(Yicai Global) March 4 -- China should resolve structural issues in the endowment insurance system as soon as possible and build a multi-layered pension system during the 14th five-year plan period to cope with the upcoming peak of the population aging problem, according to social security experts.

China has a three-tier endowment insurance system, with the first level being basic pension insurance, which covered 999 million people as of last year, according to data from the Ministry of Human Resources and Social Security. The figure for those with unemployment and job injury insurance was 217 million and 268 million, respectively. All three figures were up from 2019. About 61 million poor residents had basic endowment insurance, with enrollment just shy of 100 percent.

The second level is the corporate and occupational annuity system, which covers more than 58 million people. The third tier, the personal pension system, has not yet been launched.

China’s current social security system faces multiple challenges, according to Zheng Gongcheng, a professor at Renmin University of China and a deputy to the 13th National People’s Congress. He cited an ageing population, widespread population mobility and the divide between residents and household registration, a huge number of low-income groups and the imbalance between growth in social welfare and slow increase in personal wealth.

The preliminary consideration for the personal pension system was that it should be based on accounts and residents’ voluntary participation, with tax-related support from state finance and participation of funds to form a market-oriented investment and operation, Human Resources and Social Security Vice Minister told reporters on Feb. 26.

Pensions Debate

Social security reforms have been swaying between mutual benefit and the emphasis on liaison between social insurance payment and gained benefits in recent years, noted Zhang Yi, a researcher at the School of Public Economics and Administration of Shanghai University of Finance and Economics. For example, the debate over whether pension insurance should focus on overall plans or personal accounts is still ongoing. But from the government’s recent explanations, China has fundamentally determined the basic endowment insurance system’s main functions, namely risk sharing and reallocation. Savings and investment should be the second and third pillars of the system.

Beijing’s prestigious Tsinghua University offered suggestions for the second and third pillars. It called for improving the coverage of corporate annuity, vigorously developing trust-based personal pension asset management policies and market, and carrying out innovations for age-related finance in respects of increasing fund accumulation, managing risks and expanding consumption.

The Central Committee of the China Democratic League also urged the government to strengthen preferential tax policies, such as raising the pre-tax deduction for third pillar (personal pensions) contributions on the existing basis. The government should also establish a dynamic adjustment mechanism based on changes in average wage growth and inflation in society and other factors.

Editors: Zhang Yushuo, Peter Thomas