The Notional and the Real in China's Pension Reforms

Bei Lu, John Piggott, and Bingwen Zheng

This chapter discusses the potential expansion of the role of the notional defined contribution (NDC) paradigm in the ongoing reforms of retirement provision in China. China has remarkably high nominal retirement coverage of its population, but issues of sustainability, equity, and governance are challenging and real. Further, while many broad policy guidelines are set by the central government, jurisdictions at provincial, city, and sometimes even district level have major control over implementation, covering administration, benefit rates, and other important retirement policy features. Retirement policy and provision, regardless of the approach adopted, are necessarily shaped by fund members’ labor market experience. In China, heterogeneity is dramatic across provinces and between urban and rural settings – in development stage, cost of living, formalization level, and other characteristics. Interestingly, mature age life expectancy is remarkably uniform among formal sector workers at the time of retirement. Somewhat greater heterogeneity arises when membership of the Rural and Urban Residents Pension Scheme (RURPS) is considered, but mature age life expectancy varies by only a couple of years. The implications of a stylized NDC structure covering all three of China’s major pension systems, calibrated to be actuarially fair to different contributing members, are examined. Each system has a different contribution rate and retirement age, consistent with different life expectancies. A complementary social pension is also proposed. The chapter concludes that an increased presence of the NDC paradigm could raise aggregate welfare, especially in the large and growing Urban Employee Pension Scheme (UEPS).