Assessing the Financial Sustainability of the Pension Plan in China: The Role of Fertility Policy Adjustment and Retirement Delay

Abstract

Population aging is creating serious challenges for the sustainability of China’s pension system. To mitigate the adverse impact of the demographic shift, China has recently introduced fertility and retirement policy reforms. The research presented in this paper primarily evaluates the impacts of recent reforms on the financial sustainability of China’s Urban Employees’ Pension Plan (UEPP). By using the Leslie matrix and actuarial models, the financial sustainability of the UEPP from 2019 to 2070 is projected and evaluated under a set of assumed policy reform scenarios. The results indicate that an imbalance in the pension fund would occur in the early 2020s and then expand under existing policies. Fertility adjustment, retirement delay, or combination reforms would not fundamentally solve this financial crisis in the long term. When 100% of couples have a second child and the retirement age is increased to 65, the current and accumulated pension deficits would drop by 50.05–67.56% and 35.88–54.23% between 2040 and 2070, respectively. Supplementary policy measures should be designed to encourage childbearing and retirement delay, including family support policies and top-designed pension system reform policies.

Stochastically Assessing the Financial Sustainability of Individual Accounts in the Urban Enterprise Employees’ Pension Plan in China

“…The starting value of i 0 is 3.7769% of the mean value of the 2018 sample. According to the iteration Formula (16), the distribution of the return rate on investment in 2019 and the following years of the forecast period can be deduced. The distribution of 10,000 random numbers of the return rate on investment i 1 in 2019 and i 50 in 2069 at the end of the forecast period is shown in Figure 2.…”

“…Then, we take the average of each group as the fixed bookkeeping rate for the corresponding year. The investment return rate obeys the fitted Vasicek model in Formula (16), so it can also use MATLAB to generate its random numbers. Using MATLAB to program and substituting the above-mentioned estimated values of the number of insureds, the growth rate of working age wages, and the wages growth rate, the CBCE of UEEPPI in baseline scenario can be calculated.…”

“…Generally, the interactions of the pension system, wages, interest rates, migration, and labor supply are considered in a general equilibrium model such as the overlapping-generations model [50,51,54]. In this paper, these factors are given exogenously according to the relevant literature [14][15][16][19][20][21]28]. In fact, the factors are calibrated according to average values over a comparatively long period, during which the interactions have been roughly considered.…”

“…Although China has not yet formed an official long-term financial, actuarial reporting system for basic pensions, the Chinese government and scholars have conducted extensive research on the financial sustainability of basic pensions. These studies have helped to understand the long-term financial sustainability of China's basic pensions, to accelerate the formation of China's official long-term financial, actuarial reporting system, and to demonstrate China's experience in solving the pension crisis brought about by its aging population [13][14][15][16].…”

Assessment of the Financial Sustainability of China’s New Rural Pension Plan: Does the Demographic Policy Reform Matter?

“…In 2015, China's urban pension fund went into the red in 25 of 31 provinces [5]. Recent research shows that the current urban pension deficit is expected to reach CNY 42.02 trillion in 2050 and CNY 74.23 trillion in 2070 [6], indicating an inevitable trend towards imbalance of the pension fund [7][8][9]. However, China's rural pension plan gets much less attention than the urban pension scheme, particularly within international academia.…”