December 4, 2009

CHINA: Rural Pension Plan Takes Off

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SHANGHAI, China / China International Business Magazine / Economy / December 4, 2009

By Isabel Ding

Millions of aging rural Chinese — especially those over 60 years old — may no longer need to worry about their income after retirement.

The Chinese government has just begun a pilot pension program that, when in full operation, should serve the entire rural population.

The government is scheduled to spend RMB 3 billion (USD 440 million) on the first phase, which will be started in 10% of counties by the end of this year and expanded nationwide by 2020. Chinafotopress

First announced in August by Hu Xiaoyi, vice minister of the Department of Human Resources and Social Security (DHRSS), the trial pension plan gives a monthly endowment to farmers over the age of 60 that varies according to their area's income standards, but will be no less than RMB 55 per month.

“The rural pension plan will have a large influence on the transformation of the rural areas in China and help close the obvious gap between the countryside and the cities,” says Li Guoxiang, vice director of the Rural Economy Research Bureau of the Rural Development Institute Chinese Academy of Social Sciences. “It will also play a key role in promoting economic modernization.”

“The timing of the government decision to implement this plan has to do with the strength of our economy. The government [now] has the ability to deal with the problem of a large aging rural population,” Li adds.

“Of course, I have to say that it's also another measure to stimulate domestic consumption. Peasants have saved a certain amount of money. How to persuade them to consume? The government must guarantee more safety to them.”

AGING SOCIETY

Stimulating domestic consumption aside, there is a real need for a pension plan in China's rural areas. According to research by the Rural Development Institute Chinese Academy of Social Sciences, family size in both rural and urban areas in China has been gradually shrinking after the implementation of the Family Planning policy more than 20 years ago. There are now more retired people with no children to help care for them in their old age. This trend has had more impact on those in rural areas where there are fewer social services available.

“With rapid urbanization and the coming increase in the aging population, large numbers of rural workers will come to the cities to find work and the burden of caring for an aging population will primarily be felt in the rural areas,” says Tang Jun, the Secretary General of the Social Policy Research Centre with the Chinese Academy of Social Sciences.

“The problem of caring for the elderly will become more visible in the next 10 to 15 years,” he adds.

According to the National Bureau of Statistics the total number of rural workers in China at the end of 2008 was 225.4 million. In the next 10 years, it's expected that 8.5 million rural workers per year will migrate to urban areas, which means a total population shift from rural to urban areas of 300 million people in the next 20 years. The impact of this migration, coupled with the overall growth in the elderly population, will cause great pressure on the elderly who remain in the rural areas.

“After the implementation of the medical insurance plan in rural areas, the rural pension plan becomes the one remaining problem that needs to be resolved,” says Li.

GREAT EFFORT

This is actually the second time the government has tried to implement a rural pension system. In the early 1990s a program was introduced nationwide, but without any real financial support from central and local governments it failed. It was largely just a savings account for rural residents, and it wasn't very enthusiastically received.

“This time the central government is willing to take the lead in the new rural pension plan, with more financial backing. Due to many years' experience of dealing with the urban pension scheme the new plan will be carried out successfully, though small difficulties can't be avoided,” says Li.

This time the central government is signaling that it is more serious about making the program work. Premier Wen Jiabao said at a working conference in Beijing in August that all levels of government should increase their efforts to better implement the rural pension pilot program. He also stressed that building a new rural social pension system was an important key in establishing fairness in society and narrowing gaps between urban and rural areas. The contribution of the central and local governments is also clearly regulated in the new pilot program, which is a big difference from the previous system.

This time the payment system is divided into two parts, basic pensions and individual accounts. Individual accounts will be established for everyone joining the scheme. The central government will cover the cost of the entire basic pension in the middle and western areas of the country, and half of the basic pension in the eastern area. Local governments must also shoulder some responsibility. They must provide a subsidy of RMB 30 per year to rural residents who have contributed to the pension scheme.

In the eastern region of the country, local governments must match the central government's contribution, thus paying half of each eligible resident's basic pension in their district. Local governments may also raise the basic pension in their district, depending on their finances. During the initial phase of the rural pension scheme, participants over 60 will receive a pension of no less than RMB 55 per month; however, the State Council says that the government will adjust the minimum pension as well as the contributions depending on overall economic conditions in the country.

