PENSION REFORM IN CHINA

Session

9th CONVENTION OF THE EAST ASIAN ECONOMIC ASSOCIATION 13-14 November 2004, Hong Kong RETHINKING PENSION REFORM IN CHINA: Welfare Analysis and Lessons form Other Asian Countries YUAN, Zhigang FENG, Jin Employment and Social Security Research Center, Fudan University Abstract China’s pension system has been challenged by aging population and public fiscal unbalance, which is common to other East Asian countries. A three-pillar pension system in line with the advice of the international financial institutions was introduced in 1997 in China. However, it works badly, with high contribution levels, the ‘funded’ contributions being used for current expenditures, and delays in pension payments. The problems are often ascribed to the remaining scope of PAYG. This paper, however, argues that the advantages of FF have been exaggerated. The dynamic inefficiency of the Chinese economy and the higher relative return of the PAYG system in China justify a PAYG pension system for China. It is argued that the problems of the pension system are not caused by the use of PAYG but by the need to finance transition costs and the particular parameter values, notably incomplete contributions coverage, low pension ages, and a high replacement rate. It is these factors, and the rate of growth of output, which determine the viability of the pension system. The case of Japan is used for comparison study and policy analysis.

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RETHINKING PENSION REFORM IN CHINA: Welfare Analysis and Lessons from Other Asian Countries ∗

1. Introduction In the last decade, social insurance has been in a process of reform both in developed countries and developing countries. Old age pensions have the broadest coverage and frequently the largest cost of any program in the entire social insurance system, and in many countries have become or threaten to become a major burden on the public finances. Hence much discussion has focused on them. Attention has been concentrated on what system should be chosen: a pay-as-you-go (PAYG) or a fully funded (FF) system? Debate on the disadvantage of the traditional PAYG system has concerned such matters as : the demographic challenges, that is the secular trend of decreased total fertility rates and increased life expectancy, which affects the dependency ratio and has negative implications for the financing of PAYG; the crowding-out effect on savings, and hence the reduction in capital accumulation and the slowing down of economic growth (Feldstein, 1974,1995; Kotlikoff,1979); distortions to the labor supply and the form of compensation because of the low return implied by PAYG (Feldstein,1996; Kotlikoff, 1996). On the other hand, a FF system can prevent the adverse affects on the public finances from an aging population. Moreover, the contributions will be invested in stocks and bonds and thus the capital stock grows as a result of contractual savings. In a dynamically efficient economy, it is expected that the average rate of return on assets will exceed the real GDP growth, so that a funded system tends to generate a higher rate of return than the growth of entitlements under a PAYG system indexed to average earnings. However, the potential risks implicit in FF, such as financial risk and inadequate regulation should not be overlooked. Also FF has no redistributive function, unlike PAYG 1 . Pension reform has been undertaken in many countries. An important role in promoting it has been played by the World Bank. The World Bank advocates the reform in order to stimulate economic growth and foster development of the capital market and private pension industries, and not just to guarantee an adequate income for the elderly (World Bank, 1994). Hence, privatization of the pension system or a mixed system (three-pillar system), including a first mandatory PAYG pillar, a second mandatory funded pillar and a third voluntary insurance pillar has been encouraged by the World Bank throughout the world, with little attention to the country-specific situation. In China the pension scheme is available for urban employees. The most recent framework for pension reform was established in July 1997. The new pension system ∗

We thank professor Ellman ( University of Amsterdam) for his help and comments; We are grateful to Mr. Concialdi (IRES, France) to provide us with valuable remarks. We acknowledge support from MSH (Masion des Sciences de l’Homme) and CEE (Center d’Etudes de l’Emploi) of France. All remaining errors are ours. 1 In reality, there are different versions of pension schemes, some of which are inconsistent with the characteristics we are describing here. We focus on the fundamental features of the two systems. 2

includes three pillars: a pooling account to redistribute to all beneficiaries, compulsory individual accounts, and supplementary pensions offered by commercial insurance on a voluntary basis. The first pillar imposes a payroll tax of 17% (paid by employers) to ensure that employees who have worked more than 15 years have a replacement rate of 20%. The second pillar (paid jointly by employers and employees) establishes an individual account for each employee. The contribution for this is 11% of an individual’s wage. After retirement, the employee gets a monthly benefit from this account of the accumulated value divided by 120. 2 The target replacement ratio of first and second pillar taken together is 58.5% 3 . In this system, about 60% of contributions will go into the PAYG system, while 40% will be channeled into individual accounts. There are a number of studies which simulate China’s pension reform based on the rationale for a multi-pillar system (Barry Friedman, et.al, 1996; McCarthy and Zhang, 1996; World Bank, 1997; Yan Wang, et.al., 2000). Their results show that the costs of the transition from a PAYG to FF are quite manageable, and several ways to finance the transition are suggested 4 . However, reality is diverging from these projections. A number of problems concerning China’s pension reform have arisen. These include, the heavy contributions burden on enterprises supposed to finance the transition cost, which often leads to delays in the payment of pension contributions and outright evasion 5 , the misuse of the funds in the supposedly funded individual accounts, which remain notional 6 , and the weak performance of financial markets, which hasn’t generated a satisfactory return to the pension fund 7 . It seems that the transition problem has been underestimated while the returns on the private accounts have been overestimated. More research is needed to compare PAYG and FF under Chinese conditions, to consider to what extent the system should be mixed, and how to keep the system financially viable. The following section discusses the choice of pension reform in China in a neoclassical economic framework and using the Pareto efficiency criterion, paying special attention to the dynamic efficiency of the economy and the relative return of the alternative pension systems. Section 3 is a continuation of the welfare analysis of pension reform focused specifically on the transition process, where the current situation in China is discussed. The fourth section shows the advantages under Chinese conditions of the PAYG system. In section 5, the relation between productivity improvement and the ability 2

This assumes that the average life expectancy on retirement is ten years. It also means that the scheme redistributes income from those with short lives to those with longer lives. In addition, if the average life expectancy of retirees exceeds ten years, these ‘funded’ pensions will in fact be financed on a PAYG basis. 3 This is based on the assumption that life expectancy is 70 and the rate of growth of real wages equals the real interest rate. If one contributes to the system for 35 years, then the individual account could provide a 38.5% replacement rate. So jointly, the two pillars have a replacement rate of 58.5%. 4 In the latest research of Wang, et.al, the simulation shows the annual transition cost is around 0.6 percent of GDP between 2000 and 2010, and will decline to 0.3 percent by 2050. The transition could be financed by various taxes. Then to finance a benefit of 20% of the average wage, a contributions rate of only 10 to 12 percent is sufficient to balance the basic pension pillar annually. 5 From 1992 to 1998, the collection rate of contribution was respectively 96%, 92%, 91%, 90%, 86%, 91% and 83%, and the situation hasn’t improved more recently (Gong, 2002). 6 The estimated deficit in the individual accounts was 14 billion RMB yuan in 1997 and increased to 45billion yuan in 1998 and by 1999 the deficit was more than 100 billion RMB yuan, about 12 billion US dollars (Sun, 2001). Besides this growing implicit public debt, an annual fiscal subsidy is necessary to meet the pension payments due. In 1997 this was about 5 billion yuan, in 1998 it was over 10 billion yuan, in 1999 was over 20 billion yuan and reached 40 billion yuan p.a. in 2000 and 2001 (Zhao, 2001). 7 The investment return of the pension fund in 2000 and 2001 was below 3%. 3

of PAYG to absorb increased pension expenditures is simulated for China. The paper concludes with a brief summary about the advantages of PAYG in China.

