China’s elderly may soon be grumbling. Last week, the Chinese Academy of Social Sciences released a study estimating that China’s main state pension fund could be exhausted by 2035 – in other words, before workers born in the 1980s retire. The previous day, Beijing announced that China’s seven wealthiest provinces will, for the first time, start helping foot the bill for local pension funds in poorer regions already running dry. The immediate issue may be fixable. But the underlying problems will get worse before they get better, cutting to the heart of the Chinese Communist Party’s predicament on how to preserve its compact with its people.

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Where’d the Money Go?

For a nominally communist state, China doesn’t actually have a particularly strong social safety net. Historically, the bulk of the social welfare burdens have fallen either to state-owned enterprises or a patchwork of pension systems run largely by provincial and local governments. A job with a state agency or state-owned enterprise, for example, was long referred to as having an “iron rice bowl” – meaning a guaranteed pension and virtually free healthcare and housing. Until China’s first labor law came into effect in 1995, unproductive state workers were difficult to fire, meaning they essentially enjoyed these benefits for life. Over the past two decades, however, China has sought to gradually pare down the state sector. By 2017, partially as a result, state-owned enterprises accounted for around 15 percent of employment across China, down from about 80 percent in 1978.

As jobs moved increasingly to the private sector, provincial and local government pensions were expected to pick up much of the pension slack. But this created a fragmented, underfunded system plagued by loopholes, conflicts of interests, corruption and notoriously poor collections enforcement. A 2018 survey by 51Shebao, a social insurance information provider, claimed that more than 70 percent of Chinese firms were behind on their social insurance contributions.

Adding to this problem, a shift triggered by China’s state-sector reforms and China’s resulting accession to the World Trade Organization has hammered provincial and local funds. As the most lucrative private sector industries sprouted up in the export-centric provinces along China’s southeastern coast, Chinese migrant workers followed. Yet, China has been slow to abandon its Mao-era “Hukou” household registration system, which forces most migrant workers to obtain health, education and pension services only in their home province. As a result, the firms employing migrant workers are often paying pension contributions to coastal governments, while poorer, interior governments are still often on the hook for these workers’ retirement. According to the Chinese Academy of Social Sciences, just seven of China’s 32 provinces account for nearly 70 percent of all pension contributions. Guangdong alone receives as much funding as the rest of the ten wealthiest provinces combined.

Already, pension systems are in crisis across China’s interior provinces and in the industrial “rust belt” in the northeast. Last year, for example, a funding shortfall forced authorities in Heilongjiang province to delay pension payments. The Chinese Academy of Social Sciences estimates as many as 16 provinces will fall short this year. The social risk associated with this problem has been made starkly clear over the past four years by a surge of protests by People’s Liberation Army vets, many of them upset about being denied pensions and other benefits.

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The issue is likely to get quite a bit worse, thanks in no small part to China’s infamous one-child policy. In short, China is getting old before it gets rich, with more than a third of China’s population expected to be older than 60 within 30 years. And retirees are living longer, too. The predictive power of demographics is often overstated. Nonetheless, China’s population curve poses staggering problems for the pension system. In 2018, there were 2.8 contributors for every retired person. By 2050, according to official estimates, this ratio will fall to 1.3 to one. With China facing a prolonged economic slowdown, Beijing will find itself increasingly having to choose whether to rob Peter or to pay Paul. Last month, for example, Beijing moved to address a private sector credit crunch with a $300 billion package of tax and fee cuts – including sharp cuts to pension contribution requirements.

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Bigger Problems

Narrowly speaking, the pension issue itself still may be fixable; it’s effectively a policy transmission problem. There’s enough money floating around, at least for the time being; China just needs to iron out major kinks in the system to get the funds where they’re needed. Toward this end, it has initiated some Hukou reforms, including new measures making it somewhat easier for migrant workers to register in second- and third-tier cities (where the government wants more workers to move anyway). It’s gradually doing away with family planning controls. It’s forcing state-owned enterprises to transfer 10 percent of their shares to government pension funds, while also allowing the funds to start investing overseas. Meanwhile, China has been taking steps toward more streamlined, centralized pension systems. On Jan. 1, for example, it created a national contributions pool and transferred responsibility for collections away from local governments, paving the way for the provincial transfers announced last week. To soothe disaffected PLA veterans, it launched a national-level veterans affairs administration last year.

