1: The Statistic Yearbook 2015 of China has not been released yet. All the data in 2014 is forecasted.

Overview

The pension insurance system of urban areas in China has been running for more than 40 years. It is the

major part of the social insurance system. But now it is facing a problem. The system is likely to go

bankrupt in the next 20 years. The possible bankrupt comes from the inferior performance of the system

and the larger and larger aging population. The system underwent a major reformation in the 1990s.

Before this period, all the participants had no liabilities to contribute to the pension fund. The fund was

fully funded by the government. After the reformation, all the staff in urban corporates should contribute

certain portion of their wages to the fund. But all the staff working for the government still did not have to

contribute. This unfair contribution arrangement resulted in a tense budget of the pension fund as well as

big social problems. Another dilemma faced by the fund is that, on one hand, the budget become tenser

and tenser as retirees live longer than before and living costs keep increasing; on the other hand, because

of the regulation policy, more than CNY 3 trillion accumulated balance can only be invested as deposits in banks and treasury bonds, both of which provide a lower-than-market return.

To deal with the tense budget and possible bankrupt of the pension fund, government departments and

scholars have been discussing several reformations in recent years. The two major reformations can be the

permission for the CNY 3 trillion to be invested in market and the implementation of delayed retire

policy, which means participants should delay their retirement age. The former one aims at increase the

appreciation of the accumulated balance. The latter one aims at decrease the demand of pension fund.

Under current policy, the legal retire age for male staff in urban corporates and government departments

is 60; the legal retire age for female staff is 50 and 55 in urban corporates and government departments,

respectively. The delayed retire policy is in a gradual model. If implemented, the legal retire age would

increase by a small time span, such as half year or one year, in each year.

My research focus on the forecasts of the revenues and costs of the pension fund from 2014 to 2050.1

What I am looking for is when the accumulated balance will turn negative. The forecasts are conducted

under two different conditions. First, government will run the pension fund from 2014 to 2050 without

any reformations. Second, the government will allow the accumulated balance be invested in market, such

as stock market, and implement the delayed retire policy in the future. Table 1 shows the time when the

accumulated balance will turn negative in the first condition under different increase rate of revenue of

pension fund and increase rate of yearly wages in urban areas. Table 2 shows the time in the second

conditions. Table 3 shows, compared with the first condition, number of years delayed when accumulated

balance turn negative in second condition. Blanks in each table indicate that accumulated balance will not turn negative until 2050.

Increase rate of revenue of pension fund

10% 12% 14% 16% 18% 20%

Increase rate of yearly

wages in urban areas

6% 2026

8% 2023 2025

10% 2021 2022 2025 2035

12% 2020 2021 2022 2024 2031

14% 2019 2020 2020 2022 2024 2029

16% 2018 2019 2019 2020 2021 2023

18% 2018 2018 2019 2019 2020 2021

Table 1: Forecast of possible bankrupt time of pension fund in first condition

Increase rate of revenue of pension fund

10% 12% 14% 16% 18% 20%

Increase rate of yearly wages in

urban areas

6%

8% 2025 2037

10% 2022 2025 2034

12% 2021 2022 2024 2032

14% 2020 2020 2022 2024 2030

16% 2019 2019 2020 2021 2024 2029

18% 2018 2019 2019 2020 2021 2023

Table 2: Forecast of possible bankrupt time of pension fund in second condition

Increase rate of revenue of pension fund

10% 12% 14% 16% 18% 20%

Increase rate of yearly wages in

urban areas

8% 2 12

10% 1 3 9

12% 1 1 2 8

14% 1 0 2 2 6

16% 1 0 1 1 3 6

18% 0 1 0 1 1 2

Table 3: Number of possible bankrupt years delayed in second condition

Based on the historical increase rate, 15.000% of the increase rate of revenue of pension fund and

10.000% of the increase rate of yearly wages in urban areas are most applicable increase rate in the

forecast. Given the two rates accumulated balance will be used up in 2027 in the first condition (see

worksheet Output1 and figure 1). However, the accumulated balance will increase at an accelerated

pace in the second condition (see worksheet Output2 and figure 2). Table 3 also indicates that the

reformations in the second condition will delay the time when accumulated balance turns negative. The

delayed time will be significant if revenue of pension fund increases at a rate at least as fast as the yearly wages in urban areas. My forecasts support the two reformations for the pension fund.