2. Welfare analysis of China’s pension reform Pension reform is normally discussed in a neoclassical economic framework, where utility maximization and efficiency-improvement are the main justification for reform. The main argument of neoclassical theory for pension reform is based on the different impact on savings caused by PAYG and FF. Theoretically, there is no long run effect on capital accumulation with a moderate funded system but if the funded system is expanded to a higher level, then there is an increase of capital supply due to forced savings, while a PAYG system has a negative effect on savings and thus the capital supply is reduced 8 . From the Solow (1956) growth model, the “Golden Rule of growth” has been derived (Phelps, 1966), where the capital-labor ratio is such that the marginal product of capital is equal to the economic growth rate, that is the sum of population growth rate (n) and productivity growth rate (g), to maximize the consumption per capita now and forever: f ′( k ) = n + g . Based on the Diamond (1965) OLG (overlapping generations) model with

capital, in situations where the population growth rate exceeds the steady state marginal product of capital, or equivalently the economy is consistently investing more than it is earning in profit, the economy is said to be dynamically inefficient ( Abel, et.al, 1986). For a dynamically inefficiency economy, in which the marginal product of capital is lower than the economic growth rate, introducing a PAYG system will increase consumption per capita in the long run as well as short run. On the other hand, in a dynamically efficient economy, a FF system is optimal because it generates more savings. Therefore, in this framework the choice of an optimal pension system in China can be translated into a judgment on the dynamic efficiency (as defined above) of the Chinese economy. In reality, there are several different ways of measuring the marginal product of capital, such as the risk-free real interest rate or the rate of profit of the capital stock. Studies of developed countries show that judgments about dynamic efficiency vary depending on the rate used 9 . For comparison, we investigate the data on the interest rate and rate of profit in industry in China and compare them with the economic growth rate. Similar to the situation in other countries, the distinction between the real interest rate and the profit rate is important 10 (Figure 1). Before 1996, the marginal product of assets was much higher than the rate of interest on government bonds and after that, in 1997 and 1998, the marginal product of assets was a little below the interest rate. Since 1998, because of monetary policy in China, the interest rate has declined. If we compare the risk-free interest rate and the economic growth rate, the outcome is unambiguously that the risk-free interest rate is below the economic growth rate. However, this condition is 8

This is explained in text-books, e.g. Blanchard and Fischer，1989. Some studies base their judgment that the economy of U.S. is dynamically efficient on estimates of the marginal productivity of capital derived from observed accounting profit rates, while others compare real interest rate on safe assets with the economic growth rate, data on which suggests that interest rates are less than growth rates in mature capitalist economies and that these economies are dynamically inefficient. (Abel, et.al, 1986). 10 Abel et.al (1986) thinks this distinction is a meaningful one if profitability, the value of capital and the growth rate are uncertain. The higher return of assets is a compensation for the risk that the price will decline if the future profits fall off. 9

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not sufficient to establish dynamic inefficiency. The essential point is that it doesn’t take productivity shocks into consideration (Abel,et.al, 1986). Furthermore, in China the risk-free real interest rate is a result of direct intervention by agencies of the state rather than the equilibrium of the demand for and supply of funds. Possibly, we can assess dynamic efficiency by comparing the profit rate and economic growth rate. Figure 1 shows in some years the profit rate is higher than the economic growth rate, but in 1992-98, the economic growth rate is higher, which suggests that the economy was then dynamically inefficient. However, it is not sure the profit rate calculated in this way correctly denotes the rate of return of capital, which makes it uncertain whether China’s economy is dynamically inefficient or not. Figure 1 A comparison of real interest rate, profit rate and economic growth rate in China (annual growth rate, %) 25.0 20.0 15.0 10.0 5.0 0.0 -5.0

1986

1988

1990

1992

1994

1996

1998

2000

2002

-10.0 -15.0 safe real interest rate

profit rate

economic growth rate

Sources: National Bureau of Statistics (NBS), China, “CHINA STATISTICAL YEARBOOK” (1987-2000). Notes: “real risk-free interest rate” is the rate of return on five-year government bonds adjusted for inflation; the exact meaning of “profit rate” is the ratio of profits, taxes and interest to average assets of all the stated-owned and non-state-owned industrial enterprises. It is calculated as follows: Ratio of profits, taxes and interest to average assets (%) = [(Total profits + total taxes + interest payments) / average assets] ×100%

Abel et.al (1986) offers a general criterion for dynamic efficiency in terms of profit and investment and this criterion is consistent with, but more general than, the Diamond (1965) model. It requires only a comparison of the cash flows going into and coming out of an economy’s production sector. If the net flow is always from the firms to investors, then the economy is dynamically efficient. Conversely, if the net flow is always flowing into firms from investors, then the economy is dynamically inefficient.

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We apply this criterion to the Chinese case. Table 1 gives information on gross capital income and gross investment, both as a percentage of GDP, and their difference. Gross capital income is measured as national income less total employee compensation. Gross investment is the sum of investment in fixed assets and increases in inventories. Their difference, the dividend D, is the net cash flow of the economy. The data in table 1 indicate clearly that in 1996-2002 capital hasn’t generated more income than has been reinvested and that there is an upward trend in the absolute value of the ratio of dividend to GDP. The (absolute) minimum value of D/GDP was -0.52% in 1997 and the maximum was -6.73% in 2002. So we could say China’s economy is in a state of dynamic inefficiency and if the economy behaves in the future as it has during these years, it might be experiencing a dynamically inefficient equilibrium. Table 1 Gross Profit and Investment: Chinese Economy (%) year

Gross Capital Income / GDP

Gross Investment /

D / GDP

GDP

1996

38.3

39.0

-0.76

1997

37.4

37.9

-0.52

1998

35.3

38.7

-3.36

1999

35.2

37.9

-2.64

2000

34.5

36.7

-2.20

2001

32.8

39.5

-6.62

2002

35.0

41.8

-6.73

Sources: calculated based on the data in “CHINA STATISTICAL YEARBOOK” (1997-2003), National Bureau of Statistics (NBS), China.

