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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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With the demographic transition and continued movement of young adults into cities, families will be subject to further strain to support future generations of the rural elderly.

Executive Summary 3

• The rural elderly have been consistently poorer and more vulnerable than both working-age households and the urban elderly in China over time, and this finding includes the incidence of chronic poverty (see chapter 2). In addition to higher poverty rates, households headed by the rural elderly have been more vulnerable to poverty since the early 1990s, and the declines in vulnerability caused by economic growth have been less pronounced than for working-age households. The rural elderly 71–80 years of age have the highest poverty rates (with a correspondingly slower reduction in poverty rates between the 1990s and mid-2000s), while those over 80 have lower poverty rates than the working-age population as they increasingly coreside with their adult children.

Although location has played a reduced role as a determinant of poverty in rural elderly households over time (as for all rural households), location remains a stronger determinant of the welfare of rural elderly households than of other rural households. In terms of the factors that affect the incomes of the rural elderly, some (such as obtaining higher education levels and having a pension) are positive, as expected. The effect of having a migrant child is, however, more complex. Although having a migrant child per se has an inconclusive impact on the income of elderly rural households, having migrant children has a clearer and positive impact in terms of ability to cope with shocks to household income, whether communitywide or household specific. As a result, households with migrant children are 26 percent less likely to have incomes below the poverty line and are far less likely to become poor because of health shocks.

• Sources of support for the rural elderly differ significantly from those of the urban elderly and also change sharply among the rural elderly during their sixties (see chapter 3). The rural elderly depend far more on their own labor and family support than the urban elderly (for whom pensions also play a critical role), and family support becomes more important as older rural populations age. This finding is true even though coresidence of rural elderly with adult children has fallen from 70 percent in 1991 to 40 percent by 2006. The rural elderly work as long as they can, but even then remain very dependent on family support. To understand both the adequacy of this support for rural elderly welfare and its likely responsiveness to public subsidies for old-age support, the book examines the responsiveness of private transfers by family members to lowincome households headed by elderly residents. It finds little evidence 4 The Elderly and Old Age Support in Rural China that public transfers would crowd out private transfers, even at very low levels of income per capita. In addition, the ability of adult children to provide private transfers may be subject to considerable uncertainty. The children of the rural elderly are frequently employed as informal sector workers in nonagricultural activities either locally or in migrant destinations. Given that adult children’s own incomes are risky, examining the variance in expected private transfers is important, because some variance in adult child income is likely passed on to parents. The book finds that low-income rural elderly face the risk that transfers from adult children may not be sufficient to keep them out of poverty.

• A considerable share of the rural elderly work well beyond age 70, though labor as the primary source of support falls sharply during their sixties. This finding is consistent with research on elderly labor supply, which provides evidence that China’s rural elderly continue to work well beyond age 60 out of necessity and only stop working when physically incapacitated. The book also examines the effects of both adult child migration and increasing family wealth on labor-supply decisions of the elderly. As would be expected, rural elderly in wealthier households are less likely to be working, as are those with more educated household members and pensions. However, the effect of a migrant worker in itself is less clear, possibly because of the offsetting effects of higher income from remittances (which decrease the chances of work by the rural elderly) and the need to keep family land in use to retain it (which creates incentives for elderly family members who stay in rural locations to keep working the land).

• Saving patterns across the age distribution in China are high and remain positive even in old age, despite falling after 55 years of age. However, savings are strongly correlated with household income, and the rural poor are not saving on average (see chapter 4). The book finds that households without elderly members have higher saving rates, though the gap is narrowing, and those with migrant members have higher saving rates than those without (including households with elderly members). As might be expected, saving rates decline with age after age 55, but the average saving rate always remains positive, even into advanced old age.

Little comparable decline occurs in saving rates in elderly households with migrants, which likely reflects the perceived transitory nature of remittance income. The difference in saving behaviors between rural Executive Summary 5 households with and without social security benefits is significant and consistent over time, which is further verified when findings are broken down by income quintile group.

The analysis in chapters 1–4 provides the rationale for public sector intervention in rural old-age welfare, and the Chinese authorities are committed to rapidly expanding coverage of the rural pension under the national pilot scheme launched in 2009. Given the directions of national policy, the second section of the book (chapters 5 and 6) looks at China’s experience with pensions for the rural elderly and the lessons of experience since the 1990s, including observations on the initial implementation of the national rural pension pilot. Chapter 6 discusses key issues for the rural pension system in the longer term, and raises a number of options for consideration in the evolution of the system that may help it achieve the government’s policy objectives even more effectively over time. It also reviews relevant international experience in both matching defined contribution schemes and social pensions.

