Rural pension system coverage in Chengdu and Guangdong
b. Guangdong, 2011
a. Chengdu, 2010
0
20
40
60
80
coverage (%)
age
20
40
60
80
100
20
40
60
80
100
age
0
20
40
60
80
coverage (%)
SOURCES: Wang, Chen, and Gao 2011, based on the 2010 Chengdu Rural Pension Survey 2010; Wang, O’Keefe, and
Thompson 2012, based on the Guangdong Social Insurance Survey 2011.
NOTE: “Coverage” includes both people currently contributing to a rural pension scheme and people receiving benefi ts.
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
227
Y 30 match is sufficient to incentivize higher individual contributions and contributions
beyond 15 years.
The empirical findings support the assertion that contributors have very weak
incentives to contribute at levels above the minimum of Y 100 per year. According to a
2010 survey in Chengdu, 46 percent of participants from pilot counties chose the lowest
contribution rate, and only 8 percent chose the highest rate (Y 500 a year). A survey of
pilot counties in Anhui Province shows that more than two-thirds of participants chose
the lowest contribution rate (Luo 2011).
The current design concentrates incentives on the ex post subsidy (that is, the
financing of a basic pension benefit) and has the advantage of simplicity. For mobile rural
populations, however, ex ante subsidies (that is, the matching of individual account con-
tributions) can be more useful. Once the system matures, rural workers who enroll in an
urban scheme upon migration—or intent to move—would not benefit as much from the
incentive effect of the ex post subsidy under the current design, where portability of enti-
tlements to other schemes is still unclear. Portability may be an important consideration
with an increasingly mobile and urbanizing population. Increasing the ex ante subsidy by
increasing matching would reduce this possible disincentive effect.
An obvious question raised by a shift in the balance of public subsidies from ex post
to ex ante is the impact on the poverty alleviation objective of the basic rural pension. If
greater public subsidies were shifted ex ante, maintaining a neutral fiscal impact would
require a lower basic pension. The Y 55 benefit is already well below the rural poverty line;
reducing it leaves the basic benefit below the average per capita dibao threshold, which
could have additional negative incentive effects.
12
This problem could be dealt with in at least two ways. First, it may be possible
to effect a partial benefit reduction for individuals above a certain income threshold to
ensure a higher benefit level for poorer elderly people. Second, local authorities may be
able to top up the basic benefit to ensure that it exceeds the local dibao threshold.
Four stylistic mathematical projections of individual accumulations and benefits are
summarized in table 11.3. Scenario 1 evaluates the current monthly contributions and
matching subsidies, projected basic and total benefits, and the net present value of cen-
tral government subsidies and total central and local government subsidies. Scenario 2
increases the matching (ex ante) subsidy from 30 percent to 100 percent for the first Y
100 in contributions while leaving the subsidized ex post basic benefit at Y 55 per month.
Under this scenario, the net present value of total central government subsidies increases
somewhat, with a stronger incentive created for contributors and a small increase in pro-
jected monthly benefits. Scenario 3 would remove the ex post basic benefit entirely and
replace it with a substantial increase in the ex ante matching subsidy aimed at achieving
the same monthly benefit as the current scheme for a worker who contributes for 15
years. This arrangement could have the effect of reducing the government’s cost in pres-
ent value terms by about 10 percent (depending on the real discount rate), as a result of
the return on the matching subsidy which would be invested during the accumulation
period (assuming a 3 percent real rate of return, which has not been consistently the case
in China). Alternatively, if the central government authorities retained the same level of
subsidy in present value terms but shifted the subsidy from the basic pension benefit to a
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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
matching subsidy during the accumulation phase (Scenario 4), the monthly benefit would
increase by about 43 percent, depending on the interest rate assumed.
Public awareness of the schemes has a substantial impact on enrollment. Farmers
still have very limited knowledge about the NRPS, as suggested by a survey of pilot coun-
ties in Jilin, which showed that 45 percent of local farmers did not have a clear knowl-
edge about the policy and 6 percent had never heard about it (Liu, Wu, and He 2011).
A survey of pilot counties in Hebei revealed that only 27 percent of farmers knew that
the government provides subsidies for the RPPS (Geng 2011). Farmers were not familiar
with the NRPS in pilot or nonpilot counties at the beginning. In order to increase their
awareness, the central government asked local governments to disseminate this new policy
through various channels, including broadcasting, television, posters, brochures, and vil-
lage campaign activities. Thanks to the media and administrative campaigns, farmers are
largely informed of the NRPS program.
