China to Create Unified Pension System

China to Create Unified Pension System

Plan Looks to Provide More Central Government Funding to Poorer Regions

LIYAN QI

Updated Feb. 7, 2014 10:07 a.m. ET

BEIJING—China pledged Friday to create a unified pension system to boost consumption and encourage labor mobility, a step toward empowering its vast rural poor.

China’s State Council, or cabinet, said it planned to create a unified pension system for residents in both rural and urban areas. Funding would come from contributions from individuals, the central government, local governments and social institutions, the State Council said on the central government’s website.

The plan would provide greater central government funding for China’s poorer regions to try to ease gaps in wealth, potentially lessening the burden of rural poor residents and governments to support the system. For instance, the central government would fully cover pension payouts in the nation’s central and western areas but would pay only half the pension in the more prosperous eastern regions, the statement said.

The statement didn’t disclose details of individual payouts.

Pensions in lower-income rural areas can trail the urban areas, though amounts vary. The eastern metropolis of Shanghai offers many residents 500 yuan (about $82) a month, while residents of the central province of Shaanxi can receive one-fifth of that, according to those governments’ websites.

Nearly half of China’s 1.3 billion people are rural. China hopes to increase urbanization as a way to bolster consumer spending and ensure a dependable source of economic growth.

China’s weak social safety net has led people to save more for medical care and retirement and spend less, many China researchers and economists have said, reducing potential consumption. That is one of the reasons China relies so heavily for growth on exports abroad and investment in infrastructure and property at home.

Revamping the pension system, which ties pension benefits to an individual’s residency permit, also could encourage workers to move from rural areas to cities where they can find better-paying jobs. Some workers have been discouraged from seeking employment outside their hometowns and need to return home before they can collect their pensions.

The Chinese system consists of at least four different pension programs, according to report last year by the Paulson Institute, a Chicago think tank that focuses on China. That is partly a legacy of the closure of many state-owned firms, which used to pay workers small sums upon retirement.

Fewer than half of all adults are covered by the urban pension, according to the Paulson report. A rural pension program was introduced more recently. It allows workers to make contributions to retirement accounts that are subsidized by local and central governments.

The Paulson report, written by Robert Pozen, a former vice chairman of the mutual fund giant Fidelity Investments, recommended that the central government first should standardize pension payments under the urban plan. “Over a much longer time horizon,” Mr. Pozen said in the report, urban and rural plans should be “harmonized.” But he said “true equality among pension programs still remains decades away.”

Beijing also said it would step up spending on pensions overall, the statement said. It didn’t give a time frame for when it would establish a national pension system.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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