In fact, in China the capital accumulation has not been restricted by the amount of savings. On the contrary, the abundant savings were not transformed into investment efficiently. Comparing the annual balance of domestic savings and the loans of financial institutions can provide evidence for this, since the currency is inconvertible on capital account. Before 1994, the annual balance of loans exceeded savings, while after that, savings have been increasing rapidly over years and reached 3963 billion yuan in 2002 (Table 3, see appendix). The situation is a result of lack of demand for consumption and investment, which could be a reflection of the dynamic inefficiency. However, it is debatable whether the above criterion is applicable in China, since the assumption of a competitive market, in which capital receives its marginal product, might not be met. Hence we adopt another way of looking at the comparison of alternative pension-financing systems which uses empirical data which is less ambiguous. This enables us to compare the return of the PAYG and FF presently and in the foreseeable future. Looking at a similar problem, attention has been paid to the relative return of the two systems. In a model with two overlapping generations, the return on a PAYG system is the sum of the population growth rate and wage growth rate of each generation. Aaron (1966) showed that PAYG improves the welfare of each individual if the growth rate of the economy is higher than the interest rate, which is assumed to be exogenously given. Obviously, the return on individual accounts in a FF system is determined by the return on 6

(1 + g )(1 + n) , where r is the 1+ r return on investment, n the rate of growth of population, and g is the wage growth rate. In the framework of the OLG model (Samuelson 1958), it is clear that to get the same level of benefit, the relationship of the contribution rates of PAYG (τP) and FF(τF) must meet the following equation:

the investment. So the relative return of the PAYG system is:

τ F (1 + g )(1 + n) = τP 1+ r where g, n, r are rates in terms of a generation rather than yearly 11 . If the product of the rate of growth of population (which determines the number of contributors) and the rate of growth of wages exceeds the return on capital, then a PAYG system will improve welfare. This justifies the redistributive function of PAYG between generations. Conversely, when the product of the rate of growth of population and the rate of growth of wages is less than the rate of return on capital, to provide the same level of benefit the savings deposits required in FF are less than the contribution rate required in a PAYG. The optimistic results for China of introducing FF estimated by some authors are just an application of the above result. For example, Feldstein (1999) calculates the gain of transition to a FF system for China based on the assumption that real aggregate wage growth rate is 7% p.a. in future and the future real marginal return on capital is 12%, which he thinks quite conservative. Then after 30 years, 1 dollar in a PAYG scheme will be 7.6 dollars, while in FF that will be 30 dollars. So to get the same level of benefit, the contribution rate required in FF is only 1/4 of that in PAYG, therefore a 20% contribution rate in PAYG, for example, will be reduced to 5% in FF. The derivation is correct, given the assumptions. If we change the assumption to the case that the aggregate wage growth rate is 4%, which is conservative according to data of recent years, and the investment return is 3%, which is realized in year 2000 and 2001, the outcome will be reversed. The benefit which is likely to be received from a contribution rate of 20% in PAYG, will require a savings rate of 26.7% in FF. In fact, the result is determined by the relative return of PAYG as was showed above. If the relative return of PAYG is higher than 1, then PAYG is better than FF, and the higher the relative return, the better PAYG is. Table2 shows that the real interest rate has fluctuated sharply in recent years and the real return on government bonds has also changed sharply, and in the year 2000, the real interest rate on 5-year government bonds was 4.7%, which was approximately the average level of 1990s. But real wages have grown at a higher rate, the real average growth rate from 1986-2002 of average wage was 6.6% annually and real aggregate wage growth was 8.2% annually. Meanwhile, the population growth is still positive. During the reform period, real wage growth rate has usually been higher than the real interest rate or real rate of return on bonds. Hence, it is quite possible that relative return of PAYG system (1 + g )(1 + n) , will stay at a level of more than 1 in China. Obviously, when considering (1 + r ) possible pension reforms, we have to look to the future and not the past. The high rate of 11

For example, if the annual population growth rate 1.4% and a generation is 30 years, 1+n=(1.014)30=1.52 7

growth of real wages shown in table 2 (see appendix) was associated with a high level of capital formation and broad opportunities for technological catch-up with more advanced countries (World Bank, 1997). This cannot go on for ever, even though in China it could persist for several decades. According to World Bank (1997), during 2011-2030, real wage growth rate in China will be 4% p.a. and after 2030 will be 3% p.a. As far as the rate of growth of population is concerned for, the general expectation is that China will maintain a positive population growth rate until 2030. Furthermore, with continuous migration from rural to urban areas, the working force covered by the pension system will increase at a rate higher than the total population. It is difficult to find a clear indicator to show the marginal return of investment. However, in view of the high savings rate of China over a long period of time, we wouldn’t expect a high risk-free interest rate, Table 3 shows that there seems to be an excessive supply of funds in recent years. Deposits exceed loans of total financial institutions since 1994 and the balance keeps rising rapidly over years. As for the capital market, it has been well recognized that China’s stock market is too premature to be an effective market. The anticipated return on FF, based on the assumption of a higher return in the capital market, is highly uncertain. Basing the retirement income of the urban population on it is very risky. In fact, the financial sectors are still insufficiently developed to provide the minimum conditions for starting a fully-funded system 12 . So in the long run, the relative return of PAYG could be higher than 1 in China. In a large economy, factor prices and capital supply cannot be treated as exogenous. If the endogenous mechanisms are considered, the wage growth rate could be regarded as a reflection of productivity growth rate and the return of investment is determined by the marginal product of capital, so that the Aaron condition is reconciled with the dynamic efficiency condition.

3.

The transition features of China’s pension reform

When considering pension reform, the welfare aspect of the transition should not be neglected, that is the impact on the welfare levels of different cohorts during the period of transition from one system to another. In PAYG, the first generation received the pension as a gift, which created a cost inherent in the system. But it is an implicit debt in a rule that each generation gets the benefit from the subsequent one. When changing from unfunded PAYG to individual accounts, this implicit debt becomes explicit and it has to be decided who should pay for the liability existing throughout the history of the system (Breyer,1989; Homburg, 1990). It is commonly recognized that in general there is no Pareto improving way of making a transition from a PAYG system to a funded system. Such a transition would make at least one generation worse off (Brunner, 1996) no matter how high the average rate of return on assets is relative to sustainable GDP growth. On the transition path, funds need to be accumulated for the current generation while pensions must still be paid to the previous generations who have accumulated rights to receive pensions in the PAYG system. Barr (2000) considers cases of financing the transition cost by public borrowing, by taxation or by letting the transition generation bear the cost. He 12 According to Holzmann (1994), as a prerequisite to introduce funded pensions, some kinds of financial market must already exist to which the introduction of funded pensions should contribute.

