As China's major trading partners try to control rising public pension and health care costs, they may not realize they also have an important stake in China's ongoing struggle to fashion a safety net for its own rapidly aging population. Many observers assume China has no pensions or healthcare insurance for the 185 million people over the age of 60 (13.7% of population), the highest official retirement age for most workers. They may well believe this explains why Chinese families save so much–more than 30% of household income–and therefore spend less on consumer goods, including imports from trading partners.
But this line of reasoning is faulty because China already has large and rapidly growing public pension and health insurance programs in the cities, and is in the process of extending them to rural areas. It's time that China's trading partners, especially the United States, understand what this means for China's economic future and, by extension, their own.
For all the criticism of outgoing President Hu Jintao for presiding over a “do-nothing” administration, he did manage to oversee a substantial increase spending on China's public support systems.As a result, pensions have now become the most expensive function of the Chinese government—which already spends a lot on infrastructure, housing and defense. In 2011, pension expenditures rose to 1.28 trillion renminbi (RMB, U.S.$205 billion), up from only 489 billion RMB in 2006. These and civil service pensions cover only about half of those over age 60, but at current rates of growth universal coverage—and vastly higher expenditures—are not far off. The number of urban workers (including migrants from rural areas who in theory are in the cities temporarily) contributing to the public pension system now exceeds 290 million, while rural pensions are also growing rapidly. With so many new people paying in, the government's future pension obligations are rising quickly. A recent report issued by the Bank of China and Deutsche Bank estimated that China’s pension system will have a U.S.$2.9 trillion gap between assets and liabilities by the end of 2013. By 2033 the gap is expected to reach U.S.$10.9 trillion, or 38.7% of GDP.
What happened in the past decade or so to cause China, with an annual per capita income of around $5,000 (adjusted for purchasing power), to begin to acquire pension burdens found in richer and heavily indebted industrial states? What will this mean for trading partners who keep urging the Chinese government to rebalance its economy toward greater consumption (and imports) and away from relying so heavily on exports?
Essentially what happened is that Beijing designed a pension system in the late 1990s that will leave households with much less to spend than many observers assume. Urged by World Bank economists and foreign pension experts, the Chinese government put in place a hybrid pension arrangement that relies on both traditional pay-as-you-go collections from employers and mandatory individual accounts, from which workers were to finance anywhere from one half to two-thirds of their retirement needs. (They also were expected to buy pension and annuity products from commercial providers). But that pension design has resulted in a double whammy: households consume less in order to save for retirement needs, while the government's long term pension debt is escalating rapidly because local governments raided the individual accounts to pay benefits to current retirees.