China's long-held dual pension system will break. Vice Premier Ma Kai, when reporting to the bi-monthly session of the Standing Committee of the 12th National People's Congress on December 23, 2014, said that the country will reform the pension system for government employees and those who work for public institutions and implement the same pension system with urban employees.
Ma said that under the Central Government's arrangement, several departments have drafted a plan for the reform based on extensive studies. The draft was then approved at the executive meeting of the State Council and by the Standing Committee of the Political Bureau of the Central Committee of the Communist Party of China (CPC). The reform comes from the constructive nature of the changes that will build a pension system for Party, government and public institutions with the same qualities as that for enterprises, and the reform will be carried out nationwide simultaneously with the reform of the salary system.
Under the current dual pension system, employees in government bodies and public institutions don't need to pay for their pensions, and the government supports fully them. However, employees in various types of enterprises have to pay 8 percent of their salary into a pension account. After retirement, urban employees usually get a pension equal to 40-60 percent of their final salary, but employees in government bodies and public institutions can get 80-90 percent of their final salary.
"The pension reform plan has been approved and is expected to be revealed soon, which means a significant step forward for pension reform," said Lu Xuejing, Dean of the Department of Labor and Social Security of Capital University of Economics and Business.
Nie Riming, a researcher with the Shanghai Institute of Finance and Law, thinks the highlights of Ma's report are the simultaneous implementation of pension system reform for both government employees and those in public institutions, as well as the establishment of a nationwide universal pension system.
At great cost
According to a report of the 21st Century Business Herald, a business newspaper based in Guangzhou, south China's Guangdong Province, there are 7 million government employees and 30 million public institution employees in China. Breaking the dual pension system means these 37 million people will be included into the pension system for urban employees.
A huge cost will be needed to unite the pension system for such a large number of people. In a paper written in 2013 by Lu Mingtao, a doctoral candidate from the Department of Economics of the Chinese Academy of Social Sciences (CASS), supposing the dual pension system was applicable to the retirees in and before 2010 and the new pension system is applicable to the retirees since 2011, the government has to pay 3.9 trillion yuan ($637.25 billion) for government employees and 5.2 trillion yuan ($849.67 billion) for employees of public institutions. In 2010, the country's total fiscal revenue was 8.31 trillion yuan ($1.36 trillion).
Another estimate made by Nie shows that the government needs to pay 3.7 trillion yuan ($604.58 billion) to employees of public institutions and 4.5 trillion yuan ($735.29 billion) to government employees.
How does China cover such high a cost? Nie offers two suggestions—either the government fully fills in the gap with fiscal revenue or the pension fund for urban employees will be used temporarily to make up for the gap. "These two options both face heavy financial pressure," said Nie. "The government's fiscal revenue obviously cannot afford this sum of money."