CAN PENSIONERS RESCUE CHINA´S ECONOMY? / THE ECONOMIST

Grey power arising

Can pensioners rescue China’s economy?

The government is stingy and timid when it comes to retirement benefits

Photograph: Getty Images

INSIDE BEIJING’S third ring road, Mr Li rides a scooter for FlashEx, a courier. 

Now in his 40s, with two school-age children, he migrated from Henan province, roughly 600km to the south. 

The capital’s ring roads, he has discovered, are not paved with gold. 

Competition has increased; fees have declined. 

Of the roughly 8,000 yuan ($1,100) he makes each month, he saves more than half.

People like Mr Li pose a conundrum for China’s economic policymakers. 

If China’s households feel insecure, they will not spend. 

And if they do not spend, the country’s ever more impressive industrial system will keep struggling to find customers. 

The lack of demand has already saddled the economy with persistent deflation: China’s factory-gate prices have fallen year on year for 33 months in a row. 

Falling prices can become a vicious circle, if they oblige companies to cut wages, further dampening demand.

On a recent visit to Henan, China’s leader, Xi Jinping, urged officials to strengthen social security and improve public services. 

Many macroeconomists agree: stronger social safety-nets would be good economically, as well as being good in themselves. 

On July 28th, the government took a welcome step in the right direction with a new subsidy to boost births: 3,600 yuan a year for families for each child under the age of three.

The government might look next to the other end of the life cycle. 

If China spent another 1trn yuan on rural pensions, it would increase GDP by roughly 1.2trn, according to Liu Shijin, who used to work for a think-tank attached to China’s cabinet. 

That makes pension reform effective stimulus policy, as well as worthwhile social policy. 

It is one of China’s best structural tools to unlock household consumption, according to Robin Xing of Morgan Stanley, a bank. 

The difficulty is getting the government to use it.

China is famous for its thrift. 

Households as a group now save over 30% of their disposable income. 

Migrant workers, like Mr Li, save even more: over 48%, according to one estimate, although some of that money will be spent by their family members back in their home towns.

In the past, much of this saving was channelled into property. 

But purchases of flats have fallen by half since the housing market peaked in mid-2021. 

The saving is flowing instead into financial assets, often cash. 

Figures reported by HSBC, another bank, show that cash and deposits accounted for almost half of households’ financial assets in 2022, compared with less than 14% in America. 

These piggy banks provide peace of mind, but meagre financial returns. 

The paltry income households earn from their wealth is another reason for weak consumer spending, says Adam Wolfe of Absolute Strategy Research, a consultancy.

To increase spending, pension reform will have to make the system both more generous and more adventurous. 

The existing pension architecture, it is often said, comprises three pillars (see chart 1): state, workplace and personal, which cover more than 90% of the adult population. 

But it is, in fact, a less tidy assemblage of five programmes. 

In some schemes an individual’s contributions flow directly into assets held on their behalf. 

In others the link between money in and money out is much less tight. 

A government formula, not market returns, links past contributions to future payouts.

The government has been tinkering with many of these schemes, to improve their reach and financial returns. 

At the end of last year it rolled out personal pensions across the whole country, offering modest tax breaks to people who contribute up to 12,000 yuan a year to their private pension pot. 

Almost 73m people have signed up, but fewer than a quarter of them have paid in any money.

The government also wants the funds collected by occupational pensions (which cover about 76m people, including 44m government workers) to be invested more bravely. 

Because the money managers who handle these assets are typically judged annually, they play it safe, allocating only 10-15% of their portfolios to equities, so as to avoid a bad year. 

The result is long-term money managed with a short-term mindset, argues Bo Sun of Principal Financial Group, an investment firm. 

The government wants money managers to be evaluated over three years or more. 

That would allow them to buy more equities, which could help stabilise the stockmarket and earn higher returns over the long run.

The government is also trying to extend its mandatory social-security scheme for urban employees, which covers over 530m people, to gig workers like Mr Li and others engaged in more flexible kinds of labour. 

Such workers can now contribute 20% of their earnings if they wish, although many are reluctant to give up wages now for pensions later. 

Some e-commerce platforms have started offering to act more like regular employers, making top-up contributions for riders who divert a share of their wages into such schemes.

The biggest of China’s five schemes spans around 538m residents, most of them rural, who can choose to make small contributions in their younger years in return for modest benefits later in life. 

In March, the government said it would add 20 yuan to the minimum monthly payout of 123 yuan, which is often topped up by provincial governments (see chart 2). 

Behind the state schemes stands the National Social Security Fund, which manages some of the money collected, as well as holding equity stakes in state-owned enterprises, with a book value of 2.1trn yuan.

Some economists think the government should do far more. 

Lu Ting of Nomura, a bank, argues that increasing the monthly pension by 300 yuan would have a double benefit. 

The extra money would increase the spending of pensioners, who now number over 180m. 

It would also reduce the saving rate of the scheme’s 358m younger members who could look forward to receiving it when they retire. 

The extra cost would be less than 0.5% of GDP a year.

Is the government listening? 

In June, the Communist Party’s central committee released a set of ten opinions on “improving people’s livelihood”, covering the elderly, education, health care and more. 

They represent the first comprehensive livelihood policy, issued as a central document, since Mr Xi came to power in 2012, according to a government spokesman. 

They said China should sweeten incentives to contribute to pensions, bring more flexible workers into the fold, and make it easier to enroll in schemes where people live, not where they are registered under China’s hukou system of internal passports. 

The opinions were, however, disappointingly vague, failing to clarify “who is going to pay”, points out Mr Xing.

The government does not seem ready for the kind of generosity that would really drive growth. 

The 20-yuan addition to resident pensions offered this year and last was itself a big increase compared with past increments. 

The government is wary of haste, even when the shortfall in demand is urgent. 

In recent weeks, it increased retirement benefits for urban employees and government workers by a measly 2%. 

“The problem isn’t a lack of ideas—it’s institutional inertia,” argues Mr Xing. 

“The gap between diagnosis and delivery remains wide.”

As for Mr Li from Henan, he is not counting on pension reform to secure his retirement. 

“If we can’t work any more, we can go back to our home town to farm,” he says. 

Mr Xi tells the country’s people to look forward to “Chinese-style modernisation” and a gleaming industrial future. 

But many older people, like Mr Li, face the prospect of a return to the land.