Pensions Are a Global Problem: 7 Questions Worth Asking | 2018 Business Events ⑩

Can the wealth a person creates in 30-odd years of work pay for a life of more than 70 years?

Some are the product of continuous change — change that will go on reshaping our lives. Some are the intrusions of even less controllable forces into the business world, forcing market participants to keep adjusting their strategies. And some come from companies themselves: how a company, once it reaches a certain size, makes its peace with the public, with consumers, with public authority, and with everything else around it.

A country gets the companies it deserves. In 2018, as always, the business world changed a great deal. The year's biggest business events only confirm it.

On January 12, Jia Kang — vice president of the China Public Finance Society and former director of the Research Institute for Fiscal Science at the Ministry of Finance — said something at a public forum that stirred up the country's anxiety about pensions all over again. With pension funds running dry in the northeast, he suggested, surplus funds from southern provinces could be routed there through the central government.

The remark quickly drew fire. A commentary in The Beijing News argued that shifting pension money around could only be a stopgap, not a cure, and that only growing the economy — raising revenue while cutting costs — would really settle the problem.

But for a problem as global as pensions, prescriptions that broad are not much use. Governments everywhere have reached for the same lever: raising, or planning to raise, the retirement age and the age at which people can start drawing a pension.

Speaking about aging on December 24, Yang Yiyong, director of the Institute of Social Development under the National Development and Reform Commission, said China's aging rate had already reached 16%, and that raising the retirement age was one way to cope with it so humanity could keep going over the long run. It was the latest word from officialdom since the relevant departments first proposed studying a delayed retirement age in 2012.

Most developed countries have moved far more decisively. The United States, too, began raising the age at which people can draw a full pension from the Social Security Administration in late 2017. Americans used to collect in full at 65; now the age is 66 years and 2 months. Anyone who starts drawing early takes a bigger cut in benefits.

After the World Cup in Russia, President Putin announced a gradual reform that would push the retirement age to 65 for men and 63 for women. In February 2018, the Japanese government passed an amendment to the National Public Service Act that moved the retirement age for government employees to 70. Sweden plans to raise its retirement age to 64 so it can keep paying pensions normally in the years ahead.

Such decisions are plainly unpopular. Between 2012 and 2019, China still did not issue a delayed-retirement policy. China Economic Weekly quoted Yang Lixiong, deputy director of the Center for Social Security Research at Renmin University of China, as saying the main reason was that "people don't really understand delayed retirement, and there's still some resistance to it." In Europe, delayed-retirement policies have drawn protests and demonstrations of varying size, both before and after they took effect.

So far, governments have almost uniformly declined to answer the public. Their hard line suggests that of everything on the table, delaying retirement may be the only measure that actually works to keep massive pension shortfalls from turning into worse social problems.

How Bad Is the Pension Shortfall?

The figures countries released in 2018 are startling. In the United States, The Wall Street Journal, citing Pew data, reported that federal and state pensions briefly moved from red to black during the dot-com years before 2002, showing a surplus of about $60 billion in 2000. After the bubble burst, that flipped almost instantly to a $120 billion hole by 2002. A report from the ratings agency Moody's in April 2018 found that the U.S. pension shortfall hit $4 trillion in 2017 — the size of Germany's entire economy.

Europe has not been spared. France, Britain, Belgium, Germany, Austria, and Spain are all watching their ability to pay pensions erode, to varying degrees. As early as 1990, the implicit public pension liabilities of France, Germany, and Italy already exceeded each country's entire GDP. Britain's pension shortfall has reached £734 billion.

In China, doubts about whether public pensions can keep paying out have become steadily more visible. According to a report the Ministry of Human Resources and Social Security released in late 2017, Heilongjiang, the worst case, was already 23.2 billion yuan in the hole. In 12 regions — Guangxi, Jiangxi, Hainan, Inner Mongolia, Hubei, Shaanxi, Tianjin, Hebei, Liaoning, Jilin, Qinghai, and the Xinjiang Production and Construction Corps — the balance left that year covered less than a year of payments. Which means these provinces need fiscal subsidies to pay pensions in full.

Caixin, citing Chen Wenhui, deputy chairman of the National Council for Social Security Fund, reported that the cumulative balance of the basic pension insurance fund for urban employees stood at 4.39 trillion yuan in 2017. Overall, money coming in still exceeds money going out. But strip away fiscal subsidies and count only what the fund collects and spends, and spending has outrun collection every year since 2014. The gap was 132.1 billion yuan in 2014 and 464.9 billion yuan by 2017. Fiscal subsidies alone came to 1.2 trillion yuan in 2017.

