China pension reform targets civil servant privileges

China's 40m public sector employees are to lose their exemption from paying into the state pension system, as the government looks to curb public outrage over excess benefits for civil servants.

China's dual-track urban pension system - in which corporate employees must contribute 8 per cent of their salary to the pension system but government employees contribute nothing - has been a source of populist outrage for years. The State Council, China's cabinet, on Wednesday announced a long-awaited plan that will move to equalise the two systems.

The reform follows years of delays and intra-government wrangling. The State Council introduced a pilot pension reform in 2008 but it ran aground when professors and doctors began retiring early to avoid being ensnared by benefit cuts.

"There are definitely opposing voices," said Yang Lixiong, deputy director of the China Social Security Research Center at Renmin University. "When reform comes down on your own head, of course you won't like it . . . The pension privileges of civil servants have received criticism from the entire public, so this is inevitable."

The plan applies to 8m civil servants, who work directly for government agencies, as well as an additional 32m employees of public institutions, including teachers, doctors and state researchers.

Employees will contribute 8 per cent of their salary to the retirement insurance fund, while employers will contribute 20 per cent. There is no dedicated revenue source for public sector pensions, with the government simply paying retiree benefits out of general fiscal revenue.

The reform also addresses the gap in pension benefits favouring public-sector employees. Most government workers receive pensions equal to 80-90 per cent of their pre-retirement salary, while the ratio for non-government employees is often below 50 per cent. The new benefit schedule does not affect current retirees but phases in less generous benefits for current workers and those newly hired.

"This issue has been haunting the government for years," said Wang Feng, professor of sociology at University of California Irvine. "The plan announced yesterday shows the government's determination to confront it."

The government has moved aggressively to expand pension coverage in recent years but for most residents coverage is meagre. Mr Wang says that while 98 per cent of the population is covered by one of several pension schemes, only about 30 per cent have "meaningful" coverage.

Underfunded pensions for non-government workers have been a source of labour unrest in recent years.

In May workers at a factory that makes running shoes for Nike and Adidas in Guangdong province went on strike to protest against years of alleged underpayment of pension contributions. Anger over pension payments also fuelled a teacher strike in northeastern Heilongjiang province in November.

While addressing concerns over fairness, the pension reform may do little to address the looming pension shortfall caused by China's ageing population.

The number of people aged 65 and over will rise from 132m in 2015 to 331m by 2050, while the number aged 15-64 will fall from 1bn to 849m, according to projections by the UN. That will cause the ratio of those aged 65 and over to those aged 15-64 to rise from 13 per cent in 2015 to 39 per cent by 2050.

Even with the current low dependency ratio, many provinces run annual shortfalls that have been filled by raiding current workers' personal retirement accounts - which were intended as a pre-funding mechanism to pay future benefits - to pay benefits owed to current retirees.

The funding shortfall in China's urban pension system between 2012 and 2050 is equal to about Rmb39tn ($6.3tn) in current value terms, according to a widely cited 2012 book co-authored by Ma Jun, then chief China economist at Deutsche Bank and now chief economist at the People's Bank of China's research bureau.

In theory, requiring China's 40m public sector employees to pay into the system will reduce the shortfall but in practice experts say the government will face pressure to raise public salaries to compensate for the newly required employee pension contributions.

"If the local government gives us good wages, we don't mind paying for our pension," said a teacher from Heilongjiang, who was involved in last year's strike. She earns Rmb3,200 per month.

In addition, the plan calls for government departments and public institutions to offer tax-preferred, defined contribution retirement savings plans to which employers will contribute an additional 8 per cent of salaries and employees an additional 4 per cent.

Despite low salaries, the civil service remains a popular career choice for young Chinese. Among graduates, 38 per cent said they would prefer to work for the government, compared with 32 per cent for private companies and 23 per cent for a state-owned company, according to a survey last year by Hongwei Occupational Consulting. About 900,000 people sat for the civil service examination in 2014.

Twitter: @gabewildau

Additional reporting by Ma Nan and Wan Li

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