CHINA - China's State Council has announced plans to separate individual pension accounts from basic state social accounts giving greater protection to citizens' future income.
Starting this year, the portion deemed an individual account will be ring-fenced to encourage higher rates of savings and fix the country’s troubled retirement system.
Due to a lack of reserves to pay those who began working before the current insurance system was introduced in the 1990s, contributions to individual accounts have been widely encouraged to meet current state pension payment needs.
Currently, the pension scheme has two parts: a basic social account indexed to the average salary level and an individual account that is reliant on one's personal income.
But for years this has not been enough to ensure the full and timely payment of retiree allowances. The problem was exacerbated in the late 1990s when the pensions shortfall stood at US$890m. And as life expectancy ratios continue upward, the pension fund’s deficit will only rise as the number of pensioners soars.
The policy change is to stop dredging individual accounts representing a big shift to confront China’s pension challenge. The changes will ensure that all pensioners have an income during their retirement representing 58.5% of their average working income.
But there could be new problems. “Funding problems for the state part of the pension could occur since the government is no longer able to tap into individual accounts to make up the shortfall,” said David Wang, an investment manager based in Shanghai.
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