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Wu Xiaoqiu, a Beijing resident, clicked the “submit” button when he finished the questionnaire about the topics on the 2012 sessions of the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference. The survey, launched by People.com.cn, aims to list the top 10 topics on the public consciousness. Among the choices, Wu ranked “social security” as the top priority.
“Everyone is concerned about social security issues like pensions and health care, and we hope the government can do better in social security,” said Wu.
The survey shows that social security has become the public’s main concern while income distribution, which sat atop last year’s list, came in second.
At present, the most controversial topic on social security is maintaining or increasing the value of the nation’s pension fund.
China’s basic pension system currently has a model that combines social collected funds with individual accounts. The former, paid by employers, is equivalent to 20 percent of the employee’s average monthly wage in the previous year, and the latter, paid in monthly installments by employees, equals 8 percent of his or her average monthly wage from the previous year.
The system is designed to pay pensions for the retired with money collected from younger generations. The fund only needs to maintain a minimal surplus so that normal retirement pension payment can be secured.
To alleviate the pressure from an aging society in the coming years, individual accounts have been established. By making investment with these individual funds, the government can fend off future risks to the pension fund.
However, since the government didn’t pay for the preliminary social collected funds prior to the establishment of the pension system, the fund in individual accounts is appropriated to pay current pensions in most parts of China. This has led to empty individual accounts and massive accumulated surplus in the social collected funds. Together with the depreciation of pension surplus, the situation has posed a great challenge to China’s pension fund management.
Statistics released by the Ministry of Human Resources and Social Security showed that at the end of 2011, China’s five social security funds—pension, medicare, unemployment, work injuries and maternity—had an accumulated surplus of 2.87 trillion yuan ($462.9 billion). The pension fund totaled 1.92 trillion yuan ($309.68 billion). Currently, investment channels for the pension fund are mainly bank deposits and treasury bonds.
Zheng Bingwen, Director of the Center for International Social Security Studies of the Chinese Academy of Social Sciences, said that with this kind of investment strategy, the annual yield rate after deducting the inflation rate is negative. In other words, the social security funds are depreciating.
“The nominal yield rate of social security funds is less than 2 percent, but China’s consumer price index increased 5.4 percent in 2011. With a negative interest rate of 3.4 percent, the funds suffered a loss of nearly 100 billion yuan ($15.9 billion) in 2011,” Zheng said.
Depreciation of social security funds imposes tremendous pressure on the full payment of pensions. It’s obvious that great wisdom is needed to figure out how to manage the money and how to generate more benefits.
On December 15, 2011, Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC), said the pension surplus should be invested in the stock market. The CASS later unveiled its 2011 China Pension Development Report, suggesting the Chinese Government set up an investment company which is specialized in managing the pension fund.
Investing in stocks or not
Zheng said China’s investment mechanism for the social security funds differs greatly from that in other countries. It’s the only one that completely relies on bank interest as its major investment returns.
“It is imperative for China to carry out market-oriented reform of its social security fund investments. The sooner, the better. It would not only help to prevent depreciation, but also help the government solve problems such as expanding coverage of the pension fund,” Zheng said.
After the market-oriented reform, the pension fund only faces one difficulty: tumultuous shifts in the market. In contrast, if not reformed, the fund will face quite certain losses—depreciation, and the amount of losses will be “certain.”
According to Zheng, if invested in the stock market, the pension fund will be safe from just about anything except a serious global financial crisis or nationwide systematic crisis. Even if there are some losses, the impact will be temporary and the losses will be floating ones that can be compensated for once the economy recovers.
Pi Haizhou, an independent financial columnist, said that keeping the pension fund away from the stock market is a responsible decision. Putting the fund into the stock mar- ket is a risky business, given that people’s retirements are at stake.
However, it is hard to ensure the safety of the pension fund in the current stock market, because returns in the A-share market are even lower than the interest of bank deposits.
In the past decade, China’s GDP registered a growth of 266 percent, while during the same period, the Composite Index of the Shanghai Stock Exchange witnessed almost no growth at all. Meanwhile, the number of listed companies increased by 1,000 and the circulated stock value surged 10-folds. It seems that collecting money has become the major function of the stock market. Statistics showed that since 1990, domestic A shares have raised 4.3 trillion yuan ($683.62 billion), offering total cash dividends of 1.8 trillion yuan ($286.17 billion).
According to Pi, it is obvious that the A-share market is financing-oriented, in which investors’ interests are hard to protect. Although cash dividends have been stressed again and again since Guo took up the post of CSRC Chairman, the reality of low-investment returns has not been changed because of low quality and high IPO prices. Stocks are also intensively held by controlling shareholders or big shareholders at low cost.
“It’s not a good time for the pension fund to enter the A-share market, so it is a responsible decision to keep it away from the stock market for the safety of the pen- sion fund,” said Pi.
Wu also expressed concern. “Who should be responsible if the pension fund suffered a loss in the stock market?” he said.
