How Can China Provide Income Security for its Rapidly Aging Population?

60 Pages Posted: 20 Apr 2016

See all articles by Estelle James

Estelle James

Consultant

Cheikh Kane

World Bank

Monika Queisser

Organization for Economic Co-Operation and Development (OECD) - Social Policy Division

Date Written: October 1996

Abstract

If China implements a partially funded multipillar pension system, that reform must go hand-in-hand with reform of the financial sector and restructured investment procedures that emphasize the right mix of competition, diversification, and regulation. Otherwise, pension reform will ultimately fail.

Friedman, James, Kane, and Queisser discuss key choices policymakers face about China's pension system in the face of a rapidly aging population. (Many developing countries face the same problem, but China's problems are exacerbated by the long-term effects of its one-child family planning policy.) They describe the problems the current pay-as-you-go system faces in the near and long term and simulate policy options for solving those problems.

They find that simple design changes - such as reducing the generous benefit rate, moving toward price indexing rather than wage indexing, and raising the retirement age - are necessary but not sufficient conditions for making the pension system sustainable. Partial funding is necessary to avoid large increases in future contribution rates.

They investigate the impact on the old-age system and economic growth of a multipillar system that includes a modest mandatory tax-financed basic benefit plus a mandatory fully-funded defined-contribution (individual account) scheme.

Implementation of a partially funded multipillar pension system must go hand-in-hand with reform of the financial sector and restructured investment procedures that emphasize the right mix of competition, diversification, and regulation. Otherwise, China's pension reform will ultimately fail.

This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to analyze the impact of pension systems and pension reform.

Suggested Citation

James, Estelle and Kane, Cheikh and Queisser, Monika, How Can China Provide Income Security for its Rapidly Aging Population? (October 1996). World Bank Policy Research Working Paper No. 1674. Available at SSRN: https://ssrn.com/abstract=623907

Cheikh Kane

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

Monika Queisser

Organization for Economic Co-Operation and Development (OECD) - Social Policy Division ( email )

2 rue Andre Pascal
Paris
France

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