Government coverage

At present, distribution of pensions for retirees from enterprises has not been affected, without default or reduction of payment.

The MOHRSS figures showed that by the end of 2011, China's basic endowment insurance system had covered 261.14 million persons, and 62.99 million persons had been drawing pensions. In 2011, 1.14 trillion yuan ($179.53 billion) of pensions were distributed, and the shortfall was made up for with government funds. Among the 1.56 trillion yuan of incomes of the national pension fund system, 208.24 billion yuan ($32.79 billion) was from government subsidies, accounting for 13.35 percent; employers paid 787.89 billion yuan ($124.08 billion), accounting for 50.49 percent; employees paid 494.23 billion yuan ($77.83 billion), accounting for 31.67 percent; and interests and other incomes stood at 67 billion yuan ($10.55 billion), accounting for 4.49 percent.

"A few provinces, autonomous regions and municipalities once faced deficiency in pension payment, but with subsidies from the central and local governments, all the provinces, autonomous regions and municipalities now have balanced incomes and expenditures," said Yin.

According to the China Pension Report 2011 released by the CASS, from 1997, governments at various levels have granted 1.25 trillion yuan ($196.85 billion) in subsidies to the pension fund system. By the end of 2011, among the balance of the country's pension funds, two thirds had come from the government budget. With fiscal subsidies, China's pension fund system still has a surplus in terms of current cash flow. Many provinces and municipalities might have had difficulties in distributing pensions without government fiscal subsidies.

According to a research made by the Institute of Finance and Trade Economics of the CASS, under the present framework of the endowment insurance system, there will be inadequate cash to pay pensions by 2015. A report released by the World Bank shows that under the existing mechanism, China's pension fund will have a shortfall of 9.15 trillion yuan ($1.44 trillion) by 2075.

Aging problem

The diminishing "demographic dividend" in China will also help widen the pension fund shortfall. This dividend refers to an increase in the rate of economic growth due to an increase of people of working age.

"With the process of the aging population, the number of retirees is growing and the time that they draw pensions becomes longer, which will enlarge the country's expenditure in pensions. As the proportion of people of working age declines, the number of people paying to the pension fund system will decline. Hence the pension fund system will face difficulty in distributing pensions," said Zheng.

Zheng said currently China's pension fund system has a cash surplus, because every year there are millions of people joining the pension fund system. In 2011, revenue of China's pension fund system grew by 25.9 percent, higher than the 20.9 percent growth of expenditure. But as the population ages, such advantage will no longer exist.

In the 1960s and 1970s, China experienced a baby boom. Now the baby boomers are in working age. After that, for the family planning policy, the birth rate began to drop. In 20 years when the people of working age now get old, the number of people paying to the pension fund will be smaller than that of those drawing pensions. Actually the impact of diminishing demographic dividend has already been seen now.

Research by the CASS shows that in 1978 each employee needed to provide for 0.603 minors and 0.081 seniors above 65 years old, and in 2006, the respective numbers were 0.255 and 0.127. From 2000 to 2010, China's working age population increased by only 1 percent and it will stop increase by 2015, marking the vanishing point of China's demographic dividend.

According to Zheng's calculation, China's basic endowment insurance system now covers 260 million people, with 190 million paying to the pension fund system and 63 million drawing pensions. This means three payers need to pay for pension of each drawer. As the aging process accelerates, two young workers have to provide for four or even five pensioners.

Besides, life expectancy of the Chinese people is rising. From 1980 to 2010, it rose by one year every five years. If the retirement age remains unchanged, the time of drawing pensions will be extended, intensifying the pressure for the pension fund system.

Wrong answer

Pressure on the pension fund system has forced discussion on the possibility of raising the retirement age.

The aging population is a challenge faced by the whole world. At present, people in the United States and Germany retire at 65-67 years old, but in China, men retire at 60 and women at 50 or 55.

The present policy of retirement age adopted by China was set in the 1970s. Forty years have passed, during which life expectancy of the Chinese people has risen by seven years, but the retirement age keeps unchanged.

According to the MOHRSS, if the retirement age is raised by five years, 20 billion yuan ($3.17 billion) of pension fund shortfall can be made up. Retiring later, a worker can pay longer into the pension fund system and draw more pensions after retirement.

However, just raising the retirement age is not enough to solve this growing pressure. Even raising the retirement age, till 2050 government fiscal subsidy to make up for pension fund shortfall will still account for 9.9 percent of the national budget each year. Moreover, compared with the present shortfall of 2.2 trillion yuan ($349.2 billion), making up for 20 billion yuan ($3.17 billion) of shortfall every year is peanuts and cannot change the fact that the shortfall is expanding.

Reform needed

Zheng said in the long run, China needs to reform its social security system. Without reforms, payment of pensions will be unsustainable.

Tang Jun, Secretary General of the Social Policy Research Center of the CASS, said the government should make proper middle- and long-term plans on the proportion of government subsidies in the pension fund system, the amount of incomes and expenditures of the pension fund and the methods to make up the shortfall so as to ensure reforms of the social security system.

Tang thought the government should now particularly consider, based on an accurate estimation of pension fund payers and the population of retirees, formulating different schemes such as raising the retirement age and transferring shares of listed state-owned enterprises.