TABLE 11.3 Stylized Examples of Matching Subsidy Options
Y PER INDIVIDUAL
Scenario
1
2
3
4
Individual annual contribution
100
100
100
100
Local annual matching subsidy
(accumulation phase)
30
30
30
30
Central government annual
matching subsidy (accumulation
phase)
70
548
825
Monthly individual account benefi t in
retirement
13.8
21.2
68.8
98.2
Monthly basic benefi t in retirement
55.0
55.0
Total monthly benefi t in retirement
68.8
76.2
68.8
98.2
NPV local matching subsidy
358
358
358
358
NPV lifetime central government ex
ante matching subsidy
836
6,184
9,491
NPV lifetime central government
subsidy for basic benefi t
9,490
9,490
NPV total government subsidies
9,848
10,684
6,542
9,849
NOTE: Scenario 1: Current NRPS/URPS parameters and subsidies; Scenario 2: matching ex ante subsidies provided by
the central government at 70% of contributions increasing the total central/local subsidy to 100% of contributions; Scenario
3: matching ex ante subsidies provided by the central government at 548% of contributions with central government–
fi nanced basic benefi t eliminated; Scenario 4: matching ex ante subsidies provided by the central government at 825% of
contributions with central government–fi nanced basic benefi t eliminated. In all scenarios, the authors projected individual
contributions of Y 100 a year and local government matching subsidies of Y 30 a year. A 3 percent real interest rate and
real discount rate was assumed in all scenarios. Other assumptions included 15 years of contributions at eligibility age, an
eligibility age of 60, and life expectancy at age 60 of 19.1 years for both men and women. NPV = net present value.
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
229
ADEQUACY OF BENEFITS
Benefit adequacy—how effective the benefit is in ensuring that the elderly are shielded
from absolute or relative poverty—is difficult to measure. Two metrics often considered
are the locally determined poverty line and an international metric such as income.
13
At
the individual level, there is a natural tension between benefit adequacy and affordability.
A benefit that is completely effective at ensuring the elderly against poverty will likely
come at a high cost if shouldered entirely by the individual and his or her family. More-
over, a benefit that is barely adequate for some people will prove inadequate for others.
Benefit adequacy also depends not only on the benefit level but on the adjustment of such
levels over time, in line with prices, wages, or per capita income. Bearing in mind these
trade-offs, setting a target benefit level is challenging in China, where local economic con-
ditions vary substantially.
Benefit levels vary greatly by locality, as different counties and cities offer different
contribution levels above the national maximum, different matching subsidies, and dif-
ferent levels of basic benefits. Moreover, the benefit accruing to individuals will depend
on the level and duration of contributions, the rate of return, the matching subsidies and
supplementary financing provided by localities, and the annuity factor used to calculate
the benefit. Based on several basic assumptions and bearing these caveats in mind, the
authors calculated that a minimum benefit of about Y 73 a month would be obtained by
a worker making a Y 100 contribution a year for 15 years.
14
This projected benefit would
only partially achieve the unstated objective of protecting against poverty in old age. In
2011, this amount represented 13 percent of net rural per capita income, 30 percent of
the absolute poverty criterion of about Y 20/day, 51 percent of the national average dibao
threshold, and 38 percent of the national rural poverty line.
Before the introduction of the national scheme, pilot local programs often adopted
a rule of thumb that pension benefits should be at or slightly above the average dibao
threshold in the locality. Together the anticipated basic benefit and funded individual
account accumulations should yield a benefit that is expected to raise total pensions nota-
bly above the dibao level. The level of benefits will vary based on local fiscal capacity (for
example, Beijing sets its flat pension portion at 35 percent of rural average income).
With respect to indexation, guidelines established for the rural and urban schemes
note the importance of adjustments to the basic pension, but they do not specify criteria
or parameters. The basic benefit of Y 55 a month, put in place in September 2009, has not
been adjusted, despite annual inflation in 2010 and 2011 of 5–6 percent.
Survey data provide limited insights into actual benefit levels. A study of 18 counties
in Hebei Province indicates that as many as 55 percent of rural pensioners claim only the
Y 55 basic pension; less than 15 percent of pensioners had a monthly pension of more
than Y 100 (Geng 2011). A 2010 survey of Chengdu suggests that despite the steady
increase in the benefit levels of local programs, which are higher than the national aver-
age, about three-quarters of pensioners still receive a monthly benefit of less than Y 150,
a replacement of rural per capita net income of 31 percent. A survey of pilot counties in
Anhui Province reveals that the average monthly benefit is Y 60.4 and that 71 percent of
the elderly believe that the current benefit level is inadequate to meet their essential needs
(Luo 2011). Farmers cannot depend solely on their income from the NRPS; they have to
230
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
rely on other income sources, such as family members, farming income, property rental
income, and support from communities.
