China's pension shortfall is emerging as the next big challenge for policy makers as they intensify their years-long campaign to keep rising debt from derailing the economy.
Aging in the world's most populous country means pension contributions by workers no longer cover retiree benefits, forcing the government to fill that gap since at least 2014. Pension expenses rose 11.6% to 2.58 trillion yuan ($410 billion) in 2016, leaving the government a 429.1 billion yuan tab to cover the shortfall, according to the latest available data from the Finance Ministry.
That shortfall will reach 600 billion yuan this year and 890 billion yuan in 2020 if the system isn't reformed, according to Wang Dehua, a researcher at the National Academy of Economic Strategy in Beijing. Enodo Economics in London, which has advised policy makers on the matter, forecast last year that it could soar to 1.2 trillion yuan by 2019. The finance ministry doesn't release estimates.
"China's biggest fiscal risk is pension risk," said Wang, whose institute is under the Chinese Academy of Social Sciences, the government's top think tank. "There are big problems in the pension system if it can only keep operating with large fiscal subsidies."
The shortfall adds urgency to President Xi Jinping's quest to stem rampant growth in corporate debt, given the government will need to fund widening deficits of its own in coming years. Leaders may offer an update to the pension outlook on March 5 when they convene for the annual National People's Congress in Beijing.
While government revenue rose 7.4% last year for its first acceleration since 2011, that's unlikely to keep rebounding amid slower economic growth. That would limit Beijing's ability to cover the shortfall, which may push policy makers to issue debt to bridge the gap.
Premier Li Keqiang pledged in his report to last year's congress to increase the allowances. "We will weave a strong safety net to ensure people's well-being," Li said. "We will continue raising basic pension payments and see they are paid on time and in full."
The population is graying quickly. The State Council said last year that about a quarter of China's population will be 60 or older by 2030, up from 13.3% in the 2010 census. Meanwhile, scrapping the one-child policy hasn't raised birth rates as high living costs deter larger families. Births fell to 17.2 million last year from 18.5 million in 2016.