-200000

-100000

0

100000

200000

300000

400000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Figure 1: Accumulated balance in the first condition

revenue of Pension fund (CNY 100 million)Cost of pension fund (CNY 100 million)Accumulated balance of pension fund (CNY 100 million)

0

50000

100000

150000

200000

250000

300000

350000

400000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Figure 2: Accumulated balance in the second condition

revenue of Pension fund (CNY 100 million)

Cost of pension fund (CNY 100 million)

Accumulated balance of pension fund (CNY 100 million)

Forecast without Reformations

The key indicator of the possible bankrupt time of pension fund is the accumulated balance, which is

resulted from the difference between the revenue and the cost of pension fund every year. Because the

revenue exceeded the cost from 1995 to 2013, the accumulated balance in 2013 was more than CNY 3

trillion. The accumulated balance can be invested to realize appreciation. Under current regulation, it can

be only invested as deposits in banks and Treasury Bonds. The government is considering to permit it to

be invested in stock market, hoping to see an adequate appreciation. The forecast of accumulated balance

fall into two parts: the forecast of revenue and the forecast of cost. Revenue forecast can be done by

choosing a increase rete based on historical data. However, many factors combined determine the cost of

the pension fund. These factors are total population, population that is qualified to collect pension in

urban areas, pension replacement rate, and the yearly wages in urban areas . To make the forecast

authoritative, the forecast is based on three governmental reports: The Research Report on the Forecast of

the Tendency of Aging Population in China (hereinafter referred to as Document 1) published by National

Council for Aging Population in 2007, The Strategic Research Report on National Population

(hereinafter referred to as Document 2) published by National Health and Family Planning Commission

in 2007, and The National Plan for New Urbanization (2014-2020) (hereinafter referred to as Document

3) published by the State Council in 2014. I will provide more details on these factors and how my forecast model works in the following parts.

Forecast of Total Population

The officially historical data of total population from 1995 to 2013 can be found in the Statistic Yearbook

2014 of China. According to the population forecast in Document 2, total population will reach 1.36

billion in 2010 and 1.45 billion in 2020. The summit of total population will be about 1.5 billion around

2033. In my forecast, I set total population in 2020 at 1.45 billion and in 2033 at 1.5 billion. The two

numbers determine an implied increase rate per year of 0.261% for this period. The implied increase rate

from 2013 to 2020 is 0.912% per year. I assume that, after reaching the population summit in 2033, total population will decrease at -0.150% per year.

Forecast of Population That Is Qualified to Collect Pensions in Urban Areas

Forecast of population at age 60 and higher. According to related regulation, the official retire age in

urban areas is 60 and 50 for male and female staff, respectively. In some special situations, staff can

choose to retire in advance or delay retire. But these staffs in special situation only count a small part of

total staff. In my forecast, I ignore the effect of these special situations. Historical number of population at

age of 60 and higher cannot be found in the Statistic Yearbook 2014 or other official documents. Here I

use retrospective method to generate historical data. According to Document 1, population at age of 60

and higher was 143 million in 2004; the average increase rate for population at age of 60 and higher from

2001 to 2020 is 3.280%; population at age of 60 and higher will increase by 6.2 million every year from 2021 to 2050.

