In a major move to address China’s growing elderly and aging population, Beijing has unveiled a private pension scheme that will allow people to invest their retirement funds into pension plan accounts. The scheme will also allow them to opt into a variety of different financial and investment products.
Under the scheme, employees will be able to contribute up to 12,000 yuan (USD $1,863) per year to their pension fund, the Chinese government announced on April 21 in a policy document published online.
Those who will be eligible for the scheme also include urban employees who already contribute to their basic pension insurance under the state social security system.
Prior to the launch, both employees and employers would contribute fixed amounts under state pension plans. Under the new private pension plan however, accounts will be opened at commercial banks and designated financial institutions, and investors will be able to access those funds at any time, the notice said.
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The project marks the official launch of China’s private pension sector after almost four years of pilot testing, and is expected to attract foreign insurers and asset managers to invest into the world’s most populous nation.
Pension plan aims to ‘increase retirement savings’
“In the mid-to-long term, the new policy will benefit the retirement market by helping to accumulate more retirement income, increasing residents’ retirement savings as well as investing awareness,” Leo Shen, Shanghai-based China head of fund management business at Allianz Global Investors told Reuters.
Under the new plan, the government will also adjust the maximum contribution allowed under its policies, in accordance with economic conditions. According to the policy breakdown, the scheme will be rolled out with one-year trials in select cities before being implemented nationwide.
The notice also added that funds held in the accounts can be invested in certain financial products, such as wealth-management banking products, deposits and public stocks. However, investors must bear the corresponding risks.
Hesitance amongst retirees
Policymakers have said that the biggest challenge lies in convincing individuals to “carve out part of their earnings and invest in these plans.” In 2021, per capita disposable income nationwide stood at 35,128 yuan (USD $5,402), according to a report by the South China Morning Post.
To encourage participation in the private pension system, tax deductions will be available on personal pension contributions for the first time, while the country’s securities’ regulator said it would work towards facilitating pension investment via mutual funds as well.
“Capital markets can help preserve and increase the value of pension funds, to proactively tackle the challenges of an aging society,” China’s Securities Regulatory Commission (CSRC) said in a statement released on its website on April 21.
In an effort to further incentivize the plan, the CSRC said that pension investments “will provide more long-term, and stable funds to develop the real economy, via capital market,” and encouraged people to sign up for the scheme as soon as it becomes available.
China’s aging population a major threat to its economy
By 2042, 28 percent of China’s population will be more than 60 years old, up from 10 percent today — making it one of the most rapidly-aging populations in the world, according to findings by the World Health Organization (WHO).
If current trends continue, China’s population will peak at 1.44 billion in 2029 before entering “unstoppable” decline, according to a Chinese Academy of Social Sciences study released in January 2019.
The country will enter an “era of negative population growth,” the report says, warning that by 2065, population numbers will return to the levels of the mid-1990s. Fewer people means less domestic consumption, which would further slow down an already-struggling Chinese economy. The ratio of young-to-old will also be dramatically imbalanced by the rising ranks of the elderly, putting unprecedented weight on the ties that hold society together.
The scale of the problem is partly due to the legacy of the one-child policy, a social-engineering experiment that remains one of the cruelest in history.
Implemented in 1980 to curb a booming population, the policy saw millions of women forced to have late-term abortions, along with hundreds of thousands of men and women forcefully sterilized if they were found to be “illegally pregnant”. The policy eventually began to act as a hitch on growth, prompting Beijing to abolish the law in 2016 and shift its stance to encourage families to have two or more children.