Op-Ed Contributors

Securing the future of workers

By Wang Yiqing (China Daily)
Updated: 2010-09-09 08:02

Zheng understands people's worry over the "empty account". But he says: "When it comes to pension, what China lacks is not money but a perfect system."

"In fact, China's old-age insurance system has a 1.25-trillion-yuan surplus now, which is almost equal to the empty account." The irony that the surplus cannot fill in the fund gap reflects the imperfection of the pension system.

In terms of social pooling funds, the overall planning level of the old-age insurance system is comparatively low. Hence, it's hard for the central government to manage the funds, because of which the country's regions have pension gaps and the coastal areas have pension surplus.

Under such circumstances, improving the overall planning level of the pension system faces moral hazards and may lead to adverse selection, Zheng says. Since local governments in developed areas are reluctant to part with pension funds, they would tend to hide the surplus pension funds in their possession. On the other hand, undeveloped areas, which benefit from such funds transfer, would report retirees as much as possible. A system with depleting capital sources and rising demands is financially unsustainable and inefficient, Zheng says.

Another significant problem lies in the personal account. According to the Samuelson-Aaron Paradox, a funded system is worthwhile only if the sum of the growth rate of social average wages and the population growth rate is lower than the funds' rate of return on investment. Otherwise, the PAYG system is preferable.

Unlike Latin American countries, such as Chile which has had the funded system for years, China's rapid economic growth has increased average wages beyond the imagination of the pension system designers.