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«D I R E C T I O N S I N D E V E LO P M E N T Human Development Public Disclosure Authorized The Elderly and Old Age Support in Rural China Challenges ...»

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In addition to these most common models, other experiments with rural pensions have been conducted, including the “land for pensions” schemes. Wen Jiang County of Chengdu Prefecture, for example, allowed farmers to enter the urban pension system under the so-called two giveups approach, whereby farmers relinquish the management rights on their land and the use of the land on which they dwell. Similar approaches were taken in Chongqing and within Guangdong Province. Finally, schemes are being implemented for specific subgroups of farmers, particularly farmers whose land has been expropriated, and migrant workers in urban areas. This approach is common in areas experiencing rapid urbanization (even in less developed provinces, such as Ningxia) and Evolution of the Rural Pension System in China 93 offers entitlements in the urban system as effective compensation for expropriated land.

The preceding discussion suggests a rich history of experimentation with rural pensions in China in the lead-up to the 2009 national pilot.

Such experimentation is not surprising given the wider commitment of the Chinese authorities to balanced development and development of a rural social protection system. From this experience, a number of patterns and issues emerge, which are discussed below. They are useful in considering the ways in which the recent national pilot deals with various issues and has built on previous experience.

• Voluntary with incentives. In policy terms, all schemes have been voluntary, relying on a mixture of incentives to encourage participation. At the same time, a feature in a number of schemes (for example, in Suzhou and Baoji) has been the system of so-called family binding, whereby the pension eligibility of an older contributor close to retirement age is determined by whether his or her spouse and all adult children contribute to the new system. Opinions differ among local commentators on the merits of this feature, although it has been adopted in the national pilot.6 Apart from this feature, the new rural pension schemes have been incentive driven through the subsidy mechanism, although some debate exists on the extent to which any program with sufficiently strong support from the local administration is truly “voluntary.” The incentive-based approach has resulted in extensive coverage in a number of pilots. For example, Beijing’s participation rate rose from 37 percent to 85 percent following an increase in the subsidy level, whereas in Suzhou—where government contributions constitute 60 percent of the combined total—participation has reached 99 percent. Examples like Baoji are more nuanced, with a 68 percent participation rate among all farmers, rising to 92 percent for farmers over 45 years of age.

• Retirement ages and contribution requirements. As noted, the prescribed retirement age under the former Basic Scheme was 60 for both sexes, and participation started at 20 years of age. The retirement age has varied at both ends under the new pilot schemes—with the entry age for participation as low as 16 in Beijing and 18 in Baoji (although it remains 20 in places such as Yantai) and the retirement age set at 55 for women and 60 for men in Beijing, at 59 for both sexes in Yantai, and with no upper age limit in Baoji. A clear issue here for localities seeking 94 The Elderly and Old Age Support in Rural China to integrate urban and rural systems is the retirement ages in urban systems, which are typically 55 for women and 60 for men.

Requiring a 15-year contribution history to qualify for full benefits under pilot schemes has been a widespread practice, with the obvious exception of individual account–only schemes, in which minimum contribution periods are irrelevant. However, a number of schemes recognize the transition issue and have incorporated special treatment for those older than 45. For example, Baoji has allowed a full pension for those over 45 if they contribute until age 60; those over 60 are also entitled, subject to “family binding” (a feature adopted in the new national pilot). Some schemes also made provisions for the lump-sum payment of contributions by those without a full contribution history—in some cases at the point of retirement (for example, Beijing and Zhuhai) and in others during the accumulation phase. Other schemes have allowed older cohorts to continue to make contributions for up to five years after reaching the normal retirement age.

• Financing models and sustainability. A key feature of all the pilot schemes in this period was significant public subsidies, either for contributions to individual accounts or during the payout phase, or both. This feature represents a major shift and recognition by central and local authorities that some form of matching is necessary to incentivize participation by rural populations.7 This experience has also been addressed in part in the Chinese literature, and the need for public subsidies to support rural pension schemes is generally recognized.8 Although the large majority of public subsidies have come from general revenues, some experiments with partial funding from dedicated revenue streams have also been conducted. Zhuhai City pioneered this approach beginning in 2006 by allocating land transaction revenues to finance a reserve fund for incremental pensions and for those who exhaust their individual account accumulations.9 A major and still unresolved issue is the fiscal sustainability of different scheme designs. Simulations using government spending ranging from 1.0 to 2.5 percent of general revenues have been conducted with different system parameters. These analyses indicate that a broadbased rural pension system should be fiscally affordable and sustainable in the aggregate, although it remains to be seen whether the requisite financial commitment will be met.10 Initial reports using the government’s own projections indicate a cost of 1.8 percent of fiscal expenditures (about 66 billion renminbi) in 2008 for the central Evolution of the Rural Pension System in China 95 government’s portion in the national pilot scheme. However, more work is needed. For example, rural mortality tables on a sufficiently disaggregated basis are needed and can be generated from census data.