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shows that FF could not result in a higher return during the transition period even in a dynamically efficient economy unless at the expense of the transition generation. As for China, according to the reform framework, for those who had already retired before 1997, the original PAYG system was retained, while to those who entered the labor market in or after 1997 the new three-pillar pension system is applicable and to those who started work before 1997 and retired or will retire after 1997, a transitional plan is applied 13 . So in Chinese practice, the transition cost consists of two parts: one is the pension commitment to those who retired before 1997 which is subtracted from the amount that could be received by others from the new pooling account; the other part is equivalent to the amount needed to establish the individual accounts for those to whom the transition plan is applied. Initially, government counted on the multiple-pillar system with a higher contribution rate and extension of coverage 14 to absorb the transition cost. According to documents of the State Council (Document. 26, 1997, State Council), 4% out of the 17% contribution rate to the first pillar is for transition purposes. The benefits for the pre-1997 retirees were not to be downsized and a plan to extend the pension scheme to cover more employees was supposed to increase the inflow into the system and keep the system in financial balance. In fact, the current workers and employers bear the cost, which means a double burden for present workers: simultaneously contributing to individual accounts and paying for the current generation of retirees. On the other hand, higher investment return were expected to offset the cost, because as long as the rate of return on investment is significantly higher than the growth rate of wages, then the required contribution will be far less than doubling the contributions under the pay-as-you-go system. However, a deficit in the first pillar soon emerged and the funds in the individual account were used to pay for the benefits to current retirees. This transformed what had been intended as an actually funded system into a (partially) notionally funded system. Notional funding undermines fiscal discipline since it makes the fiscal situation look better than it is (the deficit of the individual accounts is ultimately a liability of the state budget). Furthermore, these empty accounts with an uncertain interest rate undermined confidence in the system and individuals and enterprises lack incentives to participate in it. Furthermore, the investment return of the social security fund measured by the return on government bonds was greatly below the growth of money wages which makes it difficult to accumulate financial assets which will in due course pay a pension which has a reasonable relationship to average earnings 15 . Under these conditions, contributions to the second pillar pension scheme are more in the nature of taxes than of saving for old age. So the system only expanded its coverage slowly. In 2000, 100% of state-owned-enterprises participated in the pension scheme, while only 59% of collective enterprises and 18% of private enterprises were involved in the scheme (MOLSS, 2001). It is obvious now that

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In practice, the transition arrangement differs regionally, but in most cases, the replacement rates for these retirees are similar to those for retirees who retired before 1997, on average 75%-80%. 14 China’s pension system was established in 1951 for employees in urban state sectors and one of the objectives of reform was to extend the system to non-state sectors. 15 According to Chinese regulations, not less than 50% of social security funds must be invested in risk-free assets (bank deposits, government bonds). 9

neither the contributions of current workers nor the anticipated higher investment return solved the problem of transition cost. Logically, privatization of China’s large state assets could be an attractive method to finance the transition cost, since both the pension commitments and the assets originate from the same set of organizations (James, 2001). According to the World Bank (World Bank, 1997), preliminary assessments in 1995 suggested that the state-owned enterprises had productive assets of more than 2 trillion yuan and unproductive assets (e.g. land and buildings) of 5 trillion yuan while the explicit debt of SOEs to banks was less than 2 trillion yuan. So there was room to sell part of these assets to finance the transition. In September 2000, the National Social Security Fund (NSSF) was established to receive revenue from the government, SOE sales and other sources. In June, 2001, the State Council decided to execute the plan for “Selling state-owned shares to raise funds for the social security system”. From July to the end of September, 2001, 15 enterprises raised money from IPO’s. These included selling a portion of the state-owned shares equal to 10% of the proceeds of the total share sale. The market responded to the plan with a sharp fall and the stock market index declined by 30% within four months. In June, 2002, the State Council stopped the plan, which had proved a failure in the market. It is also possible that the government in China follows the Latin American model of issuing bonds (for example, recognition bonds in Chile) to take over all the liabilities caused by transition and exchange this new explicit debt for the old implicit debt. However, this will not reduce the pressure on the public budget (Muller, 2000). The bonds have to be serviced out of taxes and future generations will have to pay higher taxes to repay them (or service their successors). Transition of this kind only translates the social security tax into other kinds of taxes. Using other taxes to finance transition conflicts with the purpose of pension reform, which is to alleviate the burden on future generations. Moreover, if both general taxation and PAYG contribution are distortionary, then a PAYG-FF reform raises Pareto-efficiency by eliminating the pure-tax component of PAYG contributions but reduces Pareto-efficiency by increasing general taxation to pay for a tax-financed transition or for the interest payments on the higher explicit government debt. Hence the net effect of pension reform on Pareto-efficiency is ambiguous ( Arrau & Schmidt-Hebbel, 1995). Furthermore, from a policy point of view, there is an important distinction between those people who will pay the debt and those who own the bonds and will receive the interest. In other words, the winners are the rich people who will subscribe to the bonds and receive the interest and the (poor) losers are those who will pay the taxes needed to service the bonds.

4. Making PAYG Sustainable A common question addressed to a PAYG system is how it handles the redistribution function under conditions of an adverse change of demographic structure, which increases the dependency ratio. Due to the economic development and population policy, China’s demographic structure has changed a lot in recent decades. The downward trend of fertility since the 1970s both in urban and rural areas caused a deceleration in the population growth rate from 1970 (Hussain, 2002). In particular, the growth rate of those 10

under 65 is declining. During 1990-1995, the growth rate of this group was 1.56% per annum, while in 1995-2000 it declined to 0.41% (table 4), far below the growth rate of the population as a whole. The decline of the growth rate of the young population caused a change of the age structure of the total population (table 5). In 1964-2000 the percentage share of the age group 0-14 dropped by 17 points, while the percentage of the population older than 65 rose by 2.5 points. Hence, the demographic old age dependency ratio (the ratio of the numbers of those aged 65 and older to the numbers aged 15-64) keeps rising, from 8.1% in 1982 to 8.3% in 1989 and 9.9% in 2000 (table 5). Demographic transition is an important reason for the increasing burden on the pension system. The dependency ratio of the pension system (number of workers contributing to the system to retirees collecting from the system) was 30:1 in 1978, i.e. 30 workers supported 1 retiree. But 5 years later, the ratio had become 10:1, was 6:1 in 1990, and 3:1 in 200016 . In view of the fact that the current total fertility rate (TFR) in China is rather low (see Table 4), even lower than some high income countries 17 , and life expectancy quite high, population aging in the future is inevitable. Based on the demographic structure of 1998 and assuming that the fertility and mortality rates remain stable, we simulate the demographic structure of China in 2030 (Figure 2) 18 . The age pyramids clearly illustrate the changing age structure and population aging, from the shape of a cedar to that of a mushroom. Even we assume a recovery in the TFR, to a level of 2, which almost equals the level necessary for a constant population, within 15 years, the population aging will still be rapid and the old age dependency ratio is going to reach almost 27% in 2030. Figure 2 Change of Demographic Structure in China

90-94 75-79 60-64 45-49 30-34 15-19 0-4 (2.00)

(1.00)

0.00 male

1.00

2.00

female

16 The coverage of the pension system in China further reduced the dependency ratio. For a long time, the pension scheme was only for employees in State-Owned-Enterprises (SOEs). Though the reformed pension system requires all urban workers and self-employed be covered, the contributors are mainly from SOEs. However, the proportion of SOEs in the economy has shrunk a lot since the reform. The employees in SOEs accounted for 63.6% of all employees in 1980 but this number declined to about 30% in 2000. 17 TFR is a summary index of child-bearing experience in particular years expressed as the expected number of birth per woman over her life. The TFR of the U.S. in 1998 was 2.06, of Germany in 1994 was 1.31, and of France in 1993 was 1.65. 18 The details of simulation are available on request.

