John Hood has warned us that North Carolina faces a significant challenge in meeting its long-term pension obligations.
At least we can console ourselves that we’re not China. The latest Bloomberg Businessweek documents the government-guaranteed pension problems for a nation of 1 billion people.
According to a recent report by economists at Deutsche Bank (DB) and the Bank of China, the projected shortfall for future pension payments will reach 18.3 trillion yuan by next year. People older than 60 already make up 13 percent of China’s population, and by 2050, the World Bank estimates that they will account for 34 percent. “They are trying to expand coverage rapidly at the same time they are aging rapidly,” says Philip O’Keefe, Human Development sector coordinator at the World Bank in Beijing.
About half of China’s 31 provinces are unable to pay their retiree costs and rely instead on financial transfers from the central government. The central government says it has enough money to cover its pension liabilities for now, but there’s a debate about how long that will last. “Many say it will become a real problem within 10 years,” says Hu Yuwei, who works for Spanish bank BBVA and who is exploring possible partnerships with local pension managers. “For now, the government can use central funds or transfer money between provinces. But in the next 10 years, the amounts will become too big to simply move money around.”
Inequality is an issue. The average monthly payout in cities is around 1,500 yuan, while those in rural areas get as little as 55 yuan. The benefits enjoyed by China’s 40 million civil servants, teachers, and state-employed doctors are particularly divisive. Their pension typically amounts to as much as 90 percent of their salary, without ever having to contribute to any funds before they retire. Those working for nongovernment institutions must contribute 8 percent of every paycheck to an individual account. On average their pension is 42 percent of their salary.