Why Is the Pension Problem a Population Problem?

The causes are tangled. On paper, the plainest explanation is that less money is coming in and more has to go out.

Heilongjiang is the textbook case. On one side, the number of people drawing pensions from Heilongjiang's accounts nearly doubled between 2010 and 2016, from 2.68 million to 4.57 million. On the other, the number paying in shrank. The sixth national census, in 2010, found that Heilongjiang had lost a net 3.225 million people to migration, and that the largest share of them, 32.6%, were between 30 and 39 — exactly the age group that pays into the system.

Seen that way, whether pensions balance is a question about population. Better medicine and better living have made people live longer; life expectancy in most developed countries is now over 80. Yet birth rates in those same countries have slid as their economies grew. The total fertility rate in the United States — the average number of children a woman of childbearing age has — fell from 3.19 in 1964 to 1.80 in 2016. Over the same years, Britain's fell from 2.93 to 1.80.

This shift means the population paying in is shrinking while the population drawing out keeps growing. The postwar baby boomers are the striking case: over the past decade they have moved into retirement, driving up pension spending in every country. Management problems surfaced along with them, and running a deficit has become normal for public pension systems.

Why Does No Country Have a Good Answer?

Faced with public pension shortfalls, governments seem to have nothing to offer but a later retirement age. That helplessness is understandable. Historically, this is the first time human beings have had to answer this particular social question: once you are old, who supports you?

For most of human history, an old person could be a burden on the family. Shohei Imamura's 1983 film The Ballad of Narayama portrayed a custom in which children carried a parent who had reached a certain age up a mountain and left them there. With food scarce, old people who no longer produced anything were treated as dead weight. Chinese National Geography has published research arguing that the folk stories about abandoning the elderly in Hubei were not invented.

At the level of society as a whole, though, old age was not much of a problem — because before the 20th century medicine was crude and disease killed people easily. Not many actually reached old age.

By United Nations figures, average life expectancy in China was about 41 years between 1950 and 1955, and only climbed to around 60 by the late 1960s.

U.S. Department of Commerce statistics show that in 1900 the American population was about 79.04 million, of whom roughly 3.03 million — under 4% — were 65 or older. By 1970 the over-65 population had passed 20 million, close to 10% of the total. Large numbers of old people are a trend that emerged only over the 20th century.

In a traditional farming society, moreover, getting old did not mean living entirely off your relatives. He Xuefeng, a sociology professor at Wuhan University, writes in his book The Last Mile (《最后一公里》) that in the countryside today the family works as a shared production unit: "While old people are still in good health, they can't just say they're 60 now and should retire, so they stop working and the son supports them."

"Rural Chinese families today commonly have a 'half working, half farming' structure — the young go out to work while their aging parents farm at home. What the parents earn from their labor is enough to feed themselves and even help their children ... Usually the stretch between a rural old person losing the ability to work and dying isn't very long, so supporting parents isn't a heavy load for rural children. On the contrary, people over 60 who are still farming bring in farm income for the household — so they aren't a burden, they're an asset."

Where Did Pensions Come From?

The idea that the old are unfit for work is a classic product of the Industrial Revolution. As industry divided up labor, production became a job that required workers to coordinate, and a factory's output was set by its slowest hand. Old people, whose bodies were failing, came to look like a drag on the line. Then techniques such as the assembly line arrived, and pushed them out of the industrial system further still.

William Osler, a founder of Johns Hopkins Hospital and a surgeon, gave a speech in 1905 that dressed this view in the language of science. He argued that 25 to 40 were a worker's golden years; that from 40 to 60 a man had no creative capacity left but could still be tolerated; and that a worker past 60 was useless and should be retired outright.

It was also in this period that the first public pension schemes covering all old people appeared. Before that, the state generally paid pensions only to public servants in dangerous jobs — soldiers, firefighters.

According to the historical records of the U.S. Social Security Administration, the German chancellor Otto von Bismarck designed a pension plan for the elderly in 1889. Kaiser Wilhelm I believed the state was naturally responsible for the old; Bismarck's motive was different. He wanted workers to be more productive. Once workers knew some social security awaited them after they stopped working, he reasoned, they would be happier on the job, work harder, and accept relatively lower wages.

In the United States, private companies moved first. In 1875, American Express — then not the credit card issuer it is now but a mail and freight business built on the railroads — launched the earliest pension plan. It was less a pension than a compensation scheme, meant to placate workers hurt on the job and cut down on disputes.

