Readying for Retirement

Will a version of the U.S. 401(k) retirement system work in China? By Liu Yunyun

Readying for Retirement

Will a version of the U.S. 401(k) retirement system work in China? By Liu Yunyun

Pension funds in 14 provinces were in the red in 2010—deep in the red by as much as 67.9 billion yuan ($10.36 billion), an increase of 25 billion yuan ($3.82 billion) compared to the deficit from the year before, according to China Pension Report 2011, released by the Chinese Academy of Social Sciences (CASS)on December 20, 2011. The report paints a perplexing and somewhat dismal picture of China’s pension system.

Among the 14 provinces, Liaoning and Heilongjiang were short of more than 10 billion yuan ($1.53 billion) in 2010.

With a rapidly aging population and a widening gap in the balance sheet of the country’s pension fund, authorities are pondering how to make China’s largely stagnant retirement accounts increase in value.

To address the pension deficit, Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC), recently suggested the pension fund be invested in domestic stock markets to reap higher returns.

Many compared Guo’s proposal to a Chinese version of the American 401(k) plan,which started in the early 1980s and is now common practice among U.S. citizens. It allows workers to set aside a portion of their income in a retirement account for withdrawal at a later age.

Those in favor of Guo’s plan said it would not only boost the yield of the pension fund,but also salvage the tumbling stock market,which is now running out of liquid capital.

Low return

Currently, local pension funds can only park their money in low-yield bank deposits and government bonds.

It’s estimated that pension funds managed by local governments total about 2 trillion yuan ($305 billion).

But the annual yield of the pension funds in the past 10 years was a paltry 2 percent,falling far short of in fl ation rate.

This caused a substantial chunk of the fund to lose value each day, said Dai Xianglong, Chairman of the National Council for Social Security Fund (NCSSF).

The CSRC and a number of government departments have discussed a proposal that would involve setting up a new entity similar to NCSSF,according to experts on the matter. NCSSF is responsible for managing the country’s social security fund and is free to invest the fund both in domestic and overseas capital markets.

XU SUHUI

The social security fund under the NCSSF’s management reaped an annual investment yield of 9.17 percent in the past 11 years, out-performing an in fl ation rate of 2.14 percent during that time.

Opposition

The proposal comes in the wake of nose-diving stock market. The Shanghai Composite Index,the benchmark index, plunged almost 30 percent since April 2011, resulting in considerable losses.The stock markets in other countries also performed badly due to the European debt crisis and uncertainty of the global economy.

Su Peike, a researcher at the Public Policy Research Center with the University of International Business and Economics, argued the pension and social security funds are closely related to the well-being of the people, so precautions should be taken when using the money.Currently, the pension fund might “enter the market like a big shark, but come out like a small fish,” Su said, adding it is not wise to invest in stocks before the government fully explains the bene fi ts and risks associated with it.

Economic commentator Ye Tan said investing the pension fund in the stock markets bears considerable risk. She proposed three conditions that need to be established if that is where the money will go. First, China needs a mature securities market. Second, pension contributors

GUO CHEN

(Left) HOW MUCH?:Villagers Wan Jiafu and his wife in Jinan, Shandong Province get their pension each month after they reached retirement age of 60

SECURITY FIRST: Villagers in Feidong, Anhui Province withdraw their retirement bene fi ts at a rural cooperative bank are willing to invest the fund in the stock markets, without intervention or direction from any government departments. Third, the basic yield on that investment must also be secured. So far,none of these conditions have been met.

Public reaction

Wan Xianchu, a resident of Hunan Province who will soon retire, said he’s indifferent to how the government invests the pension fund.

“As long as I can get the pension each month after retirement, they can do whatever they want,” Wan said. He has con fi dence that the government will not play with fi re when dealing with people’s life savings.

“Even if they do lose a large portion of the money, I strongly believe we can get our money back,” said Wang Peihua, a retired worker in Jiangsu Province. “After all, how can the government lose money?”

Wang’s confidence in the government’s ability to reap profits comes after she lost two thirds of her total investment since 2007.Professionals, she said, are more capable of managing individual or collective capital.

Wang’s monthly pension is now 1,010 yuan ($154), with an annual increment of 10 percent. Jiangsu Province implemented a rule years ago that anyone who pays the pension for 15 years can get retirement bene fi ts each month with an increment of 10 percent each year. Wang contended the government would keep its promise and play by the rules.

Despite retired people’s con fi dence in the government, the generation of those born in the 1970s and 1980s, now the backbone of China’s national economic development, are strongly opposed to the idea of putting their pension in the government’s hands.

“Our country’s supervision over public fund has always been weak and insuf fi cient,”said Jiang Chao, a 32-year-old engineer in Beijing. “If the pension fund loses money,then the people have to pick up the check.”

Putting the entire fund into the stock market is certainly an unwise move, said Zheng Bingwen, a CASS research fellow on social security. But putting limits would be set to ensure that no more than 50-60 percent is invested, and only when the market is healthy, he said. Zheng also suggested a diversi fi ed investment portfolio.

“Some can invest in the capital market, some can invest in the real industry, while others can buy fi xed-yield fi nancial products,” he said.