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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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Looking Ahead: The Rural Pilot Program Attention to the issue of rural pensions has shifted into high gear with the announcement in 2009 of a national rural pension pilot that started in late 2009 and aims to achieve full geographic coverage no later than 2013 (State Council 2009b). The diverse experience with rural pension schemes at the subnational level outlined earlier has offered important lessons for policy makers at the national level, which are reflected in significant measure in the design of the national pilot. The guiding principle of the pilot is basic insurance and wide coverage with flexibility and sustainability. The pilot started in 10 percent of counties nationwide in late 2009, with an initial aim of full geographic coverage in rural areas by 2020. However, the schedule has already been accelerated, with a target of 23 percent of counties to be included by the end of 2010 and the expectation that all counties will be covered by the end of 2012 (State Council 20011). Initial experience with take-up has been positive, with more than 36 million contributors enrolled in the first few months of implementation by Chinese New Year 2010 and approximately 13.4 million people already receiving pensions by that time. These numbers represent an estimated national participation rate of about 50 percent, with local participation rates as high as 80 to 90 percent in some areas, particularly those such as Baoji that already had mature pilots. Participation has continued to expand rapidly, with over 150 million contributors by mid-2011. The

design has several key features:

• Participation by rural workers is voluntary.

• All rural residents over 16 years of age are eligible to participate if they are not already covered in a basic urban scheme.

• Participants become eligible for a pension at 60 years of age.

• The scheme provides for individual pension accounts with matching contributions and a basic flat pension for workers who, in the mature system, will have contributed for 15 years. The initial value of the basic Evolution of the Rural Pension System in China 99 pension is 55 yuan per month, which can be supplemented by local governments at their discretion from their own revenues. Individual accounts will have a rate of return equal to the one-year deposit interest rate of the People’s Bank of China; benefits will be computed by dividing the accumulation at age 60 by 139 (as is done in the urban workers’ scheme). The indexation procedure for the basic pension is somewhat vague—to be set in accordance with “economic development and changing prices.”

• At the time the scheme is introduced, those over 60 years of age can receive the basic pension benefit, provided their children are contributing to the scheme (that is, “family binding”). Those with fewer than 15 years left before reaching 60 should contribute during their working lives and can then make lump-sum contributions to make up any shortfall in the vesting period of 15 years of contributions.

• Financing of the scheme will come from a combination of (a) central subsidies to support the basic pension (in full for central and western regions and 50 percent for eastern regions); (b) individual contributions (ranging from 100 to 500 yuan annually at the worker’s choice); (c) a partial match on the individual contribution by local governments of at least 30 yuan per year (independent of the contribution level chosen by the worker), or at a higher rate as shall be determined; and (d) collective subsidies, which are encouraged but not mandated, with no level specified. During the first months of implementation, contributors have most commonly chosen the 100- or the 500-yuan contribution levels. At the same time, some provinces and counties have allowed for considerably higher contribution levels from farmers of up to 2,500 yuan in some coastal areas.

• Fund management for individual account accumulations will begin at the county level, with the aim of shifting management to the provincial level as quickly as is feasible. Local offices of the Ministry of Human Resources and Social Security (MHRSS) will supervise funds.

The overall approach of the new pension pilot reflects a number of lessons from international experience and significantly improves on many earlier rural pension schemes. Matching individual account contributions—the so-called matching defined contribution, or MDC, approach— sensibly recognizes the need for incentives for rural workers to participate in pension schemes. In addition, the introduction of a basic minimum benefit echoes the practice of a number of developed and developing countries that have introduced social pensions for the elderly, although 100 The Elderly and Old Age Support in Rural China linking eligibility for the basic benefit to individual account contributions represents an important difference in approach. Finally, the role of central financing reflects lessons from other areas of social policy in China, including health insurance and dibao, which have clearly demonstrated the need for central subsidies to lagging regions if the equity objectives of coverage expansion are to be realized.

Although the objectives and broad design features of the rural pilot program have much to recommend them, a number of issues in the program’s design may benefit from further consideration and closer evaluation as the scheme is implemented. Addressing these issues could help





improve incentives, equity, portability, and fund management. The following four issues are discussed further below:

• Contribution levels, the degree of subsidy, and participation incentives

• Benefit eligibility and levels

• Fund management for the individual account part of the scheme

• Portability of benefits and system “dovetailing” With respect to subsidies to incentivize participation, the current match of 30 yuan against the minimum 100-yuan annual contribution is low compared with emerging practices for MDCs in developing countries (where a one-to-one match is more common). The flat match also acts as a weak incentive for making contributions over the 100-yuan minimum, although it has merit from an equity perspective. A further complicating factor is that the assurance of a basic pension after the vesting period of contributions acts as a significant incentive to participate.

Overall, no international consensus exists yet on the appropriate matching rate in MDC schemes. Thus, monitoring the pilot will be important to see whether the 30-yuan match is sufficient, both in incentivizing participation at the basic 100-yuan contribution level and in incentivizing higher individual contributions. This question can only be answered empirically.