The experience with rural pensions in China during the 1990s and 2000s has been piecemeal but provides a number of important lessons that have informed design of the new national scheme. Prior experience with rural pensions (including the wave of local pilots since the early 2000s) suggests that several issues need close attention in the funded portion of the rural pension system, including the following: (a) the regulation and oversight of funded portions of rural pensions, which have been—and in many areas remain—significantly underdeveloped;

(b) the need for a public subsidy to incentivize sustained participation of rural workers, and issues of the balance of public subsidy among levels of government, the individual, and the collective economy; (c) the relatively low retirement ages (often 60 or below) that are understandable given the current ages in the urban system and have been retained in the national pilot, but will be important to raise to reflect the rapidly changing demographics of rural areas; (d) the interaction of pension benefits with the consolidating rural social assistance system to ensure policy coherence across the social protection system; (e) the challenges of the portfolio investment rules on funded pensions leading to very low rates of return; (f) the very localized management of pension accumulations, presenting challenges of weak local capacity and failure to exploit economies of scale; and (g) the portability rules and implementing mechanisms between the rural pension system and the urban systems.

6 The Elderly and Old Age Support in Rural China The national pension pilot is an exciting and positive development in terms of expanding pension coverage to the rural population. Moreover, some adaptations of the national rural pension pilot have the potential to increase the strengths of the system over time. Chapter 6 gives options that the government could consider as it expands the current schemes for rural workers (and parallel schemes for urban residents) over time. The chapter also lays out relevant international experience.2 The following

key issues are addressed:

• Inclusion of a matching defined contribution element in the national pilot and the appropriate level of the matching subsidy and its functions relative to the basic pension benefit in terms of incentives to participate in the scheme.

Although a single “correct” level of matching subsidy is difficult to define, emerging international experience suggests that considering a stronger role for the matching subsidy as the system evolves could have merit.

• Rules for investment and management of individual account contributions, and options for reducing the challenges of low rates of return that have been seen in the urban funded system. The chapter makes a number of suggestions for consideration as the system evolves. The first is the desirability of some guaranteed rate of return on individual account accumulations, preferably national gross domestic product. The second is that the introduction of a reserve fund to address fluctuations in returns on individual accounts or the exhaustion of benefits caused by longevity may be worth considering. Third, the authorities might consider using age-based portfolio default rules that provide for more aggressive investment for younger contributors that gradually becomes more conservative over the life cycle to focus on preserving the value of accumulations at retirement. A fourth issue is whether in the medium term permitting account holders to borrow a portion of their account accumulations at a specified interest rate and with legally binding repayment conditions is desirable for the individual account. Finally, the management of funds in individual accounts and the appropriate level of the system for doing this merit consideration. Current pilot schemes and past practice have generally involved management at the county level. However, clear benefits exist to combining funds from localities into a single pot of money that can be managed at higher levels to generate economies of scale in fund management. Previous experience Executive Summary 7 with rural pensions in China cautions against localized management and investment of accumulations.

• Whether the basic pension benefit in the national pilot should in time evolve into a “social pension” in which coverage is not dependent on contributions. International experience reviewed later in this section suggests that achieving full pension coverage is very difficult at the level of the individual in rural and informal sector schemes based on approaches that require contributions, even when incentives are provided to contribute. A social pension approach—as used in all countries of the Organisation for Economic Co-operation and Development and in a growing number of developing countries—would be broadly consistent with the design of the basic benefit provision under the rural pension pilot, and this book believes it is worthy of serious consideration as the rural pension system evolves (as well as having potential relevance for emerging “urban resident” schemes).

Any social pension should be subjected to a pension test that would adjust the amount paid to those ages 65 to 74 by a proportion of benefits they receive either from an individual account or from an urban workers’ pension.

• Transition and portability issues. These will become important as the national rural pension scheme matures. The first type of transition is from old to new rural pension schemes within the same locality. Practice in China has varied, with areas such as Beijing allowing portability of funded accumulations from old to new schemes, whereas other areas, such as the province of Hunan, stipulate that participants must close out their accounts in old schemes before starting afresh in new pilots.

The national scheme appears to allow transfers of balances from prior schemes. The second (and ultimately more important) issue is portability between rural and urban schemes (or migrant-worker schemes located in urban areas where these exist). This issue will be critical to reaching the government’s stated goal of an integrated social security system by 2020. The ease with which this transfer can be done has varied according to scheme design and the compatibility of rural pilots with existing urban schemes. In principle, in all schemes, the funded portion is easily made portable. Because the matching defined contribution design adopted in the national rural pilot has no social pooling, no issues of apportionment arise.

8 The Elderly and Old Age Support in Rural China The issue of portability raises a host of design and implementation questions that will need to be closely considered during the pilot phase of the rural pension pilot. When a worker moves, will the funds in his or her account move, or will only his or her contribution records do so? How will the system account for accumulations in the rural system when workers move to the urban system? Finally, are pensions paid from various locations or from a single payment authority? These questions raise issues for record keeping, communication and information exchange between systems, and the exchange of account information. In principle, such questions should be capable of being addressed by standardized record-keeping and reporting formats for the new rural pension system being disseminated by the Ministry of Human Resources and Social Security. Harmonization of fund transfer and pension disbursement procedures would also be required. Again, some degree of centralization would be desirable to lessen administrative demands at the lower levels, although this might be at the provincial level within national guidelines.

Elaborated guidance from the central authorities on these issues will be necessary over time.

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