11/27/2007 Pension Reforms in China and Taiwan Hongxia Jiao Yi-Ying Chen

Part I: Pension reform in China - Outline Historical review of old pension system Motivations to pension reform The current pension system Issues and questions

Historical review of old pension system (1951-late 1980s) An urban- and enterprise-based, generous PAYGO system Workers employed for life by State Owned Enterprises (SOE) Pension paid by SOEs Low Wages but Total Security at 60 (Males) or 55 (Females) = 80% of final salary in addition to housing and other subsidies No Pre-funding or Reserves, solely financed by current revenues a system that is unsustainable as the fundamental structure of the economy continues to shift from one dominated by SOEs to one where the private sector is generating an increasingly larger share.

Motivations to pension reform Economic Background 1. Economic reform: shift from central- planned economy to market economy 2. The ownership of the enterprises has been diversified 3. Restructuring SOEs

Motivations to pension reform Demographic background Total: Rural Population: + Urban Population Consider: One Child Policy Greatly improved life expectancy Dependency Ratio deteriorating rapidly Exceeds 1.2 billion 900 million million Ages: million million million

Motivations to pension reform Immediate and urgent problem: Relieve the pension burdens of the SOEs inherited from the era of the former planned economy 1. In some locations in SOEs the ratio of pensioners to workers was over 100% 2. Large pension liabilities impede a company’s competitiveness 3. According to the latest estimation of the World Bank, China’s implicit pension debt is about $1.5 trillion Long-term problem: a rapidly aging population 1. China is greying fast but at a low income level 2. Low retirement age lifts old-age dependency ratio

A rapid aging population

Source: (UN) 2003

Key objective of pension reforms To substitute the old system that requires individual urban enterprises to provide all welfare benefits to their employees with a three-pillar system that distributes the burden more equitably among enterprises and workers

The current pension system On the basis of State Council Doc. 26 the central government has outlined a nation- wide basic pension insurance system consisting of three pillars - in line with recommendations by the World Bank - plus an underlying investment fund Pillar I: State administered social security system Pillar II: Enterprise Annuity / Supplementary Retirement Plan –Voluntary privately managed pension plans –Government supervised and tax-exempt Pillar III: Voluntary private pension plans No tax exemption & Less government supervision

The current pension system Employer Pillar II Personal Pillar III Enterprise Annuity/ Supplementary Retirement Plan Individual savings Tier I: Social Pool Tier II: Individual Account Voluntary Statutory Social Insurance Pillar I National Social Security Fund

Current issues and problems Reform bogged down over “legacy costs” of transition from old system A decentralised system: fragmentation and intransparency remain a challenge Extension of coverage hampered by lack of incentives: low return, public trust, and more ?? Will China grow rich, before it grows old?

Part II: Pension reform in Taiwan The comparison of old and new pension system TopicOld systemNew system Legal Basis Labor Standards Act Labor Pension Act Target Group Workers subject to the Labor Standards Act Domestic workers subject to the Labor Standards Act

The comparison of old and new pension system TopicOld systemNew system Level of Contributions 2% to 15% of a worker's monthly wage is to be deposited in a pension reserve fund Mandatory pension contributions: at least 6% Voluntary pension contributions : maximum 6% Managing financial institution Central Trust of China Bureau of Labor Insurance

The comparison of old and new pension system TopicOld systemNew system Basis used for calculating pension payments Average wage (6 months prior to retirement) Monthly wage Benefit Calculation (1-15 years) x 2 units + (16 th year – x year) x 1 unit <= 45 units 1 unit = one average monthly wage (Contributed Wages) x (6%) x (12 months) x (work seniority) + accrued dividends

The comparison of old and new pension system TopicOld systemNew system Method for calculating seniority Work seniority must be at the same business entity Accumulated amount of pension funds, not restricted to one business entity

The comparison of old and new pension system TopicOld systemNew system Pension Eligibility Requirements Work seniority of 25 years or having worked 15 years and reached 55 years of age Reach the age of 60, regardless of working or retired; if deceased before reaching 60, family survivors or designated beneficiaries may claim

TopicOld systemNew system Method of payment Lump sum payment Monthly payment : if work seniority equal 15 years or more; Lump sum payment : if work seniority is less than 15 years The comparison of old and new pension system

TopicOld systemNew system OwnershipEmployerWorker Severance payments One average monthly wage for each year of service Half average monthly wage for each year of service. The total severance pay shall not exceed six average monthly wage The comparison of old and new pension system