NCPA - National Center for Policy Analysis

THE IRON RICE BOWL HAS CRACKS

April 21, 2005

China's future retirees are hurtling toward a retirement crisis that makes financial problems with Social Security in America look tame, say observers.

A quarter-century ago, when China began abandoning central planning, it did more than free its economy. It also shattered the country's traditional cradle-to-grave social welfare system. Since 1997, Beijing has been laboring to replace the collectivist model with a new system that combines smaller guaranteed pensions with individual retirement accounts.

  • In theory, the retirement accounts should make up the difference between the traditional pension that is being phased out and the new, slimmed-down version.
  • But the government, which manages the accounts, so far has parked the funds in low-yielding, conservative investments.
  • Government officials last month told state-run China Daily newspaper that the national pension fund lacks $300 billion needed for current retirees.

Beijing's effort is stumbling even as the population is fast getting older. The number of retirees in China's cities will soar from 48.2 million last year to 70 million in 2010 and 100 million by 2020, according to the Ministry of Labor and Social Security.

Unlike the United States and Europe, which prospered before their elderly populations expanded, China is in danger of growing old before it gets rich. "Today, we're using money from younger and middle-aged workers to pay for retirees' pensions. But when these younger people get old, there's no money for them," says Tao Liqun, director of the social security division at the China Research Center on Aging.

Today's problems are the legacy both of China's "one-child" policy (which limited families to a single child) and the collectivist welfare system introduced by Mao Zedong and the Communists after they seized power in 1949, say observers.

Source: David J. Lynch, "Looming pension crisis in China stirs fears of chaosRetirees-to-workers ratio rapidly growing lopsided," USA Today, April 20, 2005.

 

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