«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 ...»
Among OECD countries, the replacement rate from the social pension ranges from 20 to 40 percent of average economywide earnings, with a cross-country average of just under 30 percent (see figure 6.5). In Japan, for example, the rate is as low as 16 percent, whereas in Portugal it is well over 40 percent. Comparisons are complicated by the availability of general social assistance programs for the elderly. Over the past decade, a number of OECD countries have significantly reformed their social pension programs although no clear directional trend exists. Some countries (such as France, Ireland, the Republic of Korea, and Mexico) have introduced (or increased the basis for) minimum pensions. Others (such as Germany, Japan, and New Zealand) have cut earnings-related pensions with little effect on social pensions. Still others (such as Italy and several eastern European countries) have abolished minimum pensions altogether.14 As table 6.2 shows, the most significant difference in design is whether noncontributory social pensions are universal, means tested, or categorical
in coverage. No definitive pattern by level of income emerges in this respect. The broad distinction is sometimes drawn between social pension systems that are core elements of old-age security and those that are supplementary (either to contributory systems or to informal support systems). This distinction can be determined by comparing the combination of coverage rates among the elderly and benefit levels relative to country income, as figure 6.6 shows for selected developing countries.
With respect to the age of eligibility, experience also differs, but 65 to 70 is most common (see table 6.2). The financing source for social pensions also varies across countries, although general revenues are most common. Brazil, in contrast, funds its social pension scheme from a 2 percent contribution from rural employers.
Figure 6.6 Ratio of Social Pension to per Capita Income Multiplied by Ratio of Number of Recipients to Number of Elderly
The effect of social pension schemes in developing countries is generally positive in alleviating old-age poverty, although evidence is limited.
Core schemes (found in Bolivia, Botswana, Brazil, Mauritius, Namibia, and South Africa) have been shown to reduce old-age poverty significantly, whereas supplementary schemes have varied more widely in their targeting and their outcomes in poverty reduction.15 Evidence for other effects from social pension schemes is even more limited, coming primarily from Bolivia, Brazil, and South Africa. The effects seem to be mixed. Positive effects may include permanent increases in income from the investment of transfers, better health indicators, and higher school enrollment rates for children from pensioner households. Negative effects may include a reduction in labor supply on the part of other household members. The evidence is mixed on the reduction of family support to the elderly.
Countries have also managed the interaction between social pension schemes and defined contribution schemes in different ways. Chile serves as an interesting example. In its 2008 reform, Chile introduced a new solidarity pension with the twofold objectives of (a) achieving universal pension coverage and (b) reducing old-age poverty more effectively. The solidarity pension also aims to better integrate the country’s contributory system and the noncontributory system. The solidarity pension targets men and women over 65 (who are among the poorest 60 percent of the population) and is subject to a national residence requirement. A universal basic pension was established for people with no individual account accumulations. Those with a contribution history and individual account accumulations, however, are eligible to have their funded pension benefit augmented subject to a ceiling on the combined amount. As a result, the supplement (known as the “solidarity contribution”) shrinks for individuals with higher account balances. The withdrawal of the solidarity pension is designed to retain incentives to sustain higher contributions to the funded portion of the scheme.
People with higher income levels are permitted to supplement their individual account balances with voluntary contributions. Figure 6.7 illustrates the scheme in graphical form. From a design viewpoint, the system strikes a useful balance between creating incentives to contribute and providing basic old-age protection for those with low or no contribution history (although concerns have been raised with respect to its projected fiscal cost).
132 The Elderly and Old Age Support in Rural China Figure 6.7 Chile’s System of Solidarity Pensions, Introduced in 2008
Source: Fajnzylber, PowerPoint slide, 2008.
The Interaction between Individual Accounts and the Social Pension and the Transitional Generation A key policy decision relates to whether individual accounts and the basic benefit (or social pension) should be combined over time as the contributory system matures. The two broad options are (a) to retain a basic benefit (or social pension) for people over a certain age to provide an income floor that is supplemented by benefits from individual accounts (if chosen, a number of questions must be addressed regarding the interaction between the basic benefit level and eligibility criteria and the contributory pension, as was illustrated in the case of Chile) or (b) to gradually phase out the basic benefit (or social pension) as the contributory system matures, addressing elderly poverty through the regular social assistance program (perhaps, as is the case in a number of urban areas already, with an elderly supplement on the dibao threshold or benefit level). This book recommends retaining the basic benefit (or social pension) even in the longer run.
In either case, a targeted benefit level from the combination of the basic benefit (or social pension) and individual accounts must be established, ideally falling between the poverty line and the average wage. The specific target should depend on the fiscal envelope and social policy decisions relating to work incentives as people age. The target should be indexed over time against prices or per capita incomes (or some combination of the two). This book recommends basing indexation policies on Issues for the Evolution of the Rural Pension System 133 some mixture of prices and wages, with prices the major factor to meet poverty-alleviation objectives.
Policy makers must decide how to handle those approaching retirement who will have insufficient time to contribute enough to their accounts to earn a reasonable pension. Special treatment is needed to manage this transition. The issue has been dealt with in a variety of ways under previous rural pension pilots in China, and a number of schemes have special treatment for people older than 45. Baoji, for example, allowed those over 45 to receive a full pension if they contributed until they reach 60; those over 60 were also entitled, subject to “family binding.” This approach is the same as that adopted in the rural pension pilot.
Some schemes have 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 older cohorts continue to make contributions for up to five years after reaching the normal retirement age.
