HOW MUCH?: Villagers Wan Jiafu and his wife in Jinan, Shandong Province get their pension each month after they reached retirement age of 60 (XU SUHUI)

Pension funds in 14 provinces were in the red in 2010—deep in the red by as much as 67.9 billion yuan ($10.36 billion), an increase of 25 billion yuan ($3.82 billion) compared to the deficit from the year before, according to China Pension Report 2011, released by the Chinese Academy of Social Sciences (CASS) on December 20, 2011. The report paints a perplexing and somewhat dismal picture of China's pension system.

Among the 14 provinces, Liaoning and Heilongjiang were short of more than 10 billion yuan ($1.53 billion) in 2010.

With a rapidly aging population and a widening gap in the balance sheet of the country's pension fund, authorities are pondering how to make China's largely stagnant retirement accounts increase in value.

To address the pension deficit, Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC), recently suggested the pension fund be invested in domestic stock markets to reap higher returns.

Many compared Guo's proposal to a Chinese version of the American 401(k) plan, which started in the early 1980s and is now common practice among U.S. citizens. It allows workers to set aside a portion of their income in a retirement account for withdrawal at a later age.

Those in favor of Guo's plan said it would not only boost the yield of the pension fund, but also salvage the tumbling stock market, which is now running out of liquid capital.

Low return

Currently, local pension funds can only park their money in low-yield bank deposits and government bonds.

It's estimated that pension funds managed by local governments total about 2 trillion yuan ($305 billion).

But the annual yield of the pension funds in the past 10 years was a paltry 2 percent, falling far short of inflation rate.

This caused a substantial chunk of the fund to lose value each day, said Dai Xianglong, Chairman of the National Council for Social Security Fund (NCSSF).

The CSRC and a number of government departments have discussed a proposal that would involve setting up a new entity similar to NCSSF, according to experts on the matter. NCSSF is responsible for managing the country's social security fund and is free to invest the fund both in domestic and overseas capital markets.

The social security fund under the NCSSF's management reaped an annual investment yield of 9.17 percent in the past 11 years, out-performing an inflation rate of 2.14 percent during that time.

Opposition

The proposal comes in the wake of nose-diving stock market. The Shanghai Composite Index, the benchmark index, plunged almost 30 percent since April 2011, resulting in considerable losses. The stock markets in other countries also performed badly due to the European debt crisis and uncertainty of the global economy.

Su Peike, a researcher at the Public Policy Research Center with the University of International Business and Economics, argued the pension and social security funds are closely related to the well-being of the people, so precautions should be taken when using the money. Currently, the pension fund might "enter the market like a big shark, but come out like a small fish," Su said, adding it is not wise to invest in stocks before the government fully explains the benefits and risks associated with it.

Economic commentator Ye Tan said investing the pension fund in the stock markets bears considerable risk. She proposed three conditions that need to be established if that is where the money will go. First, China needs a mature securities market. Second, pension contributors are willing to invest the fund in the stock markets, without intervention or direction from any government departments. Third, the basic yield on that investment must also be secured. So far, none of these conditions have been met.