A Tale of Two Regions in China - Impact of Demography on Social Security
A speech at Conference on Chinese Healthy Aging and Socioeconomics: International
Perspectives, August 20 – 21
by Michael Sze, PhD, FSA, CFA
Agenda• Worldwide perspective• Fundamental theory of social security• Pension reforms in various countries
– Some older economies– Some younger economies– Some Asian economies
• Situation in Hong Kong– Mandatory Provident Fund– Ultimate solution for Hong Kong
• Situation in Xinjiang– Aging demography – Income disparity– Possible solutions?
Basic Demographic EffectPension Cost as % of GDP
1984 2000 2020 2040
Germany 13.7 16.4 21.6 31.1
Japan 6.0 9.4 14.0 15.7
Netherlands 12.1 13.4 19.6 28.5
United Kingdom 7.7 7.5 8.6 11.2
United States 8.1 8.2 11.3 14.6
Source: OECD Aging Populations: The Social Policy Implications. Paris, 1988.
Relationship Between Percentage of the Population over 60 Years Old and Public Pension Spending
5 10 15 200
4
8
12
16
Pension spending as percentage of GDP
Jamaica
Israel AustraliaJapan
AustriaItaly
Sweden
U.K.
France
Luxembourg Greece
China
Uruguay
Panama
Costa Rica
U.S.
Percentage of population over 60 years old
Poland
Source: Estelle James: The European Pension Crisis
Public Health and Pension Spending versus Population Aging
Spending as a percentage of GDP
Percentage of population over 60 years old
0 5 10 15 20 250
5
10
15
20
Spending on health and pension
Spending on health
U.K.
Poland
Sweden
Austria
Czechoslovakia
Iceland
Australia
Cyprus
Switzerland
Japan
Brazil Trinidad & Tobago
ChinaJamaica
IndonesiaS. Korea
SwazilandZambia
Canada
New Zealand
Source: Estelle James: The European Pension Crisis
Percentage of GDP
0 50 100 150 200 250 300
France
Germany
Italy
Canada
United States
Japan
Explicit debt
Implicit public pension debt
Implicit Public Pension Debt, 1990
Source: Estelle James: The European Pension Crisis
Source: Chris Daykin – Speech at IAA meeting
Source: Chris Daykin – Speech at IAA meeting
Fundamentals of Social Security
• Let B be average pension benefit per retiree R be number of retirees• Total pension payment = R x B• Total output = W x P, where W is number of
workers, and P is productivity• Output not consumed by workers is used to pay
retiree pensions: W P (S + T), where– S is saving rate, and T is tax rate
R B = W P (S + T)
Social Security Formula
R B = W P (S + T)R / W = P (S + T) / B
Ln R – Ln W = Ln P + Ln (S + T) – Ln BTaking partial derivative with respect to time
r’ – w’ = p’ + (s + t)’ – b’
where each term denotes % rate of increase of the term
Comments on Social Security Formula
• Left side is completely dependent on demographic changes– To keep the equation in balance, we must
narrow down the gap between retiree increase and worker increase
– Most effective way is to increase retirement age according to life expectancy increase
Comments on Social Security Formula (Continued)
• Right side depends on economic increase vs. benefit increase
• There is no solution to social security problems without economic expansion
• Social security is part of the economy
• A healthy national economy is essential
Implication on Pension Reforms• Technical formula is independent of
– DB or DC method
– Full funding or PAYGO
• Some fallacies in reform policy– Moving from PAYGO to full funding will not save
social security
– Moving from public to private funded pensions cannot avoid tax increase
• Difference between DB and DC plans: easier detection of trouble in DB plans
Some Social Security Reforms• US not been able to agree on any reform• Canada’s tax increase and benefit cut in 1999 found
inadequate in subsequent years• Italy’s proposal in 2002 to increase RA to 65 by 2008
failed after general strike by 25% of workers• France’s proposal to increasing RA gradually from 60
to 65 resulted in strike by over 2 million workers in April, 2003
• Germany’s encouragement to workers to take out private pensions or company options found not adequate (2001)
• UK: Modest minimum benefit funded by public PAYGO plan, plus private savings found to provide inadequate pensions, leading to wide spread protests
Other Social Security Reforms• Japan DB reform: increasing RA gradually from
60 to 65• Singapore Central Provident Fund contribution
– 20% from employee, 16% from employer– Combined contribution rate recently decreased to 33%– Used for housing, education, medical care, retirement
• Malaysia Employee Provident Fund contribution– 9% from employee, 12% from employer
• Hong Kong implemented Mandatory Provident Fund in 2000– 5% mandatory employee contribution, with equal match
from employer (to be discussed in following slides)
Hong Kong Population - 2002
-400 -300 -200 -100 0 100 200 300 400 500
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
Population ('000)
Male Female
Hong Kong Population 2011
-400 -300 -200 -100 0 100 200 300 400 500
0-4
10-14
20-24
30-34
40-44
50-54
50-56
50-58
50-60
Population ('000)
Male Female
Hong Kong Population - 2021
-400 -300 -200 -100 0 100 200 300 400 500
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
Population ('000)
Male Female
Hong Kong Population - 2031
-400 -300 -200 -100 0 100 200 300 400
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
Population ('000)
Male Female
Source: Census and Statistics Department of Hong Kong
Hong Kong Population
Hong Kong Male Mortality Rates
0.01
0.10
1.00
10.00
100.00