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1998

100+ 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4

(2.00)

(1.00)

0.00 male

1.00

2.00

3.00

female

2030 (simulation) source：Calculating and simulating according to the age structure in 1998, data from “CHINA POPULATION STATISTICS YEARBOOK” , National Bureau of Statistics (NBS), China.

The aging population challenging the PAYG system is a worldwide concern. However, unlike European countries, in which the aging came after economic development and they can afford rich social security programs based on their affluence, aging in East Asia is so rapid that many countries will have difficulty in catching up to the speed of aging, even though their economics continue to grow rapidly. This indicates that the western style welfare state is not feasible for Asian countries (Yashiro, 1997).In Asia, Japan’s population enjoys the highest longevity worldwide, and the share of the elderly relative to the working population is almost the highest. Japan has a longer history dealing with pension scheme and experienced aging problem earlier, so its lessons and experiences are worth to note. When Japan adopted a PAYG system, it had a generosity but not bolstered by sufficiently higher premiums in 1970s and situation was exacerbated by Japan’s low eligibility age for pensions, which was 60 for males and 55 for females (Yashiro, 1997). These factors naturally produced a “potential deficit” in the public pension balance. In Japan, reform was proposed in 1999 including reducing the benefit by 5%, increasing pensionable age step by step to 65 (Takayama, 2000). Although the 2000 pension reform has reduced the government’s unfunded pension liabilities to some 60-70 percentage of GDP, but still implies that large contribution rate increases are necessary to prevent pension assets from being depleted (Faruqee, et.al., 2003). We now consider the average replacement ratio in China, which is currently usually 70% of average wages in the region concerned (Table 8). Compared with other transition countries (Cangiano, et.al, 1998), such as Central Eastern Europe (53.9%, 1993-96), Baltics (34%, 1993-96), Slavic & Moldova (38.4%, 1993-96) Central Asia (34.6%, 1993-96), the replacement ratio is extremely high in China. Keeping the replacement ratio 12

unchanged inevitably led to excessive government commitments and hence the heavy burden on current workers. In fact, pensions have been rising faster than average SOE wages or per capita income in recent years. The ratio of average pensions to average wages rose from 67% in 1991 to 77% in 1997 and 71% in 2000 (Table 8). However, if the PAYG pensions are considered primarily as a means of poverty relief, it might have been appropriate to reduce the replacement ratio. Other forms of saving such as commercial life insurance, bank deposits, stocks, or house purchase should be used if retirees want to maintain a high standard of living. In Chinese legislation, the male retirement age is 60 (the average actual retirement age is lower), for female officials, it is 55 and for female workers, it is 50. These retirement ages were fixed in 1951, when life expectancy was only about 40. Since then, life expectancy has greatly increased. Moreover, it is continuing to increase. Between 1990 and 2000 male life expectancy increased from 66.84 in 1990 to 69.63, and female life expectancy from 70.47 to 73.33. Moreover, like other transition countries the use of the pension system to cushion unemployment was quite common in China. Earlier retirement and longer life expectancy means there should be more employees or additional contributions to support a retiree. Compared with some developed countries such as UK and US, the legal retirement age in China is 5 to 15 years lower. The average annual growth rate of the number of pensioners has been much higher than growth rate of contributors. From 1980 to 1998, the growth rate of contributors was 3.8% annually, while the growth rate of pensioners was 8.6% p.a. And in 1991-2002, the contributors increased by 95% while the retirees increased by 227% (table 7). However, in China, the situation is different from that in Japan or Korea. China’s pension system is only available to urban employees, which only accounts for about 30% of total labors. While in Japan and Korea, the system covers all employees both in public sectors and private sectors. In the typical dual economy, rural-urban migration means that there is going to be a large number of younger labors to work in the urban sectors. The ongoing migration from rural areas to urban ones has important implications for the financial soundness of the pension system. For some developed countries it has been argued that migration will help society pay the benefits promised to the elderly. 19 . In China, however, what is relevant is not international migration but internal migration. Although the labor market in China is a segmented one, which hampers rural-urban labor mobility, rural-urban migration has become an important fact during the reform period. Lewis (1954) pointed out that there is a typical dual-economy in developing countries, in which a large amount of labor surplus and hidden unemployment exist in the agricultural sector so that the marginal productivity in this sector is almost zero or even negative. China has facilitated growth by promoting allocative efficiency through mobility of capital and labor away from low efficiency sectors and studies of regional disparities show that rural-urban migration is one of the most important factors influencing growth performance (Cai, et.al, 2002). During the 20 years 1979-1999, total migration from the agricultural sector to non-agricultural sectors was 116 millions, about 5.55 million each year at an average growth rate of 8.9% per annum. During 1979-1997, the main channel of migration was to be employed in the 19

For a survey of the studies about “ migration and pension”, see Assaf Razin & Efraim Sadka (1998) 13

township and village enterprises. Migration to urban areas has been under control with only 34 millions migrants in 1979-1999, only about 23% of the total migrants to the non-agricultural sectors. Urbanization in China has been lagged behind industrialization and also behind the level of other developing countries in the same income group (Lin, 1996). So there is going to be a process of urbanization in the near future. It is possible that the urbanization rate will be 70% after 30-40 years, that is, the annual increase of urbanization rate will be 1.0-1.2 percentage points, which is approximately twice that in 1978-1998. There is a distinction between the age structure in rural areas and urban areas (table 6). We take those who are in the age range 15-64 as the labor force. The percentage of the age group of 15-34 to the total labor force in rural areas are 50.23% and 50.76% for male and female respectively, and in urban area the corresponding indicators are 46.75% and 47.65%. Furthermore, the migrants to urban area are younger than the average labor force in rural area. Because of the better educational background, higher ability to take risks, higher quality and other individual factors, young people have more preference and more advantage to find jobs in cities. A study of the migrants to Shanghai shows that the percentage of the age group 15-59 to total migrants was 89.9% and 89.4% for male and female respectively. From 1996 to 2000, there were about 2 million working age persons immigrating into Shanghai and most of them belong to the younger age groups, while 200 thousand children and only 30 thousand elderly migrated to Shanghai during the same period (Ren, 2003). The migration from agricultural sectors to non-agricultural sectors and urban area has important implications for the social security system. For a long time the coverage of the pension system will be expanding. It may nevertheless be reasonable to argue that these migrants will ultimately be net beneficiaries of the welfare system in general and the future burden of the system might become heavier. But for China, the expansion is necessary on grounds of equity. For the PAYG system this means that for many years there will be an influx of young workers from the countryside which will help maintain the financial balance of the PAYG system. What’s important to China during the extension of the pension system is to establish a desirable scheme. Once a system is chosen, it is hard to change owing to implicit debts and political pressures. According to Chinese past experiences, and also suggested by Japanese scholar for Japanese system (Takayama, 2003), a PAYG defined contribution system is considered as a possible choice for Chinese pension system. First, with this system, the “twice-burden” problem can be entirely avoided. Secondly, applying this system to newly participation, it can produce a close transparent relationship between contributions and benefits, hence creating incentive-compatibility. On the other hand, the benefit is subject to frequent adjustment in line with the changing social and economic circumstances, which forms an automatic balance mechanism.

