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Less Saving More Consumption
By admin June 10, 2014

imagesOn Sunday, it was reported that China’s exports grew 7% in May from the same month last year while imports were much weaker declining 1.6%. For China’s economy to mature, the domestic consumption needs to increase.  China’s current level of savings is approximated to be over 30% of disposable income.  This over saving for retirement is due to China’s poorly designed and badly run pension system.

The current state of China’s pension system is a mixture of numerous legacy systems, local/city initiatives, and combinations of rural, urban, public, and private pension policies. Fewer than half of all adults are covered by the urban pension systems, and there are “as many as 3,000 different pension pools.”  China’s current system has failed to provide adequate coverage across China’s population and does not provide for a minimum level of income for retirees.

The World Bank has always advocated for a system built on three main pillars: a publicly managed system, mandatory fully funded defined contributions, and supplementary voluntary pensions.  China’s problems lie with its first pillar.  China’s city level social pooling, supported by a pay as you go system, has been used as a complimentary piece to Individual Accounts and used to help cover the individuals who don’t have such accounts.  Issues are numerous. Beyond the obvious disparity between rich and poor cities, the system has and will continue to create perverse incentives.  If individual’s pensions are tied to a particular city then labor shifts and movements are hindered.  China has also been expanding its coverage to cover the poor, homeless, farmers, etc which, along with accounts being underfunded, have caused politicians to raid individual accounts to cover the cost.

The Chinese government needs to focus on creating a unified national pension-pooling scheme.  This would help fix a few major issues.  Standardization across the entire country would greatly strengthen the overall effectiveness of the system and provide higher levels of confidence. If China expects to move beyond an export driven economy to a more sustainable consumption driven economy leaders must encourage less savings in favor of more consumption.

 

For more information:

Qi, Liyan. “China to Create Unified Pension System.” The Wall Street Journal. Dow Jones & Company, 7 Feb. 2014. Web. 3 Apr. 2014. <http://online.wsj.com/news/articles/SB10001424052702304680904579368453430854082>.

Roberts, Dexter. “Chinese Rage at the Pension System.” Bloomberg Business Week. Bloomberg, 31 Oct. 2013. Web. 3 Apr. 2014. <http://www.businessweek.com/articles/2013-10-31/chinese-rage-at-the-pension-system>.

Sevastopulo, Demetri. “China exports show rising global demand – FT.com.” Financial Times. N.p., 8 June 2014. Web. 8 June 2014. <http://www.ft.com/intl/cms/s/0/67bca20c-eec2-11e3-af9f-00144feabdc0.html#axzz344gKGqAz>.

Wei, Shang-Jin. “Why Do The Chinese Save So Much?.” Forbes. Forbes Magazine, 2 Feb. 2010. Web. 4 Apr. 2014. <http://www.forbes.com/2010/02/02/china-saving-marriage-markets-economy-trade.html>.

 


Thanks for sharing !


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