As the century went on, the welfare state became a mainstream ideology. Plenty of politicians came to believe the state was obliged to arrange a coordinated pension for retirees, and many countries set up retirement funds managed centrally by government. America's first public retirement fund was created in 1920.

Politicians and businessmen clearly did not foresee what the system would run into. In Bismarck's day, German life expectancy was just 37.7 years for men and 41.4 for women. In 1920, when the United States set up its public pension, an American born that year could expect to live 56.4 years. Most people simply never reached the age at which they could collect. For the people running these plans, a shortfall was far too distant to worry about.

History never tires of mocking human shortsightedness. After the Second World War, lives kept getting longer and the number of pensioners kept climbing, while birth rates were pushed down by economic growth, changing attitudes, and even state policy. Supporting old people's retirement on public pensions alone has become impossible.

What Goes Wrong When a Pension System Is Badly Designed?

Some reforms started long ago. In 1987 the United States rolled out a new pension arrangement, adding employer retirement plans on top of the public pension and encouraging people to open private retirement savings of their own. Judging by where things stand now, though, reforms that leave the population untouched have not worked well. A Citibank report found that American private pensions face a shortfall of roughly $3 trillion.

Structurally, China's pension system is in worse shape. The current system was formally established in 1991, and it began paying retirees straight away. But those retirees had never actually paid anything into the social security fund. What they collected was, in effect, paid by people still working.

This pay-as-you-go arrangement secured retirement for one group at another group's expense. The problem has a name: empty individual pension accounts. People pay into their accounts, but the money has already gone out the door to someone else. With the pension outlook darkening, how much today's workers will actually get later is an open question.

On top of that, staff at government agencies and public institutions pay no pension insurance at all, yet draw pensions funded by the central government. Employees of companies not only pay pension insurance while they work, but collect less after they retire than agency and institution staff do. This two-track pension system has drawn public criticism for years, and it has also left the pension pot underfunded.

Meanwhile, China's economy has grown fast for decades and wages have kept rising. Insurance, as a financial product, can fall badly behind the society around it.

In 2012, rural pension payments became a hot topic. Because it had not accounted for the enormous growth to come, the rural pension scheme set up 20 years earlier was still paying strictly by the standards designed back then, leaving each old person with 0.3 yuan a month. Even in the cities, pension contributions of ten-odd or a few dozen yuan a month in the 1990s came nowhere near supporting an old person's life in 2018.

Had pensions been able to share in the gains from China's growth, the problem today might be far smaller. But the relevant Chinese authorities strictly barred pension funds from high-risk financial investments, confining them to government bonds, bank deposits, and the like. With returns far below the rates of economic growth and inflation, China's pension problem has become steadily more obvious since 2010.

Given how poorly the system itself was designed, the pressure from China's population will be amplified further. The one-child policy, strictly enforced in the 1980s, produced a long stretch of low birth rates. By the 2010s the generation born in the baby booms of the 1950s and 1960s — the one that answered the call to have children — began retiring, while the only-child generation gradually became the mainstay of the workforce. Fewer and fewer people pay in; more and more draw out.

National Business Daily quoted Fang Lianquan, secretary-general of the Center for International Social Security Studies at the Chinese Academy of Social Sciences, as saying that when the pension insurance system was set up, the dependency ratio was 5:1 — five working-age people to one old person. It has fallen steadily since, to 2.8:1, and could reach 1.3:1 by 2050, meaning nearly every working person will be supporting an old person on top of themselves. The strain on pension payments is only going to grow.

Can the Wealth People Create Keep the System Alive?

If the pension problem today comes down to population, does that mean the pension system was never dependable to begin with? The crucial question is really whether human beings were ever prepared for the institution of retirement at all.

As noted above, the 21st century is the first time humanity has faced, on a large scale, a life that keeps going long after old age arrives. For the individual, the tradition was to work until the end; now people have to fund their old age without working. Without a pension system behind them, they would in principle need to start saving from their first day of work in order to support themselves later.

The arrival of pension systems seems to have left people with the impression that responsibility for their old age now sits with the government or their employer. That view is not unreasonable, up to a point. Once a government or a company collects pension contributions, it naturally takes on the job of managing that money. And with defined-benefit plans — where a government or company promises a fixed amount after retirement — the promise itself is an expression of responsibility.

But on another level, these funds cannot conjure wealth out of nothing; all they do is perform a particular kind of redistribution. A pension is in essence people's own money, saved and invested, with the proceeds returned to them after they retire. In other words, a pension is nothing more than your own principal plus what it earned.

Seen that way, whether the retirement system can hold up depends on two things: whether people can create enough wealth to serve as principal, and whether the returns on it can pay for a decent life after they stop working.