The RPPS was scaled up only in 2010; too little time has passed to evaluate the
scheme’s impact on the incomes and well-being of elderly people in rural areas.
15
More-
over, benefit levels of Y 55 a month would likely have a very modest impact on all but the
poorest rural elderly.
Despite the low level of benefits, survey data suggest that rural recipients of pen-
sion benefits in earlier schemes indicated that they felt a stronger sense of security and
self-regard (Zhang and Tang 2008). Scheme benefits help them with living expenditures,
increase economic stability, and reduce some of their reliance on other sources of income.
A 2010 study of Chengdu suggests that more than half the elderly claim their pension on
a monthly basis, some rely largely on pension income support, and 71 percent indicate
that the most important uses of their pension benefits were food, followed by health care,
production materials, and savings.
FISCAL COSTS AND WORKER AFFORDABILITY
Five sets of fiscal costs are associated with the NRPS and URPS:
• Central government financing of the basic benefit, initially set at Y 55 a month
per person
• Local government financing of matching subsidies, which are at least Y 30 per
year per contributor
• Local government financing of individual contributions for dibao recipients and
possibly others deemed locally to be entitled to a contribution subsidy
• The subsidy required to finance the difference between the annuitized benefit
using the current annuity factor of 139 and a more appropriate and actuarially
fair annuity factor
• The payment to survivors of any remaining balance in a deceased worker’s indi-
vidual account.
Presumably, the local authorities will bear the costs of the fourth and fifth items,
which will come payable only over time.
An unresolved issue is the future fiscal affordability of the new schemes. Initial calcu-
lations suggest that the central government’s commitments are affordable, although as sug-
gested above, such affordability may come at the price of insufficient adequacy for many
beneficiaries. The cost to the central government of the portion of the basic benefit for
which it is responsible is low and likely to remain so despite a growing elderly population.
Simulations using different system parameters find that spending on pensions consumes
1.0–2.5 percent of central general revenues (Cheng 2011).
16
Providing Y 55 a month to
everyone in China over age 60 would cost the central government about 0.26 percent
of gross domestic product (GDP).
17
These costs are projected to grow over time, as the
elderly population increases in China. However, if the benefit level were to grow at the
same rate as GDP growth and the central authorities were to finance 100 percent of the
basic benefit, an estimate of the cost would still be less than 0.75 percent of GDP in 2050.
Keeping such costs low and affordable over the coming decades will inevitably depend on
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
231
the expansion of the importance of the NRPS/URPS saving provisions as well as other
saving options for nonwage citizens.
Fiscal affordability at the county and municipal levels is more uncertain, as the level
of matching contributions for individual accounts and the fiscal situation varies greatly
across localities. The current matching is evenly shared by provincial, city, and county-
level governments. The cost to local governments of minimum matching subsidies is
very low relative to GDP, although it depends on local revenue-generating capacity.
18
The
minimum fiscal commitment therefore should be affordable in the aggregate, although it
remains to be seen whether the required commitment will be met in every locality. The
obvious challenge is to avoid a situation in which poor counties fail to match individual
account contributions (resulting in lower accumulations for the poor) while still maintain-
ing enough local interest in the scheme to encourage accountability at the county level.
A third subsidy is implicit in the annuity factor used to calculate benefits for the
individual account pension. The guidelines specify that the coefficient used to determine
the benefit is 139 months (the same coefficient used to calculate benefits from workers’
individual accounts in the urban workers scheme), based on a life expectancy calculation
at age 60 and a 4 percent expected rate of return on funds during retirement. Unisex life
expectancy tables published by the World Health Organization for China indicate that
life expectancy at age 60 in 2009 was 19.1 years (229 months), suggesting that the 139
figure is much too low.
19
There is thus a substantial subsidy embedded in the annuity fac-
tor for the individual account pension of about 65 percent of the benefit amount (Wang,
O’Keefe, and Thompson 2012). This subsidy would be the responsibility of the authori-
ties administering the scheme, which in the short term would be local authorities.
