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Blue Model Failing in China Too

Reuters reports some disturbing news from China:

Policy makers and economists have long been worried about the financial burden of China’s expanding patchwork of pension schemes, but those concerns have recently escalated as its rural pension scheme took off in the past three years.

The funding shortage is daunting: economists say it could blow out to a whopping $10.8 trillion in the next 20 years from $2.6 trillion in 2010, towering over China’s $3 trillion onshore savings, the biggest hoard of domestic savings in the world.

Time is not on China’s side. Its fast-maturing society and economy — thanks to a one-child policy and a rapid rise in living standards — demand better pension coverage in future.

Yet China is already straining to hold things up. . . .

Trapped by rising costs and deficient funding, China spends about 40 percent of state earnings on pension, compared to under 15 percent in Japan and the United States, the OECD said.

Stretched, China’s local governments are widely believed to be emptying 2.2 trillion yuan worth of pension accounts of young working adults today to pay for current retirees, the Chinese Academy of Social Sciences said.

But such financial wizardry does not get rid of the crater in China’s pension budget, said economists Ma Jun and Cao Yuanzheng from Deustche Bank and Bank of China respectively.

Funding shortfalls hit 16.5 trillion yuan in 2010, the two economists said, and will quadruple to a stunning 68.2 trillion yuan by 2033. That is about 40 percent of China’s gross domestic product, assuming its economy grows 6 percent a year.

Unless China diverts 80 percent of dividends from listed state firms to pension funds to balance the pension account by 2050, they said, the nation may suffer “enormous fiscal stress”.

For Chinese retirees, this is scary. For young people whose bank accounts are being emptied to pay for their elders’ pensions, this is cause for outrage. And for the banks and state governments trying to balance the budget, the challenge is overwhelming.

Across Asia, rising “tiger” economies used to look at the American and European “blue” systems of social welfare and entitlement schemes as models. Those systems are now in serious crisis, and Asian countries are about to get bitten by the same bug: China is by no means the only Asian economy staring down the barrel of runaway pension schemes. In 2009 the OECD investigated pension systems across Asia and warned that each is “ill prepared to provide economic security for the large number of retirees who loom on the horizon.”

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