Wu learned from the Internet that countries whose pension funds are heavily invested in stocks, such as Ireland, Canada and Norway, suffered terribly during the global financial crisis. In 2008, the volume of global pension funds shrank from $31.4 trillion to $25 trillion.
On February 23, Hu Xiaoyi, Vice Minister of Human Resources and Social Security, said the national social security funds will be invested in multiple channels to form an investment portfolio, not a single channel of investment.
In fact, current regulations don’t allow the pension fund to be invested in the stock market. According to Article 22 of the Provisions on the Management of Workers’ Pension Fund, social security management institutions of all levels are prohibited from granting loans, commercial involvement, starting companies, stock purchase or providing financial guarantee for economic activities.
If the government wanted to invest the pension fund in the stock market, it would first have to revise the provision.
The way out
Since investing in the stock market is still in dispute, the question remains: How should China manage the fund to ensure its value?
Su Peike, chief researcher at the Institute for Public Policy Research of the University of International Business and Economics, said the question should be focused on the benchmark interest rate for one-year time deposit, which is 3.5 percent, and why the investment return rate is just 2 percent.
The reason, Su said, is that the management authorities puts a majority of the pension fund in demand deposit so that they can be drawn back flexibly.
“But with even the lowest calculating capability, the management authorities of the pension fund can figure out the exact surplus and how long the surplus will last, then save the surplus as a time deposit,” said Su.
In China, there are more than 2,000 pension fund management institutions, most of which are city- and county-level social insurance agencies with the funds deposited in special government accounts. Therefore it is difficult to supervise so many institutions in an efficient way, and the investment rate is low.
Su said the top priority for pension fund management is making a nationwide pension fund strategy, improving the management capability and incorporating all the people into a unified social security system.
Zheng said the current pension fund investment mechanism must be reformed immediately. The reform can be carried out in three stages.
First, within one or two years, the pension fund should be completely invested in special treasury bonds and abolish all bank deposits. Since the inflation rate is expected to be about 4 percent, the interest rate of the special treasury bonds can be 4-5 percent.
Second, the investment management mechanism of the pension fund should be reformed. Uniform individual accounts can be set up to incorporate payment from both employers and employees to facilitate establishment of a “fund pool.” Then the country can establish a nationwide management institution of the pension fund to carry out uniform and multiple investment of the pension fund in order to diversify investment channels and increase the investment returns.
Third, the reform should be further deepened to thoroughly solve the problem of low returns rate.
“If the current mechanism is not reformed, the depreciation of the pension fund will continue to embarrass us in even 10 years,” Zheng said.
“Everyone is concerned about social security issues like pensions and health care, and we hope the government can do better in social security,” said Wu.
The survey shows that social security has become the public’s main concern while income distribution, which sat atop last year’s list, came in second.
At present, the most controversial topic on social security is maintaining or increasing the value of the nation’s pension fund.
China’s basic pension system currently has a model that combines social collected funds with individual accounts. The former, paid by employers, is equivalent to 20 percent of the employee’s average monthly wage in the previous year, and the latter, paid in monthly installments by employees, equals 8 percent of his or her average monthly wage from the previous year.
The system is designed to pay pensions for the retired with money collected from younger generations. The fund only needs to maintain a minimal surplus so that normal retirement pension payment can be secured.
To alleviate the pressure from an aging society in the coming years, individual accounts have been established. By making investment with these individual funds, the government can fend off future risks to the pension fund.
However, since the government didn’t pay for the preliminary social collected funds prior to the establishment of the pension system, the fund in individual accounts is appropriated to pay current pensions in most parts of China. This has led to empty individual accounts and massive accumulated surplus in the social collected funds. Together with the depreciation of pension surplus, the situation has posed a great challenge to China’s pension fund management.
Statistics released by the Ministry of Human Resources and Social Security showed that at the end of 2011, China’s five social security funds—pension, medicare, unemployment, work injuries and maternity—had an accumulated surplus of 2.87 trillion yuan ($462.9 billion). The pension fund totaled 1.92 trillion yuan ($309.68 billion). Currently, investment channels for the pension fund are mainly bank deposits and treasury bonds.
Zheng Bingwen, Director of the Center for International Social Security Studies of the Chinese Academy of Social Sciences, said that with this kind of investment strategy, the annual yield rate after deducting the inflation rate is negative. In other words, the social security funds are depreciating.
“The nominal yield rate of social security funds is less than 2 percent, but China’s consumer price index increased 5.4 percent in 2011. With a negative interest rate of 3.4 percent, the funds suffered a loss of nearly 100 billion yuan ($15.9 billion) in 2011,” Zheng said.
Depreciation of social security funds imposes tremendous pressure on the full payment of pensions. It’s obvious that great wisdom is needed to figure out how to manage the money and how to generate more benefits.