No simple metric measures worker affordability. For workers themselves, minimum
contributions of Y 100 a year represented only 1.4 percent of rural per capita income in
2011. They should therefore be affordable for all but the lowest deciles of rural workers.
Of course, many rural workers will be liquidity constrained or concerned about the risk
that the benefits received after 15 years of contributions may turn out to be far different
from intended at the outset. Such a contribution would be more affordable for urban
workers, who generally have much higher income levels.
FUND MANAGEMENT AND GOVERNANCE
The initial approach under the new schemes of allowing fund management at the county
level has a range of drawbacks, including investment risk and the risk that funds are used
for other pressing purposes, leaving accounts that are in practice empty. Localized man-
agement also complicates the portability of account balances for rural workers who move
beyond their home counties. In addition, demographic trends in rural areas suggest that a
sizable reserve fund will likely be necessary, which is best managed at higher levels.
Raising the level of risk pooling—which can occur only gradually—would have sub-
stantial benefits in terms of both the soundness of the system design and implementa-
tion capacity.
20
Gradual steps should probably be considered to upgrade the pooling level
from county to prefecture (as has already happened in the urban workers scheme and
in some prefectures for all schemes); from prefecture to province; and from province to
the national level. Some cities or provinces, such as Beijing, Hunan, and Shanghai, have
already been managing the funds at the provincial level.
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The experience of local pilot programs with respect to scheme administration and
fund management demonstrates a modest degree of capacity and continuity, but regula-
tion demands greater attention. Administration of new schemes has remained with the
Social Security Bureau, with roles for villages (for collection of contributions and in some
cases payment of benefits), townships (for consolidation of collections, approval of ben-
efits and registration), counties (for general oversight and scheme design), and banks (for
payment of contributions and delivery of benefits in many cases). There also appears to
have been a general improvement in scheme information systems, in particular with the
issuance of standard software by the MHRSS for the scheme.
Within this general administrative structure, there are a variety of local innovations
in administration. For example, farmers in Guangdong and Suzhou have been able to
make contributions directly through banks rather than village officials, and post offices
(including mobile facilities) are being used in areas with lower banking penetration. Some
schemes also allow for the seasonality of farmer incomes, so that schemes such as the one
in Baoji collect payment only once a year.
In addition to the drawbacks of subprovincial fund management, the use of the
one-year deposit rate of interest as the rate of return for individual accounts is likely to
prove problematic over time (as it has for urban schemes), because it has typically pro-
vided a negative real rate of return, which affects both the return on contributions and the
adequacy of benefits. Although very secure, the low rate virtually guarantees a low indi-
vidual account balance at retirement, thereby weakening participation incentives for rural
workers. Other approaches, such as nonfinancial or notional defined contribution plans,
can in principle provide benefit promises based on higher rates of return, but such returns
would require additional fiscal subsidies. Another option would be to invest reserves in a
much riskier pool of assets, which would subject members to additional risk and require
substantial additional institutional infrastructure and oversight.
PORTABILITY OF PENSION RIGHTS
Portable pension rights reduce pension losses for individuals who move across space and in
and out of formal sector employment. Portability is therefore important to the overall par-
ticipation incentives in the rural and urban resident pension schemes as well as to address-
ing gaps in the overall set of pension instruments, including the urban old-age insurance
system. Portability of vested rights and individual account balances—both across rural
areas and between rural and urban schemes—is important given China’s increasingly
mobile labor force. Conceptually, it is much easier to achieve portability of pension rights
within rural and urban resident pension schemes, as they would have the same essential
design and compatible institutional infrastructure; it is more difficult achieving portabil-
ity between separate pension schemes, such as between the NRPS/URPS on the one hand
and the urban workers pension scheme on the other.
The NRPS/URPS guidelines anticipate but do not address the portability of pen-
sion rights under the schemes. In 2009, the Chinese government established an initiative
for pension portability within the urban worker’s pension scheme.
The next policy priority will focus on making pension rights portable within and
across programs; MHRSS is developing regulations along these lines, which the govern-
ment plans to introduce in 2013. Ensuring portability will require the rapid development
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
233
of systems to reliably transfer information and funds across localities, integrating rural and
urban schemes and integrating both schemes with urban social insurance. Provinces such
as Guangdong are already working on development of the provincial management infor-
mation systems needed to do so.
The lack of a national policy has contributed to pension system fragmentation and
weak incentives for participation. Fragmentation between the urban and rural pension
schemes has become an important barrier for coordinated urban-rural development and
urbanization (Deng and Liu 2011; Wang 2006). A number of provinces and cities have
integrated pension schemes for rural and urban residents. What is needed is a national
policy to guide the transfer and portability of pension rights within and between pension
schemes.
