Stochastic Assessments of Urban Employees’ Pension Plan of China

Abstract

In the uncertain environment of population and economy; the pension plan for urban employees in China is under threat from various types of financial risk. This paper mainly builds a comprehensive risk assessment system to evaluate the solvency sustainability of the urban employees’ pension plan of China. Specifically, we forecast annual accumulative net asset; actuarial balance; and potential support ratio for the next seventy years. To account for the impact of demographic uncertainty on long-term finances, stochastic simulations are used to estimate the probability distribution of relative risk indicators. Moreover, we integrate the Lee–Carter model into the population projection. According to the median projection, the public pension fund will have a gap in about 35 years; and the cash flow will be negative about 25 years later. Furthermore, under the existing policy, the burden of insured employees will increase rapidly. Delayed retirement could relieve the coming solvency risk, but it does not fundamentally resolve the solvency problem in the long run.

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

“…In the long run, neither the fertility policy adjustment nor the retirement delay would fundamentally solve the pension payment crisis. The results of the general trend of an expanding pension gap are consistent with the findings of Zhao et al [20] as well as Tian and Zhao [43].…”

“…Salditt and Whiteford [19] analyzed pension sustainability issues and pointed out that the limited coverage, low management level, empty individual account, poor returns, high replacement rates, and low retirement age compromise obstacles to the pension system. Using statistical models integrated with the Lee-Carter model, Zhao et al [20] accessed the solvency of the pension plan and concluded that under existing socio-economic policies and pension regulations, the payment burden of the pension system would increase rapidly. Moreover, they observed that delaying retirement age could not fundamentally solve the sustainability crisis of the pension system.…”

“…The population of retirees consists of two parts-the new arrivals meeting the retirement requirements and the survival retirees from previous years [20]. The population of retirees can be calculated by:…”

“…As mentioned previously, China's partially accumulated pension system of urban employees has devolved into a pay-as-you-go system that provides definite benefits for retirees. In this context, the present research uses current pension surpluses/deficits, accumulated pension surpluses/deficits, and the dependency ratio to monitor the financial sustainability of the public pension, all of which have been commonly adopted indicators for a defined-benefit pension system [20,27,28].…”

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

“…Zheng and Liao (2017) [41] established the basic pension contributions and expenditures forecasting model under the assumption that payment status and retirement age were random variables, and they verified the accuracy of the prediction model with Beijing data. Zhao (2018) [42] assessed the solvency sustainability of UEEPP in China by a stochastic simulation method.…”