Raising the retirement age: the impact on the individual and actuarial balance for Chinese urban workers’ basic pensions

Abstract

Rapid population ageing and increasing longevity are raising concerns about the sustainability of the basic pension systems in China. Raising the retirement age, as an important way to maintain long-term financial sustainability, has become the main policy choice for China. Some studies show that postponing retirement can solve the financial pressures of pension systems effectively. However, if the pension benefits increase with the pensionable age, this may offset some effects and even have a negative impact on the financial balance. This paper builds cohort models and period actuarial balance models for Chinese urban workers’ basic pension system to measure the cohort and period effects of postponing retirement, with the aim of analysing the change in the individual pension net wealth and the long-term actuarial balance of the system with population ageing and increasing life expectancy. The result shows that raising the retirement age, which is linked to life expectancy, will lead to an increase in the pension benefits, individual net pension wealth and then pension fund expenditure. It may benefit the individual and short-term actuarial balance but have a small effect on the long-term actuarial balance of the system.

Keywords:

• Basic pension
• retirement age
• pension net wealth
• actuarial balance
• China

Disclosure statement

The authors report no conflicts of interest. The authors alone are responsible for the content and writing of this article.

Notes

1 The data in this article are obtained from the National Bureau of Statistics of China (http://data.stats.gov.cn) except specifically referenced.

2 In this article we do not distinguish the ‘retirement age’ from the ‘pensionable age’; the two concepts usually have the same meaning in China.

3 Under a DC plan, pensioners make contributions on a predetermined regular basis and the future pension benefits depend on the accumulation of contributions, remaining lifetime after retirement and interest rates. Under a DB plan, the future pension benefits are predetermined and pensioners make contributions at a rate determined by the way in which the pension liabilities are accumulated and amortized.

4 Assuming that high-age employees are able to have jobs and contribute to the pension system.

5 In the past 10 years, the average annual rate of return of the basic pension insurance fund was 4%. Its standard variation was 1%. Therefore, we assume that the interest rate and discount rate will both be 4% in the future.

6 In the past 10 years, the pension was indexed to the average wage increase. Here we assume that the pension benefit growth rate will just equal the wage growth rate in the future.

7 In the past 20 years, the wage growth rate was higher than the GDP growth rate, and the labour remuneration still accounted for a low proportion of the GDP. Thus, we assume that the wage growth rate will be higher than the GDP growth rate. Here the growth rate of the average wage is set as 6% in the long term.

8 Based on the Chinese population mortality data published by the census of 2010, the remaining life expectancy at 60 is about 20 years.