Distinct local policies have been adopted to address this issue. Suzhou, for example,
initiated a simple 2:1 rule for farmers wishing to transfer their social pooling rights from
the rural to urban scheme; transferring their rights is simple, because the rural contribu-
tion base has been exactly half that of the urban system. The 2:1 rule means farmers
will receive half of their social pooling benefits when transferring into the urban scheme
because their contributions are exactly half that of their urban counterparts. Beijing has
made provisions for portability, albeit only at the point of retirement. Former farmers who
have accumulated enough years in the urban system at retirement will receive an urban
pension (with an allowance for lower rural contributions); their urban contributions will
be credited with a rural pension scheme if the accumulation period in the urban system
is less than 15 years. In principle, the funded portion of all schemes could easily be made
portable.
The clear direction of policy is toward eventual integration of the schemes for rural
and urban residents; some prefectures have already done so.
21
The Social Insurance Law
promulgated in July 2011 spells out unequivocally: “The government needs to set up
a robust pension program for urban residents. Provincial government[s] or the govern-
ments of municipalities directly under the central government may, in line with their local
conditions, establish an integrated pension program for urban and rural residents.” Such
integration is an important objective for China’s pension reform.
INSTITUTIONAL CHALLENGES
Little information is available about institutional capacity, although several key challenges
are clear:
• Local capacity needs to be increased, particularly at the county level and below.
The massive and very rapid expansion of the system places demands on local
implementation and delivery capacity. The government intends to introduce
rural social security service centers at least down to (and ideally below) the county
level. However, existing staffing ratios imply service loads in an expanding system
well above levels observed in similar schemes in other countries. Experiences from
provincial partnerships with the banking sector may assist in helping spread the
administrative burden of managing client contributions and basic recordkeeping.
For example, Guangdong has a generalized service agreement with the Postal Sav-
ings Bank, which accepts contributions, is the vehicle for payment directly into
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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
pensioners’ accounts, and has an information system linked to the Department of
Human Resources and Social Security.
• Collection and payment systems need improvement. Incomplete penetration of
financial and banking services in some rural areas likely affect implementation,
by constraining contribution collections and payments. The MHRSS is working
actively on this issue, in cooperation with national banks such as the partnership
with the Postal Savings Bank, but even banks with wide coverage do not have
branches in all townships.
• Information systems and links to related programs—such as to the New Coop-
erative Medical Scheme—and other localities need strengthening. The govern-
ment’s stated intention is to extend the systems to the grassroots level; doing so
will require increasing system capacities and training personnel. If the system is
not closely managed, information systems could be fragmented (the standardized
software from the MHRSS should help promote greater coherence than has been
observed in urban schemes).
Lessons for Other Countries
China’s adoption of national pension programs for rural and urban residents in 2009–11
may provide insights for other countries considering similar reforms. Lessons include the
need for high-level political commitment, iterative and gradual policy development, an
incentive structure for voluntary participation, policy design to achieve rural-urban inte-
gration, and assignment of financing responsibilities of central and local governments in a
decentralized environment. At the same time, it is important not to be overly mechanical
in interpreting these lessons, as they reflect idiosyncratic characteristics of China’s labor
market, political, and fiscal systems.
As China moves from a middle-income to a high-income country, the acceleration
of pension programs aims to narrow coverage gaps between rural and urban areas and
across regions and promote more integrated development. This effort has been driven by
China’s ambitious policy goal to provide basic social protection for all by 2020. Such high-
level political commitment is key for developing countries seeking to approach universal
coverage and allow all people to share the fruits of economic development. The innovative
design of China’s matching defined contribution plus basic benefit scheme has already
dramatically increased the registration of rural and urban residents. Only time will tell if
such high voluntary participation is sustained.
The process and mechanism of policy reform in China has followed an iterative
and gradual paradigm. China has conducted subnational piloting, accumulating experi-
ence and lessons for policy design at the national level and subsequent roll-out. For a
large country, local experiments are useful to accommodate diverse conditions and decen-
tralized environments. Few countries are as fiscally and administratively decentralized as
China (DRC and World Bank 2011; Lou and Wang 2008). Many countries may be suf-
ficiently centralized that they can prescribe more uniform designs and financing for such
programs. Even in these cases, however, countries could benefit from piloting designs and
“learning by doing,” as China as done.
