Pension sustainability in China : crouching provinces, hidden deficits

Abstract

This study examines the sustainability of the existing pension system in China up to 2040. The methodology employed by this paper is an adaptation and extension of Zeng Yi's paper, "Effects of Demographic and Retirement-Age Policies on Future Pension Deficits, with an Application to China". Our model incorporates the existing pension balance from the previous year and the variables of average wages, number of workers and retirees, contribution rate and payout rate to project the pension balance at the end of each year. With different scenarios of wage growth, payout rates and retirement ages, the model is then employed to project the sustainability of the pension system on a nationwide scale as well as on provincial levels. Many studies have been done on a national level but little or no research is done on provincial levels. We would be going in depth at the provincial level. A total of nine provinces with different economic and geographical backgrounds were projected. In general, the national projection showed deficits in most of the scenarios, but it would be sustainable if retirement ages were increased and payout rates were lowered. The provincial projections illustrated a different picture whereby “good” provinces would continue with better surpluses and “bad” provinces would have worse deficits in the future.