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The following OECD assessment and recommendations summarise chapter 7 of the Economic Survey of China published on 2 February 2010.
Pension reforms have addressed only part of the challenges faced by an ageing population
China’s population is ageing fast, owing to low fertility rates and rising life expectancy. With ongoing migration of the younger cohorts to urban areas, the old-age dependency ratio will rise even more in rural than in urban areas. A patchwork of pension arrangements exists across the country, with diverse and segmented systems in urban areas, belated retirement and low replacement ratios in rural areas, and special rules governing public sector pensions. This raises issues of efficiency, in that labour mobility is impeded, and fairness, to the extent that work experience in one sector is not recognised for pension purposes once the individual moves to another. Urban pensions underwent parametric reform around the turn of the millennium and again in 2005. On both occasions, benefits were reduced. Moreover, some geographical pooling has also been introduced. Nonetheless, contribution rates are low in areas that have experienced rapid population growth through migration but much higher in cities with a declining industrial base or a high share of elderly. Measures were also taken in 2005 to raise the coverage of the self-employed and those with flexible forms of employment. A new rural pension scheme was announced in mid 2009 and provisions to cover migrants have been proposed. Some of the recent reforms have increased fragmentation, while others, notably those providing for greater geographical pooling, have not been fully implemented. Also, under current rules, effective replacement rates are fairly low and projected to decline further, both for rural and urban residents. This may be difficult to sustain, as the elderly are increasingly unlikely to live with their descendants. Furthermore, as most of the ageing population is likely to be concentrated in the countryside, much of the additional burden will be shouldered by local governments, many of which in poorer areas have insufficient resources.
Urban elderly depending principally on their children
Source: Tabulations of the 2006 China Health and Nutrition Survey.
The various pension regimes need to be gradually consolidated, and the average retirement age needs to be increased
These challenges can be addressed by gradually consolidating the various regimes, shifting more of the cost of rural pensions to the central government, pooling pension contributions nationally and increasing retirement ages. Even if different schemes for different categories of workers (employees versus self-employed in particular) are to persist, each should be unified geographically over time, first provincially and then nationally. In the process, the distinction between rural and urban residents ought to be phased out, in line with the recommended ending of the local population registration system. Retirement ages are currently very low and to ensure long-run pension system sustainability they should in due course be raised incrementally, at least in line with rising life expectancy, as is the case in some OECD countries. For the time being, pre-funding future government pension liabilities is not necessary, as national saving is already very high.
How to obtain this publication
The complete edition of the Economic Survey of China is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the China Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Richard Herd, Samuel Hill and Yu-Wei Hu under the supervision of Vincent Koen. Research assistance was provided by Thomas Chalaux.