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
235
China is now trying to coordinate and integrate its systems for urban and rural
workers. In other countries, it may be possible to avoid the initial split between rural and
urban schemes for informal workers, which in China is a legacy of a broader social policy
framework of separate programs for rural and urban people linked in part to the hukou
system.
The main difference between China’s old and new rural pension schemes is that
the ex ante and ex post financing from central and local governments has helped assure
participants of the credibility of the scheme. The ex ante subsidy to individual accounts
is financed by local governments (province, city, and county); the ex post subsidy to the
basic pension is financed totally by central governments for inland provinces and shared
by central and provincial governments for coastal provinces. The financing responsibilities
of central and local governments are clearly defined. Both central and local financing have
been important because many Chinese lost confidence in earlier rural pension programs
that depended entirely on individual responsibilities and local collectives. The lesson for
other countries is that a significant and credible public subsidy may be necessary to incen-
tivize the voluntary participation of nonformal workers. The commitment of the central
authorities to a significant subsidy has also added credibility to the pension commitment.
In other countries, government support may not be sufficient to give individuals the con-
fidence to contribute.
A related question is the appropriate balance between ex ante and ex post public
subsidies and the extent to which the ex post subsidy is best “bundled” with a match-
ing defined contribution ex ante subsidy (as in the NRPS and the URPS) or poten-
tially delinked through a noncontributory social pension approach. The initial success
in achieving substantial registration in rural China can be attributed to the structure of
incentives of government subsidies, vesting requirements, and family binding provisions.
Family binding provisions may prove of particular importance in China, where the pro-
portion of rural migrants of working age is substantial and many of the rural elderly have
remained in rural areas.
Linkages between voluntary matching defined contribution schemes and a basic
defined benefit pension represent an innovative design that deserves consideration by
countries with comparable needs, conditions, and the administrative apparatus to carry
such a design forward. At the same time, preliminary empirical findings show that rural
young people are less likely to participate in the NRPS, suggesting that the incentives may
not be strong enough. Given the relatively low participation of younger rural workers to
date, it may be worth considering rebalancing the public subsidy from an ex post toward
an ex ante subsidy.
A bigger question for China and other developing countries is whether it may be
worth going even farther and converting the basic pension benefit into a full-blown
noncontributory social pension largely delinked from the matching defined contribution
portion of the schemes. To reduce elderly poverty, China could consider a social pension
(World Bank forthcoming).
China’s pension schemes for rural and urban residents appear to be financially sta-
ble, because they focus on fiscal and worker affordability while providing only a very
modest benefit. This situation will be changing with the rapidly aging population. Fiscal
affordability will also depend on the future levels at which the authorities provide ex ante
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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
subsidies, the returns on individual account accumulations they commit to, and future
adjustments to the level of basic pension benefits. Whether the fiscal costs of ex ante and
ex post subsidies are affordable and appropriate for other countries will depend on their
characteristics, including the working age and elderly income distribution and household
composition.
The limited adequacy of benefits may leave a substantial portion of the elderly
insufficiently protected against poverty. Potential remedies include increasing the ex
ante matching subsidy, which induces individuals to save for their own retirement, and
strengthening the linkages between the pension and dibao programs.
Other challenges China faces include pooling and managing funds, strengthening
institutions and capacity for service delivery, and managing funds while rapidly increas-
ing the geographic coverage of the program. These challenges are common in develop-
ing countries. A key lesson of earlier schemes in China is that overly decentralized fund
management, pooling, and regulation pose real risks that need to be managed, prefer-
ably through higher-level pooling and scheme management. Institutional penetration
in remote areas of China—including the presence of finance bureaus, labor and social
security bureaus, banks and other funds transfer agents, and a strong system of identifica-
tion and registry—was another important asset. Not all developing countries have this
administrative and financial sector infrastructure, raising questions about the possibility
for achieving such wide coverage expansion so quickly and the relative roles of govern-
ment and nongovernmental partners in the process. Even in China, partnering between
government and financial sector players has proven important in achieving accelerated
scheme expansion. Although China’s experience demonstrates the potential of a voluntary
and incentive-driven approach to expanding coverage, its specific political economy has
probably been a significant factor in the impressive initial performance. Although the
NRPS and the URPS are voluntary, China retains a degree of moral suasion to encourage
participation that may not be present in many developing countries. These enabling con-
ditions—and not just the design characteristics—may have supported these pension pro-
grams. At the same time, such suasion was present in earlier rural schemes, which failed
to achieve significant penetration, suggesting that the NRPS and URPS design features of
are likely to be important factors in the early success of the schemes.