5. Productivity and PAYG As Nicholas Barr (2000) has pointed out, output and its growth is the key to financing pensions. The much-debated choice between PAYG and FF is of secondary importance. It matters less than the capacity of the government to manage the economy 14

effectively, to promote adequate growth of output, and to sustain a stable foundation for whatever pension system is adopted. What is different between PAYG and FF is the way that claims on current output to satisfy the consumption of pensioners is met. Under FF, the retiree’s claim on the goods they consume is met by spending the money accumulated in their own accounts while under PAYG, the retiree gains the goods by way of government taxes. As long as there is enough output for workers and retirees, from a macroeconomic point of view, it is unimportant which system to adopt. If output remains constant or declines, even FF cannot avoid problems. Under such situation, the FF system cannot escape from inflation in the goods market or deflation of asset prices, both of which reduce the real value of the pension. So for pension systems, the crucial issue is always the level and rate of growth of output. When productivity is growing, the economy can absorb the increased expenditures on dependents. We cite the method of Concialdi (1999), to examine how pension benefits and economic growth are related. Currently the pension expenditure as a percentage of GDP in China is quite low, less than 3% (Table 8). 20 Suppose we allow no increase of the share of GDP devoted to the pensioners, which means we fix the burden on workers unchanged (the contribution rate stays constant) during the period of time concerned .We also assume various real economic growth rates, and then we calculate the multiple of average benefit the economy could afford at the end of the period relative to the initial year under various assumptions on dependency ratios and real economic growth rates. We consider the period from 2000 to 2030. We assume several real economic growth rates: 2%, 3%, 4% and 5% with the real average wage growing at the same rate. The dependency ratio of the pension system in 2000 is about 0.3 (Table 7). As to the dependency ratio in 2030, several factors are going to be taken into consideration in China, including the demographic structure, migration rate and the extension of coverage. So it is appropriate to simulate a range of dependency ratios. Table 9 Increased Pension Benefit and Economic Growth Rate Dependency Ratio 0.3 0.4 0.5 0.6 Increased Income of workers

Average Annual Economic Growth Rate (2000-2030) 2% 3% 4%

5%

1.81

2.43

3.24

4.32

1.36

1.82

2.43

3.24

1.09

1.46

1.95

2.59

0.91

1.21

1.62

2.16

1.81

2.43

3.24

4.32

Note: numbers represent the amount by which real pension benefit per dependent in 2030 could rise relative to 2000 without increasing the share of GDP devoted to pension expenditures, given a particular rate of real growth.

20

Mulligan & Sala-i-Martin (1999) gives the data of pension expenditure as a percentage of GDP in developed countries, 5% in US, 13% in Italy, 16% in Sweden and 20% in Belgium and some less developed countries also have large social security programs, e.g. 7% in Brazil. Their studies about the cross-sections of countries also show that fraction of GDP devoted to public pension is positively correlated with per capita income. 15

Table 9 lists the level of pensions in 2030 relative to that in 2000 without increasing the burden on workers, given a particular rate of real economic growth and under various dependency ratios. The higher economic growth rate could guarantee a larger amount of pension benefit (relative to current pensions) even if the dependency ratio rises to a higher level. For example, when economic growth rate is 5% annually from 2000 to 2030, even if the dependency ratio rises to 0.6, the average benefit could be 2.16 times as much as that in 2000, thus allowing a substantial increase of retirees’ standard of living (although it would fall relative to future average earnings). Table 9 also shows the income distribution between two generations under various economic growth rate and dependency ratio. If the dependency ratio stays stable during the period, then the income distribution stays unchanged, which means the two generations share the fruits of economic growth equally. As the dependency ratio is rising, not to increase the burden on workers implies that the two generations don’t share the growth of output proportionally. The higher the dependency ratio is, the higher the inequality of the two generations is. But the key issue is that the higher the growth rate, the higher the standard of living for both generations that could be guaranteed no matter what the income distribution is. Economic growth is the essence of a financially viable PAYG pension system under adverse demographic conditions. 6. CONCLUSION In the 1997 China adopted a pension system for the urban population, with first and second pillars, in line with the advice of the international economic organizations. (Most of the population lives in rural areas and is not covered by the pension system.)Nevertheless, the pension system is currently in crisis. The level of contributions is high, the PAYG system has insufficient income to pay the pensions due, and the individual savings accounts have been used to finance current expenditures. The second pillar has become a (partially) nominally funded system, which undermines confidence in it and also undermines fiscal discipline. The problems are not caused by PAYG as such, which has the advantages of universal coverage (for the group considered), poverty relief, redistribution, avoidance of capital market volatility, and low administrative costs. The problems are mainly caused by the finance of transition costs and the particular parameter values, namely a high replacement ratio, a poor coverage of contributors, in particular in the private sector, a high rate of growth of money wages, and increasing life expectancy not matched by an increasing retirement age. Advocates of the Fully Funded system, based on the argument that since 1930s the economies of main industrialized countries have been dynamically efficient, argue that introduction of a FF pension system is helpful to economic growth. The debate about pension reform has moved from its redistribution function to economic growth. However, in China the economy is in a state of dynamic inefficiency and the real interest rate is lower than the rate of growth of wages. Accordingly, a FF system is neither an efficient one now nor is it likely to be so in the foreseeable future. A mandatory PAYG system with wide coverage, low replacement ratio and a redistributive function would benefit most of China’s urban population. The aim of such a mandatory pension system would be poverty 16

