Op-Ed Contributors

Securing the future of workers

By Wang Yiqing (China Daily)
Updated: 2010-09-09 08:02

The news of China's old-age pension funds having a "1.3-trillion-yuan ($191.31 billion) empty account" has caused widespread public anxiety. But social security expert Zheng Bingwen, the person who revealed this fact at an international seminar, sees the problem differently. To him, an "empty account" indicates the failure of the personal account mechanism rather than a shortage of money in the old-age insurance scheme.

The general director of the Center for International Social Security, affiliated to the Chinese Academy of Social Sciences, has studied the country's pension system for years. He says the intentions of the system's designers were good but they couldn't foresee many of the problems plaguing it today.

Generally, two types of pension systems are followed globally. One is the "pay-as-you-go (PAYG)" social pooling program, under which the government uses the old-age premium paid by current workers to pay pension to retirees. The other is the cash-basis total accumulation "account" method, the best example of which is Chile's mandatory saving "personal account" system. Under this system, employees and employers have to deposit 10 percent of their salaries before taxes into their personal account, from which their pension is paid when they retire.

The designers of China's system wanted to combine the advantages of the two systems to highlight the State's role in redistribution and ease the government's financial burden through individual participation. China has set up a partial accumulative pension system, under which an insured employee deposits 8 percent of his/her wages in the personal account and his/her employer pays 20 percent to the social pooling program.

Since personal accounts were supposed to have been fully funded according to the original design of the system, there should not have been any "empty account". The huge "transformation cost", that is, the fund gap in the current old-age insurance system caused by pensions paid to people who retired before the reform in 1990s, is to a large extent responsible for the "empty account".

For many reasons, the problem of "transformation cost" in the pension system has not yet been overcome totally despite the reform, Zheng says. Instead of filling in the financial gap through State transfer payment or issuing recognition bonds, which are practiced globally, the government chose to use the money in personal accounts to pay pension to retirees. This made the "supposedly-fully-funded" personal accounts an empty shell.