Change

GLOBAL INVESTOR 1.17 —13
Photo: Sigrid Bjorbekkmo
Pensions
When I’m
sixty-four
Old-age pensions are an entitlement in many countries around the
world. But aging populations make it more difficult to finance
these systems. We look at solutions to the pension question in
two very different countries: China and Switzerland.
INTERVIEW BY GISELLE WEISS, freelance writer
Yikai Wang
is an assistant professor in the
Department of Economics at the University
of Oslo, specializing in quantitative
macroeconomics and the Chinese
economy. He received his PhD in Economics
from the University of Zurich in
2014. From 2011 to 2012, he was a
visiting scholar at the Massachusetts
Institute of Technology.
Even in industrialized countries,
guaranteeing pensions is no
easy matter. China is a devel oping
country with a huge and rapidly
aging population. How is it addressing
the issue of retirement income?
Giselle Weiss: Do the Chinese think
in terms of baby boomers and millennials
and so forth?
Yikai Wang Actually, my generation is
known as the “after 1980s.” Because we
were born after the market reform, we never
lived in a planned economy. And we were
the first generation to really be restricted by
the one-child policy, which became quite
tight after the 1980s. We had cousins to
play with, not siblings. So we think a little
differently from previous generations.
In 2012, you and your colleagues wrote
a paper on Chinese pension problems that
got picked up by the “Economist” magazine.
What was that about?
Yikai Wang We were interested in
two questions. First, the replacement rate
for Chinese retirees – the percentage
of pre-retirement income that is paid out as
pension – is quite high. How sustainable
is the current pension system? And, second,
because Chinese incomes have been
growing very fast, older generations are
poorer than future generations will be. What
amount of intergenerational transfer – i.e.,
using the contributions of younger workers to
fund current retirees – will improve the
welfare of the older generations without
hurting future younger generations?
Very-fast-growing income sounds like a
good thing.
Yikai Wang For the older generations,
though, it isn’t necessarily. Take someone
who entered the Chinese labor market in
1970 and someone who entered it in 2000.
During those 30 years, wages grew at 6%
per year on average. Which means that a
person who entered the market in 2000 can
expect to earn six times as much as the
person who entered the market in 1970.
Moreover, traditionally, most older
generations just put their money in a bank,
and they had little to begin with.
What percentage of the population
in China can expect a pension?
Yikai Wang Broadly speaking, only
urban workers are covered by the pension
system, and of those workers, only 60%
participate. The system isn’t compulsory.
There’s basically no pensions in the rural
areas, which since the end of the planned
economy in 1978 have officially been
responsible for taking care of themselves.
What do old people in the rural areas do?
Yikai Wang They rely primarily on
support from their children, who work in
urban areas. We actually wrote a follow-up
to our paper in which we hypothesized how
a universal pension system that includes
the rural areas might not be a major burden
because worker income there is so low.
What makes the pension
situation in China so acute?
Yikai Wang The Chinese population is
aging very, very fast. For example, right
now, the old-age dependency ratio – the ratio
of old to young – is a bit more than 0.1.
It will take China only 40 years, say until
around 2055, for the old-age dependency
ratio to increase to 0.5. That means one
senior for every two working-age persons in
China. And that’s if you compare the over-
65 population with the under-65 population.
A second factor is that there is a huge
movement of young people to the cities.
That slows down the aging problem in the
urban areas, but it aggravates it in the countryside.
By one measure that we used,
there will be 1.6 seniors for each workingage
person in rural China by 2050.
If the government is worried about
the sustainability of the pension system,
wouldn’t it make more sense for the
system to be mandatory?
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