Conclusions
China’s recent establishment of national pension schemes for its rural and uncovered
urban populations represents a major step toward its ambitious objective of universal pen-
sion coverage by the end of 2012 and provision of basic social security for all by 2020.
The policy designs support the principle of broad coverage, in part by providing modest
basic benefits. The urban and rural designs have already achieved substantial momentum
in increasing the registration and participation of previously uncovered populations. The
common policy framework has provided a channel for an integrated pension scheme for
rural and urban residents. Such a framework also appears able to accommodate the wide
variation in economic needs and circumstances across China.
Although the NRPS and the URPS have several innovative features and represent
milestones in social policy in China, there remains scope for improvement and refinement
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
237
of some policy parameters if China is to fully achieve its objectives. Looking forward,
whether China will be able to achieve universal pension coverage at the individual level
will depend in large part on the incentives for sustained participation, the authorities’
ability to enhance portability and eventually integrate the programs, and their ability to
strengthen institutions and capacity for service delivery and management.
The authorities have established a benefit level and financing plan that can achieve
broad coverage, but the benefit may not be sufficient to protect substantial numbers of
elderly beneficiaries from poverty. In setting the benefit level and guaranteeing the financ-
ing of the basic benefit for most provinces, the authorities have balanced benefit adequacy
against a very modest fiscal commitment while at the same time enabling local authorities
to supplement benefits where local fiscal situations and priorities permit. One means of
promoting a higher replacement rate could be to increase the matching subsidy in the
pension savings scheme, including perhaps providing financing by the central government
to enhance the match. Doing so would both increase incentives to contribute more than
15 years and improve benefit adequacy. But such a move would need to be accompanied
by gradual relaxation of portfolio rules to allow investment of accumulations in vehicles
that ensure a positive real rate of return, which is not currently the case.
The linkages between the vesting requirements and family binding provisions for
the savings scheme on the one hand and the basic benefit on the other likely provide
strong incentives for participation while at the same time creating a significant adminis-
trative challenge for a very modest benefit. Further evaluation is needed of the costs and
challenges of linking the two components of the scheme. Increasing the matching subsidy
(and target replacement rate) could enhance the benefits of linking the two elements.
Decentralized and fragmented fund management in China cannot achieve risk pool-
ing, which is essential for ensuring benefits over the long term. Measures are needed to
raise the level of fund and risk management to at least the provincial level in order to
achieve risk pooling and portability, two important objectives for China’s increasingly
mobile labor force and diverse local fiscal circumstances. A higher level of participation
in fund management and regulation can increase professionalism and system robustness
within given capacity constraints.
Notes
1. This section draws extensively on Cai and others (2012) and World Bank (forthcoming).
2. The term “resident” has a specific meaning in the context of social insurance, because resi-
dency in China is defined based on a person’s hukou (household registration) status and type
of employment. In this chapter, the term refers to all rural workers (except local officials) and
self-employed, informally employed, and nonworking people with local hukou in urban areas.
Residents are contrasted with workers, who are covered under the urban workers pension
scheme.
3. There were five major variants in local schemes during this renewal phase: (1) flat pensions
plus individual accounts with government financing at the payout stage only; (2) flat pen-
sions plus individual accounts with government financing by matching contributions to indi-
vidual accounts or at the payout stage through the financing of flat pensions from general
238
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
revenues; (3) individual accounts with social pooling, with government financing in the
accumulation phase; (4) individual accounts combined with social pooling, with government
financing by matching contributions to individual accounts or at the payout stage; and (5)
individual accounts only, with government matching for contributions to such accounts. This
simple design lacks risk pooling of any form. For descriptions of the systems in Beijing, Baoji,
Suzhou, and Yantai, see Wu (2009). For a detailed discussion of the Baoji pilot rural pension
experience, see Zhang and Tang (2008).
4. China’s definitions of scheme coverage and participation are not consistent with international
norms, as total figures for scheme participation tend to include both working-age people still
contributing and people already receiving pensions and no longer contributing, as discussed
later in this chapter.
5. Other cities launched their own pilots before the establishment of national RPPS guidelines in
2009. They include Lianshan, in Shandong Province; Zhengzhou, in Henan Province; Yulin,
in Shaanxi Province; and Wuhu, in Anhui Province. These urban programs generally adopted
a design of matching defined contribution savings arrangements and basic benefits (social
pooling), but they varied greatly in terms of the financing and contribution rate; the central
government did not provide any financial support. There was significant variation in benefit
levels resulting from differences in local economic circumstances and the fiscal position of
local governments.