relief and income redistribution, subject to keeping government commitments within its budget constraint. Financing pensions at a decent level for a growing population of retirees is basically a matter of ensuring that there is sufficient income for this purpose. References: 1. Aaron, Henry, 1966. The Social Insurance Paradox. The Canadian Journal of Economics and Political Science, Volume 32, Issue3, 371-374. 2. Abel, Andrew B., 1986. Assessing Dynamic Efficiency: Theory and Evidence. NBER Working Paper No.2097. 3. Arrau, Patricio & Schmidt-Hebbel, Klaus, 1995. Pension Systems and Reform: Country Experiences and Research Issues. The World Bank Policy Research Working Paper 1470. 4. Barr, Nicholas, 2000. Reforming pensions: Myths, Truths, and Policy Choices. IMF Working Paper, WP/00/139. 5. Barry Friedman, et.al. 1996. How Can China Provide Income Security for Its Rapid Aging Population? World Bank, Policy Research Working Paper No.1674. 6. Blanchard, O. and Fischer, S., 1989. Lectures on Macroeconomics, MIT Press, Cambridge, MA. 7. Breyer, F., 1989. On the Intergenerational Pareto Efficiency of Pay-as-you-go Financed Pension System. Journal of Institutional and Theoretical Economics, 145(4):243-358. 8. Brunner, J.K., 1996. Transition from a pay-as-you-go to a fully funded pension system, The case of differing individuals and intragenerational fairness. Journal of Public Economics, 60, 131-146. 9. Cai, Fang, et.al., 2002. Regional disparity and economic growth in China: The impact of labor market distortions. China Economic Review, 13 197-212. 10. Cangiano, Marco, Cottarelli, Carlo, Cubeddu, Luis, 1998. Pension Developments and Reforms in Transition Economies. IMF Working Paper, WP/98/151. 11. Concialdi , 1999. Demography, employment and the future of social protection financing. In Ministry of Social Affairs and Health: Financing Social Protection in Europe. Helsinki. 12. Diamond, P.A., 1965. National Debt in a Neoclassical Growth Model. American Economic Review, Volume 55, issue 5, 1126-1150. 13. Fauqee, N. et.al.,2003. Population aging in Japan: demographic shock and fiscal sustainability. Japan and World Economy, 15 (2003), 185-210. 14. Feldstein, M.S., 1974. Social Security, Induced Retirement, and Aggregate Capital Accumulation, Journal of Political Economy, 82, 905-926. 15. Feldstein, M.S., 1996. The Missing Piece in Policy Analysis: Social Security Reform. American Economic Review. May, 1-14. 16. Feldstein, Martin, 1999. Social security pension reform in China. China Economic Review 10, 99-107. 17. Gong, Qiuquan, 2002. The Reform of the Financing of Pension System in China. Social Security in China (in Chinese), No.6. 17

18. Holzmann, R.,1993. Reforming Old-age Pension System In Central and Eastern Countries in Transition. Journal of Economics, Suppl.7: 191-218. 19. Homburg, S., 1990. The Efficiency of Unfunded Pension Scheme. Journal of Institutional and Theoretical Economics, 146(4): 640-47. 20. Hussain, Athar, 1994. Social Security in Present-Day China and Its Reform. American Economic Review 84, 276-280. 21. Hussain, Athar, 2002. Demographic Transition in China and its Implications. World Development Vol.30, No.10, 1823-1834. 22. James, Estelle 2001. How Can China Solve its Old Age Security Problem? The Interaction Between Pension, SOE and Financial Market Reform, Prepared for Conference on Financial Sector Reform in China, Harvard University, September 2001. 23. Kotlikoff, L.J., 1979. Testing the Theory of Social Security and Life Cycle Accumulation, American Economic Review, 69, 396-410. 24. Lin, J. Yifu, Fang Cai and Zhou Li, 1996. The China Miracle: Development Strategy and Economic Reform, Chinese University Press. 25. Lewis, W.A.,1954. “Economic Development with Unlimited Supplies of Labor”, The Manchester School of Economic and Social Studies 22, 139-191. 26. McCarthy, F.Desmond and Zheng, Kangbin, 1996. Population Aging and Pension Systems: Reform Options for China. World Bank, Policy Research Working Paper No.1607 27. Ministry of Labors and Social Security of China (MOLSS), 2001. Risk Management of China Social Security Fund. Conference on China’s Insurance Regulation. Beijing, 2001 (in Chinese). 28. Muller K., 2000. Pension Privatization in Latin America. Journal of International Development 12: 507-518. 29. Mulligan & Sala-i-Martin, 1999. Social Security in Theory and Practice (1): Facts and Political Theories. NBER working paper 7118. 30. Phelps, E.S., 1966. The Golden Rule of Accumulation: A Fable for Growthmen, American Economic Review, 56, 638-643. 31. Razin, Assaf & Sadka, Efraim. 1998. Migration and pension. IMF working paper, WP/98/165. December. 32. Ren, Yuan, 2003. Migration Measured by Permanent Population and its Impacts to Urban Development in Shanghai. China’s Demographic Science (in Chinese), No.5 33. Samuelson, P.A., 1958. An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money. Journal of Political Economy, LXVI ,467-482. 34. Solow,R.M. 1956, “A Contribution to the Theory of Economic Growth”, Quarterly Journal of Economics, 70. 35. Song, Shunfeng , Chu, George, 1997. Social Security Reform in China: The Case of Old Age Insurance. Contemporary Economic Policy, April, Vol XV, 85-93. 36. Sun, Qixiang, 2001. Empty Account and Transformation Costs: An analysis on the effect of pension reform in China. Journal of Economic Study (in Chinese), No.5. 18

37. Takayama, N., 2003. A Balance Sheet Approach to Reforming Social Security Pensions in Japan. Is NDC the Answer? Conference on NDC Pensions. Sandhanm, Sweden, 28-30 September, 2003. 38. Takayama, N.2000. Demographic Changes, Economic Downtown and the Pension Reform Debate in Japan. 39. Wang, Yan , Xu, Dianqing , Wang Zhi and Zhai Fan, 2000. Implicit Pension Debt, Transition Cost, Options and Impact of China’s Pension Reform___ A Computable General Equilibrium Analysis. World Bank, Policy Research Working Paper. 40. World Bank, 1994. Averting the Old-age Crisis ___ Policies to Protect the Old and Promote Growth. OUP: Oxford. 41. World Bank, 1997. Old Age Security: Pension Reform in China. In China 2020 series, Washington, D.C. 42. Yashirro, N. 1997.Aging of the Population in Japan and Its implications to the Other Asian Countries. Journal of Asian Economics. Vol.8, No.2, 245-261. 43. Zhao, Yaohui, 2001. The Incentive Mechanism in the Reform of China’s Pension System. Quarterly Journal of Economics (in Chinese), Vol.1. Appendix:

Table 2 Main Macroeconomic and Social Indicators in China (1986-2002, %) (1) Year

(2)

(3)

(4)

GDP

Real average

Real

growth

Wage

aggregate

rate

growth rate

wage growth

(5)

(6)

(7)