More important, clarity is needed on the financing responsibilities of subnational levels of government and the variable capacity of different levels to meet them.11

• Contribution rates and benefit levels. As one would expect, the structure of these local pilots, their absolute levels of contributions, and their benefit levels have varied substantially. Most schemes for which information is available have designated a range for the contribution rate made to individual accounts, which is often linked to average wages or rural incomes. Baoji has had a range of 10 percent to 30 percent of average rural income (and plans to lower the base to 5 percent), whereas Beijing had a much wider range, from 9 percent of average rural incomes to 30 percent of average urban wages. Suzhou appears to have been an exception in this regard, with a flat contribution rate and base for all contributors (either 10 percent of the rural average income or 50 percent of the average urban income). Interestingly, at least one Chinese scholar has raised the idea of farmers’ being allowed to make some contributions in grain—although no such example was found in the research for this report—whereas others have proposed allocating grain subsidies paid to farmers to rural pension schemes.12 With respect to benefits, an emerging practice is to pay close attention to the dibao level and fiscal sustainability when setting benefits for the flat pension portion of schemes. The general rule of thumb appears to be that flat pension benefits should be at or slightly above the average dibao threshold in the locality. Adding funded benefits is anticipated to take total pensions notably above the dibao level. This threshold may vary upward according to local fiscal capacity (for example, Beijing sets its flat pension portion at 35 percent of rural average income). For the individual account portion of schemes, the calculation of the payout has varied. For Beijing and Baoji, for example, the individual account benefit has been calculated by dividing the amount in the account at retirement by 139 (the same method that is used in their urban schemes—which reflects the combined assumptions of a notional life expectancy of 60 and an assumed drawdown interest rate of 4 percent; this method has also been adopted by the new national pilot). Although a similar approach has been taken 96 The Elderly and Old Age Support in Rural China elsewhere, the actuarial factor used in the calculation has varied (for example, Zhuhai has used a factor of 180, whereas Suzhou has used 120). Such variable practice strongly suggests a need for work on rural mortality tables, ideally at a disaggregated level, to ensure that this portion of the benefit is not exhausted too early (or, more likely if urban mortality rates are being used, too late).

• Institutional issues. The experience of local pilots in this period with respect to both scheme administration and fund management demonstrates a degree of continuity, but regulation demands greater attention.

Overall administration of new schemes has remained with the Social Security Bureau, with roles also for villages (collection of contributions and, in many cases, payment of benefits), townships (consolidation of collections, approval of benefits, and registration), and counties (for general oversight and scheme design). The computerization of scheme information systems also appears to have generally improved, even in less developed areas such as Baoji. Within this general administrative structure, a variety of local innovations in administration occur. For example, Suzhou farmers have been able to contribute directly through banks rather than through village officials, and post offices (including mobile facilities) are being used in areas with lower banking penetration. Some schemes have also allowed for the seasonality of farmer incomes, so that schemes such as that in Baoji have made collections only once a year in July or August.

With respect to fund management, the Basic Scheme resources had been managed at the county level; and this practice has remained for local pilots after 2003. Some researchers have suggested the city as the appropriate level for fund management; others have proposed the provincial or even national levels (see C. Liu 2007; Z. Liu 2003;

Lü 2005; and Z. Wang 2004). Portfolio rules have clearly continued to be very conservative (and remain so in the national pilot). Some researchers have proposed establishing reserve funds to cover low rates of return (although such funds are more typically used to address fluctuations in returns or the exhaustion of benefits because of longevity in funded systems). The concept of a reserve fund is, in principle, attractive, and actual practice, in places such as Zhuhai, suggests an interest.13 The more significant concern going forward is the regulation of the funded portion of the new national scheme. As discussed earlier, regulation was a significant weakness of the old schemes, and even in the mature urban schemes, it continues to be Evolution of the Rural Pension System in China 97 an area in which the capacity of the system remains stretched (World Bank forthcoming a).

• Portability between schemes. A range of transition policies has been observed for schemes initiated in this period. The first type of transition

is from old to new schemes in the same locality. Practice has differed:

areas such as Beijing have allowed portability of funded accumulations from old to new schemes, whereas others, such as the province of Hunan, stipulate that participants must close their accounts in old schemes before starting afresh in new pilot schemes.14 The second (and ultimately more important) issue is portability between rural and urban schemes (or migrant-worker schemes located in urban areas where such schemes exist). Portability will be critical in reaching the government’s stated goal of an integrated social security system by 2020. The ease with which portability can be achieved has varied according to scheme design and the compatibility of rural pilots with existing urban schemes. In Suzhou, for example, a simple two-to-one rule has been used for farmers wishing to transfer their social pooling rights from the rural to the urban scheme; such transfer is easily done because the rural contribution base has been exactly half that of the urban system. In Beijing, provisions for portability have also been made, although transfer is only done at the point of retirement. If a former farmer has accumulated enough years in the urban system at retirement, he or she will enjoy an urban pension (with an allowance for lower rural contributions), whereas his or her urban contributions will be credited to the rural pension scheme if the accumulation period in the urban system is fewer than 15 years. In all schemes, the funded portion is easily made portable, in principle.

• Interface of pensions and social assistance. The relationship of these local rural pension schemes to various social assistance benefits also merits consideration. The most interesting example is wubao, a social welfare benefit that guarantees an “average” standard of living for people in the so-called three-nos category (no income, no labor capacity, no sources of family support), in which the elderly appear to be significantly overrepresented.15 In some areas, such as Suzhou, wubao recipients have had their individual account benefits refunded. For rural dibao, individuals can receive both a pension and wubao (because the latter is a household-level benefit), which can result in the total household income falling below the local dibao line even with a pensioner in a new 98 The Elderly and Old Age Support in Rural China scheme. Finally, pensions from local schemes have had no effect on the receipt of the supportive allowance for following family planning policy, although some Chinese researchers have proposed integrating the programs through the use of the family planning subsidy as an additional subsidy toward individual pension contributions (once participants are past child-bearing age) (see Mi and Yang 2008; C. Yang 2007;

and Y. Yang 2007).

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