China’s situation is not entirely unique. U.S. Social Security is likewise facing a funding shortfall stemming, in part, from demographics. And in nearly every country, wealthier regions are forced to subsidize livelihoods in poorer ones. In 2015, New York received 83 cents for every dollar its taxpayers sent to Washington, while Mississippi got $2.13.

But two broader challenges highlighted by the pension crisis are particularly intractable in China. One is the central government’s historical struggle to keep the wealthier coastal regions aligned with the rest of China – one of the country’s core geopolitical imperatives. The more acute coast-interior disparities become, the more wealth the coasts will be asked to transfer to the interior, and the more coastal resistance to Beijing’s writ there’s likely to be.

The second is the scope of the grand bargain the Communist Party has made with the Chinese public – and the extraordinary degree of risk embedded in this social contract. Essentially, Beijing gets full rights to micromanage the Chinese people. In exchange, it takes on full responsibility for the welfare of the people. In other words, when the state demanded they do so, hundreds of millions of Chinese citizens gave up the right to have multiple children who, in keeping with core Chinese values, would see to their care in their golden years. Now, they’re finding the state may force them to spend these years destitute and alone. When Beijing scaled back the state sector, hundreds of millions left the interior to work in manufacturing on the coasts, propelling China toward untold wealth and global influence. Now, they’re finding that the state has neglected to make those who’ve gotten rich off their labor contribute their share to the social safety net – and that Hukou, a system designed for social control, is preventing them from getting what’s theirs.

Risky Bargain

Beijing can make a persuasive enough case that an economic slowdown is inevitable due to forces beyond its control. It’s capable of lowering public expectations of infinite growth and deflecting the responsibility of party mismanagement for the hard times to come. Xi and other senior leaders are constantly warning that China is not yet rich, that the project of national rejuvenation means constant preparation for hard times ahead. But Beijing cannot easily explain away problems plainly rooted in policy myopia, corruption and systemic dysfunction. And polls routinely show that what Chinese people want most from the party is not a headlong pursuit of national prosperity, but rather clean and responsive governance tailored to preserving the grand bargain.

This is why, under Xi, Beijing’s emphasis has shifted toward things like “quality growth,” pollution, corruption and social welfare. Xi has approached these sorts of issues with a heavy hand, focusing primarily on purifying the system of corrupt and recalcitrant elements. This is, in part, because so many other factors darkening China’s outlook are outside his control. He also presumably realizes that, as China’s external woes intensify, the party will need to prove that the power it has appropriated from the people is being wielded in service of their demands.

Ironically, though, this has meant strengthening the role of what Beijing can most directly control – the machinery of the state – and further narrowing space for political, civil and economic freedoms. Under Xi, Beijing has been strengthening state-owned enterprises, centralizing the bureaucracy, embedding party watchdogs at private firms and exploring new ways to supervise society. This, in turn, means the state is implicitly agreeing to shoulder ever more responsibility for the public’s welfare – and more of the public’s ire when it falls short.

Phillip Orchard
Phillip Orchard is an analyst at Geopolitical Futures. Prior to joining the company, Mr. Orchard spent nearly six years at Stratfor, working as an editor and writing about East Asian geopolitics. He’s spent more than six years abroad, primarily in Southeast Asia and Latin America, where he’s had formative, immersive experiences with the problems arising from mass political upheaval, civil conflict and human migration. Mr. Orchard holds a master’s degree in Security, Law and Diplomacy from the Lyndon B. Johnson School of Public Affairs, where he focused on energy and national security, Chinese foreign policy, intelligence analysis, and institutional pathologies. He also earned a bachelor’s degree in journalism from the University of Texas. He speaks Spanish and some Thai and Lao.