The second is the easier question, because investment returns are numbers anyone can track. In 2018, more Chinese pension money went into the stock market. In July, the Ministry of Human Resources and Social Security said 14 provinces, autonomous regions, and municipalities had signed entrusted-investment contracts with the National Council for Social Security Fund, and that 371.65 billion yuan had already been deposited and put to work. At the end of November, the council disclosed its annual investment returns for the first time. In 2017 the basic pension insurance fund earned 8.783 billion yuan, a return of 5.23%.

Before that, more than 86% of pension money sat in bank deposits. Zheng Bingwen, director of the Center for International Social Security Studies at the Chinese Academy of Social Sciences, calculated in 2015 that, measured against the consumer price index, China's pension funds had lost nearly 100 billion yuan in value over the previous 20 years. Now that the money can go into the market, returns should improve somewhat.

The first question is the hard one, because it really asks this: can the years a person works pay, in economic terms, for a whole and decent life? Take China. The National Health Commission put average life expectancy at 76.7 years in 2017, while the statutory retirement age is 60 for men and 55 for women. If you start working at 22, can 33 to 38 years of work buy 75 years of decent living?

That depends entirely on how much a person can produce. A farmer still working the soil by slash-and-burn obviously cannot expect meat and wine at every meal. A graduate earning 8,000 yuan a month would — leaving social development aside — have to live like someone earning 4,000 yuan a month to make sure their standard of living did not drop noticeably after retirement.

Factor social development back in and the conclusion is that people who have already retired, limited by the technology of their time and other constraints, mostly did not produce enough in their prime to pay for the way they live now. So the pension burden becomes an inheritance passed to the next generation — today's Chinese born in the 1970s and 1980s, and everyone born since.

This is one reason the welfare state is hard to sustain. After the Second World War, Western countries built comprehensive welfare systems, partly to head off another war, Britain's the most comprehensive of all, covering housing, healthcare, education, and more. Fast growth in the 1950s and 1960s kept the model running. But growth stalled in the 1970s and 1980s, the government spending the welfare state required kept rising, and then–Prime Minister Margaret Thatcher privatized a number of industries; Britain's welfare-state model became hard to hold together.

Since then only the Nordic countries have maintained high welfare in the traditional sense, and even they have run into trouble. A 2015 article in Foreign Policy noted that Sweden's center-right coalition government had been cutting benefits, and many surveys have said the Swedish welfare system cannot last. Three years later, Bloomberg made a similar argument: nationalists are winning more support in Sweden precisely because people have begun to doubt the welfare system can go on.

China's situation is distinctive in one further way: it carries a heavy burden of old-age support while its overall productivity has yet to reach developed-country levels — the problem usually called "growing old before growing rich."

What Can People Do About It?

Since workers are the ones who actually create wealth, one of the few ways to close the pension gap is to have them create more of it. Hence all the retirement-age policies. Longer working lives mean people produce more, and also draw less from the pension pot afterward.

The most extreme case is Russia, where male life expectancy is about 67.5 years. If Putin's policy takes effect and the male retirement age reaches 65, a Russian man will collect a pension for two and a half years — a bleak, hopeless-sounding prospect.

Governments have also adjusted how pensions are collected and paid. Rather than promising a fixed sum after retirement, governments and companies now adjust the amount according to what a person paid in: the more you contribute, the more you get. Robert Merton, who won the Nobel Prize in Economics in 1997, argues that all these shifts point one way — responsibility for retirement security is moving off the government and the employer and onto the individual.

For Chinese people, though, planning your own old age is not easy. The American pension system has three parts: the Social Security Trust Fund the government requires, the pension plans employers and companies set up (the 401(k) being the archetype), and the individual retirement accounts and other supplemental personal plans people open voluntarily. Together they are known as the three pillars of retirement.

China's system is far from complete by comparison. The pensions run by government departments may not be able to fund an ideal retirement. And because the current system requires companies to pay pension contributions worth 20% of an employee's salary, they have little appetite for setting up corporate annuities or pension plans of their own. The long habit of the state handling everything has also left many people unaware of how much personal saving matters for old age. China Retirement Readiness Report (《国人养老准备报告》), released jointly by Tsinghua University and Tencent, found that 91% of respondents had not begun planning for retirement, and 69% had made no financial preparations for it.

The latest bad news came from the National Bureau of Statistics on January 21: 15.23 million babies were born in 2018, a birth rate of 10.94 per thousand — the lowest since 1952. The hope of passing the pension burden to the next generation is dimming too.

Cover image / stills from The Looming Storm and Amour