Forecast of female population at age between 50 and 59. According to the fifth (2000) and sixth (2010)

demographic censuses conducted by National Health and Family Planning Commission, female

population as percentage of total population was 4.250% and 5.899% in 2000 and 2010, respectively. The

implied increase rate for this ten-year period was 3.333%. I assume that female population will increase at

the same rate after 2010 until 2016, when female population as percentage of total population reaches

7.000%. After 2016, the increase rate will be fixed at 7.000%. The intuition behind is that the effect of

aging population results in a high percentage of female population but it cannot increase forever. So I

assume it will reach the summit in 2016. With the percentage of female population at age between 50 and

59 in total population, I can calculate female population at this age range. Add population at age 60 and

higher with female population at age between 50 and 59, I get the total population in China reaching legal

retire age.

Forecast of urban population as percentage of total population. Historical data about urban

population as percentage of total population can be found in the Statistic Yearbook 2014 of China.

According to Document 3, urban population as percentage of total population will reach 60.000% in

2020, indicating an implied increase rate of 1.589% starting from 2013. Generally, urban population as

percentage of total population in developed countries is higher than 80.000%. I assume that urban

population as percentage of total population will maintain this increase rate after 2020. At this increase

rate, urban population as percentage of total population in China will reach 80.000% in 2039. I assume China maintain 80.000% after 2039.

Forecast of pension coverage rate of urban population. Not all population living in urban area is

qualified to collect pension. According to Document 3, pension coverage rate of urban population was

66.900% in 2012. Document 3 also sets 90.000% as the goal of pension coverage rate of urban population

in 2020. The two time points set an implied increase rate of 3.777%, which is used to calculate the

pension coverage before 2012 using retrospective method. It is rational that increase rate of pension

coverage will slow down after 2020. I assume that pension coverage will reach 100.000% in 2025, indicating an implied increase rate of 2.130%.

With the previous forecasts, I can calculate the population that is qualified to collect pension. For

example, in 2014, population reaching legal retirement age is 290 million while urban population as

percentage of total population and pension coverage rate of urban population are 54.584% and 72.049%,

respectively. Population that is qualified to collect pension is 290*54.584%*72.049*=114 million. The

forecast shows that population that is qualified to collect pension will reach its summit of 403 million in 2046.

Forecast of Average Yearly Wage in Urban Areas

The Statistic Yearbook 2014 of China provides the historical data of average yearly wage in urban areas

from 1995 to 2013. The average increase rate during this period is 13.433%. The most possible case is

that the average yearly wage will increase at a rate around 10%. I make a sensitivity analysis based on

different increase rates of average yearly wage (see worksheet sheet1 and sheet3). Clearly, the faster the

average yearly wage in urban areas increase, the bigger the financial burden the pension fund has, because

pension per retirees should increase as average wage increase in order to make sure that retiree can maintain a good living level.

Forecast of Pension Replacement Rate

Now I can calculate historical pension per retire by taking the cost of pension fund divided by population

that is qualified to collect pension. The pension replacement rate is the ratio of pension per retiree to

average yearly wage. My calculation shows that pension replacement rate decreased dramatically from

1995 to 2013, from about 100.000% to 36.887%. The decrease was resulted from the high increase rate of

average yearly wages in urban areas and relative low increase rate of pension per retiree. In recent years,

the pension replacement rate decreased at a much lower rate than before. It is highly possible that pension

replacement rate will reverse in next few years. Because Document 1, 2 and 3 set year 2020 as the pivotal

time point, I assume that replacement rate will reach its historical low level, 35.000% at 2020, which

gives me an implied increase rate of -0.747% from 2013 to 2020. The goal of pension replacement rate set

the government is between 60.000% and 70.000% in the middle of 21st century. I assume that the pension

replacement rate will reach 65.000% in 2050, which determines an implied increase rate of 2.085% from 2020 to 2050.

Now I have forecasted the average yearly wages in urban areas and pension replacement rate from 2014

to 2050. Multiplying the average yearly wages with pension replacement rate, I get the forecasted pension

per retiree from 2014 to 2050. Then I calculate the cost of pension fund by multiplying pension per retiree with population that is qualified to collect pension.