In trial areas, those over 60 can receive the pension immediately, even if they haven't previously contributed to the system. However, their children will be required to join and contribute to the rural pension program, even if they live in an urban area. Contributions by individuals are voluntary, and amounts range from RMB 100 to RMB 500 and will figure into the pension amount earned upon retirement.

DIFFERENT REACTIONS

Feng County, one of the poorest counties in Jiangsu Province, has been chosen as one of the first pilot areas for the new scheme, and promotion of the new rural pension there has been somewhat slow.

“We have received notice from the labor bureau of the county and opened a related working meeting,” says Si Shaoyong, the director of Huankou Town in Feng County.

“We plan to organize promotional activities in the villages after the October holiday and explain in more detail to the locals. The specific policies will be nailed down at that time.”

However, despite the slow progress of official promotion, many are already aware of the new program. “I heard about the news several days ago from other people and I didn't pay much attention to it,” says Ms. Sun, 80, whose three children all work in the city.

“I can't believe it. There are so many old people in my village. Can all of them enjoy this money?”

Another rural resident, 55 year-old Yu Fazhu, heard about the program from the television news. Although he still needs to contribute to the pension, he is eager to join the scheme.

“If I get the notice, I will be the first one to join it. I'm already 55 and I also have a mother aged 83. She can enjoy the pension without contribution,” says Yu. However, he doesn't think that all of the local residents will be receptive to the program at first.

“They will understand the benefit of it eventually, and when they do, all of them will want to join it,” he says.

But not all rural provinces are alike. An Shang Town, a small village in Henan Province, is home to the famous Yuntai Mountain, a popular travel destination. Local residents here are richer than those in nearby villages. “I heard of the new rural pension program, but I'm afraid that I won't join it immediately,” says Wang Xiaoli, in her 20s,

“I'm still young and there are so many years for me to wait to enjoy the pension. I prefer to do business right now.” Two of Wang's brothers have opened a small tourist hotel in the village and she helps to bring in visitors. She lives together with a grandparent who is over 80 years old and according to the regulations of the new scheme, this living situation makes her grandparent ineligible for the free pension. The requirement that the children of those over 60 must contribute to the scheme will undoubtedly hinder many elderly rural residents from receiving their pension.

“This regulation is aimed at getting more young people to join the rural pension program, especially during the trial phase. I believe it will be amended or changed in the future,” says Li.

“As rural residents become more familiar with the benefits of the policy and enjoy its rewards, things will be different.”

QUESTIONS REMAIN

Though the new rural pension system means elderly rural residents will no longer need to rely on their children or their own savings to support them, there are still some problems. The minimum pension of RMB 55 for rural residents is still too low compared with the amount of pension given to retired people in other sectors. According to Hu Xiaoyi, the average 2009 pension figure for urban retired enterprise employees is RMB 1,200. In addition, the pension for civil servants is 10% larger than the amount given to enterprise employees.

“The minimum pension figure for rural residents is related to the government's financial power. It's still not very strong, so the principle for the new pension plan is to cover as many as possible, but to keep a low level of payment,” says Li.

Ma Hongman, an economic consultant and the anchor of Shanghai's First Financial Channel, believes that the lack of financial capital will be the biggest difficulty in the new plan's implementation, but he still thinks that putting money into building up a social security system is much better than increasing investment. “It will stimulate the economy and create more consumption demand,” wrote Ma in his blog.

Referring to the problem of lack of financial support, he suggests that the current requirement of 10% transfer rate of state-owned stakes into the social security fund could be raised further and more treasury bills could be issued to raise money.

The rural pension plan is still waiting on the Social Security Act for full implementation. The act has been discussed since 1994, but it still hasn't been formally published, leaving doubts about the reliability of the rural pension fund.

A strong system of oversight is needed to guarantee the security of the rural pension fund, and preserving and increasing the value of the fund is also a difficult problem. If the funds are put in banks the value will lessen over time because of low interest rates compared to the rate of inflation.

According to one report from China News Weekly, the civil affairs bureau of Hong He in Yunnan Province received more than RMB 60 million in pension funds from different counties in the area between 1996 and 2003, but only about RMB 1.3 million was left in that account at the end of 2003. With such a rate of return, it might still be better to put the money under your mattress. [rc]

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