On December 15, 2011, Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC), said the pension surplus should be invested in the stock market. The CASS later unveiled its 2011 China Pension Development Report, suggesting the Chinese Government set up an investment company which is specialized in managing the pension fund.
Investing in stocks or not
Zheng said China’s investment mechanism for the social security funds differs greatly from that in other countries. It’s the only one that completely relies on bank interest as its major investment returns.
“It is imperative for China to carry out market-oriented reform of its social security fund investments. The sooner, the better. It would not only help to prevent depreciation, but also help the government solve problems such as expanding coverage of the pension fund,” Zheng said.
After the market-oriented reform, the pension fund only faces one difficulty: tumultuous shifts in the market. In contrast, if not reformed, the fund will face quite certain losses—depreciation, and the amount of losses will be “certain.”
According to Zheng, if invested in the stock market, the pension fund will be safe from just about anything except a serious global financial crisis or nationwide systematic crisis. Even if there are some losses, the impact will be temporary and the losses will be floating ones that can be compensated for once the economy recovers.
Pi Haizhou, an independent financial columnist, said that keeping the pension fund away from the stock market is a responsible decision. Putting the fund into the stock mar- ket is a risky business, given that people’s retirements are at stake.
However, it is hard to ensure the safety of the pension fund in the current stock market, because returns in the A-share market are even lower than the interest of bank deposits.
In the past decade, China’s GDP registered a growth of 266 percent, while during the same period, the Composite Index of the Shanghai Stock Exchange witnessed almost no growth at all. Meanwhile, the number of listed companies increased by 1,000 and the circulated stock value surged 10-folds. It seems that collecting money has become the major function of the stock market. Statistics showed that since 1990, domestic A shares have raised 4.3 trillion yuan ($683.62 billion), offering total cash dividends of 1.8 trillion yuan ($286.17 billion).
According to Pi, it is obvious that the A-share market is financing-oriented, in which investors’ interests are hard to protect. Although cash dividends have been stressed again and again since Guo took up the post of CSRC Chairman, the reality of low-investment returns has not been changed because of low quality and high IPO prices. Stocks are also intensively held by controlling shareholders or big shareholders at low cost.
“It’s not a good time for the pension fund to enter the A-share market, so it is a responsible decision to keep it away from the stock market for the safety of the pen- sion fund,” said Pi.
Wu also expressed concern. “Who should be responsible if the pension fund suffered a loss in the stock market?” he said.
Wu learned from the Internet that countries whose pension funds are heavily invested in stocks, such as Ireland, Canada and Norway, suffered terribly during the global financial crisis. In 2008, the volume of global pension funds shrank from $31.4 trillion to $25 trillion.
On February 23, Hu Xiaoyi, Vice Minister of Human Resources and Social Security, said the national social security funds will be invested in multiple channels to form an investment portfolio, not a single channel of investment.
In fact, current regulations don’t allow the pension fund to be invested in the stock market. According to Article 22 of the Provisions on the Management of Workers’ Pension Fund, social security management institutions of all levels are prohibited from granting loans, commercial involvement, starting companies, stock purchase or providing financial guarantee for economic activities.
If the government wanted to invest the pension fund in the stock market, it would first have to revise the provision.
The way out
Since investing in the stock market is still in dispute, the question remains: How should China manage the fund to ensure its value?
Su Peike, chief researcher at the Institute for Public Policy Research of the University of International Business and Economics, said the question should be focused on the benchmark interest rate for one-year time deposit, which is 3.5 percent, and why the investment return rate is just 2 percent.
The reason, Su said, is that the management authorities puts a majority of the pension fund in demand deposit so that they can be drawn back flexibly.
“But with even the lowest calculating capability, the management authorities of the pension fund can figure out the exact surplus and how long the surplus will last, then save the surplus as a time deposit,” said Su.
In China, there are more than 2,000 pension fund management institutions, most of which are city- and county-level social insurance agencies with the funds deposited in special government accounts. Therefore it is difficult to supervise so many institutions in an efficient way, and the investment rate is low.
Su said the top priority for pension fund management is making a nationwide pension fund strategy, improving the management capability and incorporating all the people into a unified social security system.
Zheng said the current pension fund investment mechanism must be reformed immediately. The reform can be carried out in three stages.
First, within one or two years, the pension fund should be completely invested in special treasury bonds and abolish all bank deposits. Since the inflation rate is expected to be about 4 percent, the interest rate of the special treasury bonds can be 4-5 percent.
Second, the investment management mechanism of the pension fund should be reformed. Uniform individual accounts can be set up to incorporate payment from both employers and employees to facilitate establishment of a “fund pool.” Then the country can establish a nationwide management institution of the pension fund to carry out uniform and multiple investment of the pension fund in order to diversify investment channels and increase the investment returns.
Third, the reform should be further deepened to thoroughly solve the problem of low returns rate.
“If the current mechanism is not reformed, the depreciation of the pension fund will continue to embarrass us in even 10 years,” Zheng said.