6. This system combines a basic pension and individual account, with a flat individual contribu-
tion rate of Y 2,400 a year and immediate vesting. Participants could claim a monthly pension
of Y 400 the same year they began to make contributions. Contributions during working life
were waived for dibao household members (people participating in the minimum living guar-
antee social assistance program).
7. Currency values in this chapter are given in Chinese yuan; Y 1 = $0.1591.
8. Pilots were run in Zhejiang Province, Chongqing and Chengdu in Sichuan Province, Qingdao
City in Shandong Province, and Taizhou City in Jiangsu Province.
9. This is the same method used in urban schemes. It reflects the assumptions of a notional life
expectancy at age 60 and an assumed draw-down interest rate of 4 percent.
10. Survey evidence from selected major cities in China for 2010 confirms that a proportion
of migrant workers reporting participation in pension schemes were in fact contributing
to schemes in locations other than that of their surveyed residence (Giles, Wang, and Park
forthcoming).
11. Geographic coverage refers to offering the scheme to all workers and the elderly people in
certain geographic areas. Full geographic coverage refers to offering the scheme to workers and
the elderly throughout China.
12. Dibao refers to the minimum living guarantee social assistance program for China. The dibao
threshold is the subsistence level below which household incomes are topped up.
13. Ideally, an elder assistance benefit should be sufficient to cover the poverty gap for such
individuals.
14. Assumptions include a contribution of Y 100 a year, a matching subsidy of Y 30 a year, and
retirement at 60 based on life expectancy in 2012. The benefit in 2012 for 15 years’ accu-
mulations would be about Y 18 a month, and the basic benefit would be Y 55 a month. The
adequacy of benefits provided by individual account pensions will depend on the contribution
level, the rate of return on individual accounts, and the annuity factor used to determine the
pension benefit.
11. CHINA’S PENSION SCHEMES FOR RURAL AND URBAN RESIDENTS
239
15. Studies show that households with social security tend to have a low savings rate, suggesting
that pension provision could reduce saving and boost household consumption (Cai and others
2012).
16. The assumptions underlying these simulations merit note. Chen uses a projection model
based on data from Jiangsu Province that assumes that one-quarter of the increase in general
revenues would be needed for rural pension subsidies to support a universal pension for men
at age 60 and women at age 55. Assuming that this figure represents 2.5 percent of general
revenues, a universal farmers’ pension of Y 825 a year could have been provided in 2010 com-
pared with a minimum basic benefit of Y 660 under the national scheme.
17. The 0.26 percent of GDP figure is likely to be overstated, for several reasons. First, the central
government is responsible for only 50 percent of the basic benefit for beneficiaries in coastal
provinces. Second, recipients of the urban contributory old-age pension are not eligible for the
URPS. Third, the NRPS or the URPS is not likely to cover all elderly people.
18. In this case, the estimated cost of providing a minimum annual pension of Y 30 per person
for all working people age 18–59 would be 0.4 percent of GDP in 2012. This figure would
gradually decline, as the projected working-age population is projected to decline over the
coming years.
19. See http://www.worldlifeexpectancy.com/your-life-expectancy-by-age.
20. The authorities indicated that “in the pilot phase, the new rural pension funds can be man-
aged by counties…and with the rolling out of the pilot, management can be transferred to
higher levels; provincial management can be practiced in places with the required conditions.”
Funds were “to be deposited into the fiscal account of social security funds, and managed in
a way of separating revenue from expenditures with separate book-keeping and auditing and
inflation-proofing and appreciation according to relevant regulations” (State Council 2009).
21. The 2009 State Council decision states:
The way the new rural pension scheme can be dovetailed with the urban workers basic pension
scheme and other pension schemes should be decided by the Ministry of Human Resources and
Social Security together with the Ministry of Finance. There is also a need to dovetail the new rural
pension scheme with other policies and systems, such as social security of farmers whose land has
been requisitioned; policies for reservoir resettlement; preferential policies toward households prac-
ticing family planning in rural areas; Wubao [the five guarantees program for the elderly, people
with disabilities, and youth who lack the ability to work, sources of income, and sources of sup-
port, such as assistance from family members; about 5.5 million people have been covered by such
benefits in recent years] in rural areas; social special care; and dibao. The specific methods will be
studied and decided by the Ministry of Human Resources and Social Security and the Ministry of
Finance, together with other relevant departments.
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