CHINA - The Chinese pension system is faced with a "demographic time bomb" and requires urgent reform if a crisis is to be avoided, a report from Deutsche Bank (DB) has found.
China is saddled with a rapidly aging work force, expected to peak between now and 2010, who are at a very low income level. Worsening the problem is the fact that the pension system was burdened by a significant unfunded liabilities from the old pension system.
And while the pension system has undergone a number of changes since its inception in the 1950s, faster reform is necessary to lift the various fiscal and demographic changes, the report stated.
“A demographic time bomb is exacerbating the problem – the consequence of the one-child policy – which significantly increases financial pressure on the system and makes the need for further reforms even more urgent.”
The report cited the latest UN projections, which stated that between 2005 and 2050 the median age in China will jump by 12.2 years to almost 45 years, compared to Germany’s increase of only 5.3 to 47 years.
As a possible solution, DB suggested a combination of increased coverage for the pay-as-you-go pillar and a higher rate of return on investment for the capital accumulating in individual accounts to improve the system’s viability.
“Government action is needed to improve the incentives to contribute to the system.”
DB also suggested centralising the system’s management, converting the implicit pension debt into explicit public debt and raise funds to pay for the unfunded part while easing the transition to the new system.
Further liberalised capital markets could create financial products with higher returns and longer maturities, DB suggested.
By Damian Clarkson
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