One option for dealing with the transitional generation (defined, for example, as people over 50 in the year they start contributing) is to notionally credit their accounts with full individual and matched contributions for all the years in which they did not contribute, assuming a standard age of entry into the scheme of somewhere between 20 and 25.
Moving from Rural Pensions to a Residents’ Pension?
Apart from the issues discussed above, a further consideration for a pension system for rural populations is the future integration of urban and rural pension systems and the issue of portability. Although integration is unlikely in the foreseeable future, implying full equalization of benefits between rural and urban areas (just as the current urban system does not provide the same benefits everywhere), a common design framework would be useful to facilitate portability between systems. Such a framework can already be seen in several areas, where integrated rural and urban residents’ pension schemes are in place (for example, Zhongshan in Guangdong Province). In recent years, rural migrant workers have tended to stay longer in their destination location, with about two-thirds of migrant workers remaining resident for three or more years. This practice reflects the long-term trend in the labor market toward greater urbanization. In such cases, the need to move workers’ pension accumulations and entitlements with them—or “totalize” their benefits between 134 The Elderly and Old Age Support in Rural China different locations so they can enjoy them from different locations at retirement—will become increasingly important. These bigger-picture integration issues will quickly become key concerns for the evolving rural pension system as it consolidates during the 12th Five-Year Plan period.
Conclusion The issues outlined in this chapter suggest that some adaptations of the national rural pension pilot have the potential to strengthen the system over time. They are offered as options the government could consider as it expands the current schemes for rural and urban workers. In any case, the issues discussed address only the general framework and would need elaboration to become operational. However, they may over time help strike a reasonable balance among concerns for elderly welfare, fiscal demands, and labor market effects. The current rural pension pilot is clearly a major step in the right direction and provides a solid foundation from which to think about evolution of the rural pension system over the coming decade and later. This book has shown a seemingly compelling rationale for public intervention in the welfare of the elderly who are not already covered by urban pension systems, and the new rural pension pilot demonstrates the government’s commitment to achieving its goal of universal social security coverage this decade.
1. This chapter is an adapted and shortened form of the annex on rural pensions in China: A Vision for Pension Policy Reform Options (World Bank forthcoming). That paper covers all elements of the Chinese pension system in a more comprehensive manner.
2. For a comprehensive discussion of recent experiences with “closing the coverage gap” through the extension of pension systems to rural and informal sector populations, see Holzmann, Robalino, and Takayama (2009) and Palacios and Robalino (2009) on the framework for matching defined contribution schemes.
3. See (a) Lin (2006) for European, Commonwealth of Independent States, and low-income countries; (b) Gong (2006) for Japan; (c) Su (2007) for the Republic of Korea; and (d) Leisering, Sen, and Hussain (2002) and Zheng (2007) for a general discussion of the subsidy approach.
4. Localized examples of collectives in urban areas have solid revenue bases from the rental of collective land to factories or for other users that may be able to provide significant matching, whereas rural collectives may not.
Issues for the Evolution of the Rural Pension System 135
5. See Zheng (2007) regarding a reserve fund proposal. See Lü (2005) for proposals for higher-return portfolio options.
6. Examples of contracting arrangements in other countries offer the benefits of competition among asset managers while limiting the number of asset managers to ensure a critical mass of funds and generate economies of scale in fund management (for example, India’s new pension scheme and a number of funded pillar schemes in Central Asia, Europe, and Latin America). However, most of these countries have more developed regulatory and accountability frameworks than China does at present (see Rajkumar and Dorfnum, 2011).
7. See Holzmann and Palmer (2006) for a comprehensive review of notional defined contributions.
8. See http://www.cnr.cn/china/gdgg/201009/t20100907_507012375.html, accessed October 12, 2011.
9. This section draws on Palacios and Robalino (2009).
10. These figures assume a benefit level of 1,200 yuan per year (about 4.1 percent of the projected urban average wage) beginning in 2010.
11. For comparison purposes, the reduction resulting from the application of the pension test is assumed to be the same in the two scenarios. Realistically, the cost reduction in the application of the pension test should be greater in the second of the two scenarios because the benefit before the reduction is far higher.
12. See Palacios and Sluchynskyy (2006). See also Asher for middle-income countries and Barrientos for lower-income countries, both cited in Holzmann, Robalino, and Takayama (2009).
13. See Pearson and Whitehouse (2009) for a discussion of social pensions in high-income countries.
14. See Pearson and Whitehouse (2009) for details on the effect of these pension reforms on net replacement rates by earning level.
15. See Kakwani and Subbarao (2005) on African schemes, Barrientos (2009) on four developing countries, and Palacios and Sluchynsky (2006) for an international overview.
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APPENDIXData Sources for Analysis of Rural Elderly Welfare
The book documents the sources of financial support, poverty incidence, and vulnerability of the rural elderly since the early 1990s. In contrast to the urban elderly, who frequently have pension support, the rural elderly typically rely either on their own labor income or financial support from adult children. A substantial share of China’s rural elderly continue to work well beyond age 70, but labor as a primary source of support falls sharply during their 60s.
Additional evidence suggests that the rural elderly work well beyond 60 out of necessity and only stop working when physically incapacitated.
The final sections of the book review experiences with rural pensions during the 1990s and 2000s and draw out the lessons that have informed the design of a new national rural pension scheme. Among the many issues discussed, the report highlights the importance of providing incentives for participation in the pension scheme and of the portability of pensions for a mobile population.