The major resources of revenue of pension fund are participants’ contribution and national government

expenditure on pension. Revenue of pension fund is more predictable than its cost. The historical increase

rate of revenue of pension fund was, on average, 20.035%. This increase rate is too high to be maintained

in the next several decades. The rational increase rate should be around 15.000%. Using 15.000% in my

forecast, I get the forecasted balance from 2014 to 2050 by subtracting the cost of pension fund from the

revenue of pension. The sum of the difference between the cost and the revenue is the accumulated

balance of pension fund, the key indicator of the possible bankrupt time. Note that the accumulated

balance can be invested in deposits in banks and Treasury Bonds under the current regulation. Most of the

accumulated balance is invested as deposits in banks and most of that portion is invested as one-year

deposit. To simplify the forecast, I assume all accumulated balance is invested as one-year deposit in

banks. In this way, the accumulated balance will appreciate at a same rate with interest rate of one-year

deposit in banks. For the period from 1995 to 2013, the investment return was the interest rate of one-year

deposit applied at the beginning of the year. Starting form 2014, I assume that the accumulated balance, if

positive, will appreciate at 3.000% per year, equal to the interest rate of one-year deposit rate in recent

years.

Forecast with Reformations

Under current regulation, the accumulated balance, more than CNY 3 trillion, cannot be invested in

market, in which specialize management can generate significant appreciation. More and more people

appeal to loosen the regulation on the usage of accumulated balance. Government has already put it on the

agenda. The change is around the corner. In my forecast, I assume that, starting from 2017, the

accumulated balance will be invested in market, including the stock market. I use 8.000% as the

investment return, close to the average investment return of the social security fund which has been

investing various financial markets since 2003. Note that, in the first several years, only part of the

accumulated balance will be invested in the market. As time goes, more accumulated balance will be used

in the market. I assume that, in 2017, 50.000% of the accumulated balance will be invested in the market

and each year another 5.000% will be added in the following years until reaching 90.000%. Given the

risks, 10.000% of the accumulated balance will still be invested as deposits in banks and Treasury Bonds.

The overall investment return of the accumulated balance is the weighted average of interest rate of one-

year deposits, 3.000%, and the forecasted average investment return from the market, 8.000%.

Another possible reformation is the implementation of the delayed retire policy. Many politicians and

scholars agree on a gradual version of the policy, which is more feasible. According to the gradual

version, after the reformation, the legal retire age will have a small increment, such as 0.5 and 1 year,

every year until it reaches the target retire age. In 2014, scholars in Tsinghua University once proposed a

delayed retire plan, in which the legal retire age for male increase by 0.5 year every year after 2035 and

the legal retire age for female increase by 0.5 year every year after 2015. I use this plan to forecast how

many people will be affected if the gradual version is implemented (see worksheets forecast under

gradual retire). The policy will affect male population at age between 60 and 64.5 starting from 2035 and

female population at age between 50 and 64.5 starting from 2015. The legal retire age will be 65 for both female and male in 2045.

To forecast population affected at each age group, I use data of age composition from statistics of the

sixth demographic census conducted by National Health and Family Planning Commission in 2010. I

calculate proportion of each age group and adjust the results to reflect the bigger aging problem in the

future. For instance, population at age 60 was 0.519% of total population in 2010. In my forecast, I use

0.550% as the proportion of this age group. Female at age of 50.5, instead of 50, can retire in 2016. To

simplify the forecast of the population affected by the policy, I assume that female population at age of

50.5 holds 50.000% of female population at age of 50 and another 50.000% for female population at age

of 51. Total population affected by the policy is the sum of male and female population affected. After the

implementation of the policy, population that is qualified to collect pension each year will be decreased by number of population affected in the same year.

The effect of reformations is significant to the financial condition of pension. When revenue of pension

fund and average yearly wage in urban areas increase at 15.000% and 10.000%, the accumulated

balance will turn negative in 2027 without reformations while the accumulated balance will continuously increase with reformations (see worksheets sheet1 and sheet3).