The discussion of subsidies and incentives also raises the issue of the appropriate balance between ex ante subsidies (that is, the matching of individual account contributions) and ex post subsidies (that is, the provision of a basic pension benefit). Although the current emphasis on the ex post subsidy has the advantage of simplicity, it is less attractive for a mobile rural population. Once the system matures, rural workers who enroll in an urban scheme upon migration—or who intend to move—would not Evolution of the Rural Pension System in China 101 benefit as greatly from the incentive effect of the ex post subsidy under the current design. This consideration may be important with an increasingly mobile and urbanizing population. Increasing the ex ante subsidy by increasing matching would lessen this possible disincentive effect.

An obvious question raised by a shift in the balance of public subsidies from ex post to ex ante is its effect on the poverty alleviation objective of the basic rural pension. If greater public subsidies were shifted ex ante, maintaining a neutral fiscal effect would require a lower basic pension in a situation in which the 55-yuan benefit is already below the rural poverty line and could reduce the basic benefit below the average dibao level, which has additional negative incentive effects. Such a shift could be addressed in at least two ways. First, a partial benefit reduction of the basic benefit for individuals over a certain income threshold may be possible to protect the benefit level for poorer elderly people.16 Second, the local administrative level may be able to supplement the basic benefit to ensure that it exceeds the local dibao level.

A second issue that merits consideration relates to fund management.

The initial approach of allowing fund management at the county level has a range of drawbacks, including investment risk and the risk of accounts being in practice “empty.” Such localized management complicates providing portability of account balances for rural workers who move beyond their home counties. In addition, the demographic trends in rural areas suggest that a sizable reserve fund will likely be necessary in the rural system, the management of which is best done at higher levels.

In addition to the drawbacks of subprovincial fund management, using the one-year deposit rate of interest as the rate of return for individual accounts will likely prove problematic over time (as has been the case for urban schemes). Although very secure, such a low rate virtually guarantees a low individual account balance at retirement and thus weakens participation incentives for rural workers. Even given the appropriate desire to limit investment risk, other approaches, such as notional defined contribution schemes, can in principle address this objective while still providing an adequate rate of return.

The following specific elements of eligibility for the scheme would

benefit from being closely monitored and reviewed over time:

• Retirement age of 60. For the present, this requirement is sensible in its alignment with the urban scheme. At the same time, the aging of China’s population will demand the upward adjustment of retirement 102 The Elderly and Old Age Support in Rural China ages over time; such adjustment should be considered sooner rather than later by both rural and urban systems. A pressing need exists for reliable—and periodically updated—rural mortality tables to assess the appropriateness of the coefficient of 139 in the drawdown phase of individual account balances. The coefficient is aligned with that used by the urban system but should, in principle, be fine-tuned to line up with rural mortality trends.

• Policies for vulnerable groups for whom local governments are expected to pay partial or full individual account contributions. The State Council document leaves this issue open, referring to groups “with paying difficulties... like those with serious disabilities” (State Council 2009b).

Given the importance of the principle of equity underlying this provision, development of a better-defined common policy for people for whom contributions should be made (and in what amounts) would be useful. Apart from those with disabilities, for example, adults in dibao households would appear to be included under this provision. Practice appears quite mixed; some areas contribute on behalf of dibao households, in whole or in part, whereas other areas have adopted narrower categories of eligibility.17 Considering whether the central government should fund—or partly fund—such contributions, perhaps together with local authorities, would also be useful. Although central funding raises the risk that local-level authorities will game the system, that risk could presumably be controlled through clear guidelines on eligible populations and would obviate the risk of excluding poor people in fiscally constrained localities.

• Eligibility of workers with rural hukou who reside in urban areas but are not enrolled in the urban pension system.18 In principle, the scheme allows workers with rural hukou to participate and to receive local and central subsidies even when residing in cities (a modern-day example of nong cun bao wei cheng shi, “the countryside encircling the cities”). In monitoring implementation, attention should be given to see how this element plays out, and the policy interactions with emerging urban residents’ pension schemes should be studied. Although the current residence of workers (rather than hukou) should, of course, not affect the central subsidy, the incentives are questionable for local authorities to (a) match individual account contributions and (b) supplement the basic pension benefit for workers with local rural hukou who do not currently reside in the rural locality.

Evolution of the Rural Pension System in China 103 The policy anticipates but does not clearly address the portability of pension rights under the new scheme. This issue is important and should be addressed soon. Portability of vested rights and individual account balances—both across rural areas and between rural and urban schemes—is important given China’s increasingly mobile labor force. The recent document (State Council 2009c) on the portability of rights within the urban enterprise system suggests that the issue has been recognized. Ensuring that portability (both in policy and in practice) in the new rural scheme is aligned with emerging practices in the urban scheme is essential if the new scheme is to achieve its social security and labor market objectives.

In practical terms, portability will require the rapid development of systems to reliably transfer information and funds across localities.

The implementation of the scheme will face four key challenges (on

which the MHRSS is already focusing):

• Capacity at local levels, particularly at the county level and below. The massive and very rapid expansion of the system will place demands on local-level implementation and delivery capacity. These demands will present real challenges in many areas, particularly in service delivery for participants and beneficiaries. The government’s intention is to introduce rural social security service centers at least down to (and ideally below) the county level. However, existing staffing ratios imply service loads in an expanding system well above those one would typically observe internationally for similar schemes. At the same time, interesting experiences are emerging from initial partnerships with the banking sector that are helping spread the administrative burden of managing client contributions and basic record keeping (for example, in Ping Yuan County in Guangdong Province).



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