Opening remarks at the ILO/MOHRSS Seminar on Reform of Pension Adjustment Mechanism

By Mr Tim De Meyer, Director, ILO Country Office for China and Mongolia

Statement | Beijing, China | 01 September 2017
Director General Hao Bin, International Cooperation Department of MOHRSS,
Director General Jin Weigang, Institute of Social Security Research of MOHRSS,
Distinguished experts, friends,

Welcome to this Seminar on the Reform of the Pension Adjustment Mechanism. A sincere thank you to our colleagues from the Institute of Social Security Research for organizing this event. Thank you to the distinguished experts from the government and social partners, academia and the different provinces for your contribution to this seminar. A special vote of thanks to my colleague Krzysztof Hagemejer for joining us from afar today and sharing with us international experience on pension adjustment.

Today we are putting the final touches on policy recommendations for the Reform of the Pension Adjustment Mechanism. The Institute for Social Security Research, experts such as yourself and Prof Hagemejer have combined considerable brainpower over several months to present some policy options based on their professional insights. I hope their work will be given the consideration it deserves.

It is difficult to overstate China’s achievements in building a comprehensive social protection system for over 1.3 billion people. The International Social Security Association (ISSA) 2016 Award for Outstanding Achievement testifies to this remarkable accomplishment. Pension reform, including pension adjustment, is a high priority in the 13th Five-year Plan. Pension reform is essential for the realization of the goal of building a well-off society before 2020. It is also vital for a number of the Sustainable Development Goals beginning with the first: end poverty in all its forms everywhere. Getting rich before getting old is nowhere a bigger challenge than in China, but nowhere is the commitment to universal social protection and the determination to get it right firmer.

Much is riding on getting pension reform right: human dignity, social stability, and social cohesion – of course. But also that key ingredient of economic transformation, productivity, gets a boost if economies manage to keep their most dynamic and innovative men and women economically active for as long as they can. Public confidence in a pension system reduces the incentive for excessive saving and helps rebalancing the economy. A similar economic stimulus may arise from lifting the purchasing power of a growing cohort of retirees. Merrill Lynch estimates the Silver Economy at $7 trillion per year and growing, making it the 3rd largest economy in the world. That is, if countries get also the balance between sustainability and adequacy of the pension system right.

Regular adjustments are essential to keeping pension benefits adequate. The Social Security (Minimum Standards) Convention, 1952 (No. 102) – which China is commendably considering for ratification – requires adjustment when earnings change substantially as a result of substantial changes in the cost of living. Regular adjustments provide cover against old-age poverty, a risk that must not be overlooked. Even though most European countries established pension systems much earlier than China, a fifth of the EU population over 65 still lives below the poverty line.

China is clearly embracing a concept of adequacy that serves two purposes: preventing old-age poverty, but also protecting a reasonable level of purchasing power so that retirees can share the economy’s productivity gains. This is very much the ILO’s approach, serving human dignity, fairness and economic dynamism at the same time.

Adequate benefits can only be delivered by a financially sustainable system. An ageing society has forced EU countries in recent years to work on the future of pension financing and their experience may be useful for China at this stage. So-called “parametric reform” measures such as the increase of contribution rates or the extension of the retirement age – and let us not forget the equalization of the retirement age between men and women – are not invariably popular. Yet, they are still the most effective way to improve sustainability. To find acceptance, they should be accompanied by pro-active employment and industrial relations policies supporting people to stay healthy and work longer. Transparency of the system and good communication with the public is paramount to overcoming reform resistance. Supplementary pension plans and national reserve funds also play a role in securing adequate benefit levels: in 2009, OECD countries on average reserved 10 per cent of their GDP for future pension gaps.

Just like adequacy is not possible without sustainability, sustainability will not work without adequacy. Without the trust of all workers, including rural migrant workers, in a reliable and adequate long-term return on the contributions they are making now, financing will suffer.

Lastly I want to talk very briefly about the pension adjustment mechanism as you are all experts on this topic:

Pension reform always involves difficult choices – and they do not become easier by postponing them. If parametric reform of the pension system is needed, let us do it now.

Every country is home to people who cannot find or cannot keep their place in a dynamic environment. When they grow old, they must be able to fall back on minimum pensions and minimum income provisions, in the interest of both social inclusion and economic sustainability.

Economic fluctuations are a fact of life and tampering with pension adjustment during economic downturns is often a political temptation too hard to resist. Enshrining pension adjustment in law can avoid such tampering and secure transparency and predictability of adjustment.

Constant monitoring of benefits and revenues are obviously key to effective adjustment.

Gradualism, transparency and emphasis on fair burden-sharing among generations also increase the chances of a successful reform.

The proposed ILO/ISSR research is mostly qualitative. As a next step, the design formulas should be tested in terms of both old-age income protection level and the impact on the financial equilibrium of the fund.

ILO is ready to further provide technical support. Getting pension reform right is critical for China, for the rest of world and for developing countries that are increasingly keen to learn from China in the context of South South and Triangular cooperation. Given the progress China has made in social protection coverage extension in recent years and the complexity of such a large country, your experience will provide inspiration for many other countries.

I wish you a fruitful discussion and the seminar every success. Thank you.