Real

Real

Natural

Inflation

Interest

Return of

growth

rate

rate

Bond

rate of

rate

population

rate 1986

8.8

8.2

14.0

6.0

1.2

0.0

1.56

1987

11.6

0.9

6.0

7.3

-0.1

-1.3

1.66

1988

11.3

-0.8

4.6

18.5

-10.6

-11.0

1.57

1989

4.1

-4.8

-4.7

17.8

-7.8

-2.8

1.50

1990

3.8

9.2

10.6

2.1

7.9

7.9

1.44

1991

9.2

4.0

9.7

2.9

5.2

6.1

1.30

1992

14.2

6.7

13.1

5.4

2.2

3.6

1.16

1993

13.5

7.1

11.6

13.2

-4.0

-0.2

1.15

1994

12.6

7.7

13.7

21.7

-10.7

-6.6

1.12

1995

10.5

3.8

6.9

14.8

-3.8

1.1

1.06

1996

9.6

3.8

6.0

6.1

3.1

7.0

1.04

1997

8.8

1.1

2.8

0.8

5.8

9.4

1.01

1998

7.8

7.2

2.8

-2.6

7.5

9.1

0.95

1999

7.1

13.1

9.2

-3.0

5.3

6.6

0.88

2000

8.0

14.1

9.4

-1.5

3.8

4.7

0.76

2001

7.5

15.2

11.8

-0.8

2.8

3.9

0.70

2002

8.0

15.5

12.5

-1.3

3.3

4.4

0.65

Source: “CHINA STATISTICAL YEARBOOK” , National Bureau of Statistics (NBS), China Statistics Press. These are official statistics and exaggerate the GDP growth rate. 19

Notes: (1) is the GDP growth rate calculated at comparable prices. (2), (3) are wage growth rate of non-agricultural sectors. (4) is general retail price index. (5) is average one-year household deposit rate. (6) is the rate of return on five-year government bonds.

Table 3 Deposits and Loans in Financial Institutions of China (billion yuan) Deposits

Loans

Balance

1990

1401

1768

-367

1991

1808

2134

-326

1992

2347

2632

-285

1993

2963

3294

-331

1994

4047

4081

-34

1995

5386

5054

332

1996

6857

6115

742

1997

8239

7491

748

1998

9570

8652

918

1999

10878

9373

1505

2000

12380

9937

2443

2001

14362

11231

3131

2002

17092

13129

3963

Source: “CHINA STATISTICAL YEARBOOK” , National Bureau of Statistics (NBS), China Statistics Press.

Table 4 Total Fertility Rates in China 1981

1989

1995

1996

1998

1999

2000

TFR National

2.63

2.47

1.46

1.67

1.60

1.47

1.22

Urban

1.39

1.59

1.16

1.62

1.51

1.17

0.86

Rural

2.9

2.57

1.58

1.69

1.66

1.63

1.43

Population growth rate of age group under 65（% p.a.） 1982-1990：

1.36

1990-1995：

1.56

1995-2000：

0.41

Source：TFR before 1999 are from Hussain (2002) and of 2000 from 5th national census in 2000. Population growth rates are calculated based on the data in “CHINA POPULATION STATISTICS

YEARBOOK” , National Bureau of Statistics (NBS), China Statistics Press.

20

Table 5 Demographic Structure in China (%)

Old dependency

1964

1982

1990

1995

2000

2030(projected)

0-14

40.4

33.5

27.69

26.73

22.98

17.88

15-64

55.1

61.5

66.74

66.57

70.15

64.54

65+

4.5

5

5.57

6.70

6.96

17.58

age

8.17

8.13

8.35

10.06

9.92

27.23

ratio

a

（%）

a: the number of those older than 64 as a percentage of those aged 15-64

Source： data of 1964,1982 are from Hussain (2002)；Others from “CHINA POPULATION STATISTICS YEARBOOK” , National Bureau of Statistics (NBS), China Statistics Press. The projection is based on the assumption of a TFR of 2.

Table 6

Age Structure of Labor Force (1998) national

Age group

(%)

urban

rural

15-19

male 11.19

female 10.48

male 9.31

female 8.58

male 12.18

female 11.56

20-24

10.42

10.92

9.43

10.22

10.93

11.32

25-29

14.25

14.79

13.82

14.73

14.47

14.82

30-34

14.37

14.57

14.19

14.13

14.47

14.82

35-39

10.54

10.45

12.08

11.42

9.73

9.89

40-44

11.40

11.20

12.49

11.99

10.83

10.76

45-49

9.59

9.46

9.75

9.64

9.51

9.37

50-54

7.10

7.11

7.14

7.16

7.08

7.08

55-59

5.71

5.60

5.85

6.05

5.64

5.35

60-64

5.43

5.42

5.94

6.09

5.16

5.04

15-34

50.23

50.76

46.75

47.65

52.05

52.51

35-64

49.77

49.24

53.25

52.35

47.95

47.49

Source: “CHINA POPULATION STATISTICS YEARBOOK” 1999, National Bureau of Statistics (NBS),

China Statistics Press.

Table 7

Contributors and Retirees (1991-2002) Contributors

Contributors/

Contributors/Urban

Retirees

Dependency

(million)

Population

Employment

(million)

Ratio

（%）

（%）

1991

57

4.9

1992

78

6.7

1993

80

6.7

1994

85

7.1

1995

87

7.2

1996

88

7.2

1997

87

7.0

(%)

33 44 44 46 46 44 42

11

19.3

17

21.8

18

22.5

21

24.7

22

25.3

23

26.1

25

28.7 21

1998

85

6.8

1999

95

7.5

2000

104

8.2

2001

108

8.5

2002

111

8.6

1991-2002

95%

increase

39 42 45 45 45

3.7 percentage

12 percentage

points

points

27

31.8

30

31.6

32

30.8

34

31.5

36

32.4

227%

13.1percenta ge points

Source: “CHINA LABOR STATISTICS YEARBOOK” 2001, China Statistics Press.

Table 8 Expenditures and Revenues of Pension System (1991-2002) Expenditures （billion

Expenditures / GDP

Revenuesa

Contributions

Average benefit/

Average

(billion yuan)

/ GDP

Average wage

contribution/

（%）

（%）

Average wage

（%）

yuan）

（%） 1991

17.3

0.8

21.5

1.0

67

16

1992

32.2

1.2

36.5

1.4

70

17

1993

47.1

1.4

50.4

1.5

78

19

1994

66.1

1.4

70.7

1.5

69

18

1995

84.8

1.5

95.0

1.7

70

20

1996

103.2

1.5

117.2

1.8

72

21

1997

125.1

1.7

133.8

1.8

77

24

1998

151.2

2.0

145.9

1.9

75

23

1999

192.5

2.4

196.5

2.4

77

25

2000

211.5

2.4

227.8

2.6

71

23

2001

232.1

2.4

248.9

2.6

63

21

2002

284.3

2.7

317.2

3.1

64

23

Source: “CHINA LABOR STATISTIC YEARBOOK” 2001, China Statistics Press. Note: a) “Revenues” comprise contributions, both to the PAYG scheme and to the (notionally) funded accounts as well as fiscal subsidies and revenue from selling state-owned assets.

22