1000.00
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Age
De
ath
Ra
te p
er
Th
ou
sa
nd
2001 2011 2021 2031
Source: Census and Statistics Department of Hong Kong
Mortality Improvement
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Age
% D
ec
rea
se
in
Mo
rta
lity
Ra
tes
2001-2011 2001-2021 2001-2031
Source: Census and Statistics Department of Hong Kong
Dependency Ratios
Population
(in ’000’s) 2002 2011 2021 2031
Age 15-59 1,016 1,334 2,054 2,714
Age 60+ 4,686 5,187 5,138 4,990
Dependency Ratio 22% 26% 40% 54%
Annual Rates of Increase
2002
to 2011
2011
to 2021
2021
to 2031
% Increase in Retirees r’ 3.07% 4.91% 3.14%
% Increase in Workers w’ 1.14% - 0.10% -0.32%
Difference
r’ – w’ 1.93% 5.02% 3.47%
Implications of Demographic Changes for Hong Kong
• Continual decline in mortality rates – Life expectancy from birth: 78.2 for males and 84.1 for
female in 2001; 82.3/87.8 in 2031– Dependency ratio increases from 22% in 2002 to 54% in
2031– Two workers must carry one retiree
• % rate of retiree increase exceeds that of worker by 4-5%. Possible remedy includes – Productivity increase: not easy– Benefit decline: not desirable– Savings and tax rate increases: only choice
Brief Description of Mandatory Provident Fund of Hong Kong
• Implemented in 2000 to cover workers aged between 18 and 65
• High compliance rate, as of 12/31/2003– 95.4% of employers– 96.3% of relevant employees– 81.5% of self employed
• Contribution Rate– 5% pay from employer and employee each– Employees with monthly pay < HK$5,000 may opt-out
Description of MPF (Continued)
• Tax deductible contributions– Employee: 5% pay, up to $1,000/month– Employer: 5% pay
• Investment options: flexible for employee• Investment income: not taxable• Retirement age: flexible• Retirement benefit: lump sum of individual
accumulated fund, with no tax
Test Effectiveness of MPF
• Stochastic simulation program constructed to test the effectiveness of MPF
• Analysis of impact on retirement income as % of pay due to various strategies on– Contribution rate– Retirement age– Entry age– Investment
• Retirement income % is called Pay Replacement Ratio (PRR)
Projection Parameters for Base Case Study
Item ParameterEntry Age 30Retirement Age 60Initial Wealth 0Contribution Rate Employer 5% Employee 5%Excess Pay Increase 0%Investment Strategy Ages 30 - 40 Aggressive Ages 40 - 50 Moderate Ages 50 - 65 Conservative
Investment Strategies
Aggressive Moderate Conservative
Long Bonds 30% 50% 50%
Domestic Stocks
40% 20% 20%
Foreign Stocks 30% 30% 10%
3-month Fixed Deposit
20%
Assumptions Data SourceConsumer Price Index Census and Statistics Dept. of HK3-Month Fixed Deposit Census and Statistics Dept. of HKLong Bond Yield US Long Government Bond YieldExecutive Wage Increase Census and Statistics Dept. of HKDomestic Stock Return Hang Sang Index Total ReturnForeign Stock Return Standard & Poor 500 Total ReturnAnnuity Assumptions Mortality 1983 Group Annuity Mortality Interest Rate 6% per annum
Data Source
Simulation ProgramParameters
Retirement Initial Employer EmployeeEntry Age Age Monthly Pay Excess Pay IncrWealth ContributionContribution Sex
50 65 30,000 -2% 500,000 10% 5% MInvestment Strategy Portfolio Distribution
Start Age End Age Long Bonds 3-Months FixedDomestic StocksForeign Stocks30 39 30% 0% 40% 30%40 49 55% 25% 20% 0%50 65 55% 25% 20% 0%
Retirement Analysis for Male Age 50 - Initial Wealth = 8 Times Annual Pay
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Percentile
Pay
Rep
lace
men
t R
atio
RA 60/5% Er/5% Ee Cont. RA 60/ 15%Er/15% Ee Cont. RA 65/ 10% Er/5% Ee Cont.
Source: Results of author’s stochastic simulation
Simulation ProgramParameters
Retirement Monthly Excess Initial Employer EmployeeEntry Age Age Pay Pay Increase Wealth Contribution.Contribution Sex
30 55 25,000 2% 50,000 15% 10% MInvestment Strategy Portfolio Distribution Start Age End Age Long Bonds3-Months FixedDomestic StocksForeign Stocks
30 34 30% 0% 40% 30%35 49 50% 0% 20% 30%50 65 50% 20% 20% 10%
Retirement Analysis for Male Age 30 - No Initial Wealth
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Percentile
Pay
Rep
lace
men
t R
atio
RA 60/ 5% Er/ 5% Ee Cont RA 60/ 15% Er/5% Ee Cont. RA 55/ 15%Er/10% Ee Cont.
Source: Results of author’s stochastic simulation
Concluding Remarks on Hong Kong
• Need for assurance varies with individuals– The higher the assurance, the higher the
contribution rate
• For older employees without sizeable savings, retirement income is grossly inadequate– For these employees, a contribution rate of over
30% is required to produce decent retirement income at age 60
– Better if they retire at 65
• Severe transition issue must be addressed
Concluding Remarks for Hong Kong (continued)
For young employees: • 10% contribution is inadequate• It takes over 15% contribution to produce reasonable
retirement income• For early retirement, say at 55, more than 25%
contribution may be needed• Starting at 45 instead of 30, 5% more contribution is
bu 5% less• Current investment strategy is quite optimal
2000 Population of China (in millions)
15 10 5 0 5 10 15
0
6
12
18
24
30
36
42
48
54
60
66
72
78
84
90
96
Age
Male Female
Source: 2000 Population Census of People’s Republic of China
About Chinese Demography
• Mid segment of population is broad• Current working population is sizeable
– When this segment retires, there will be much pressure on country’s finance
• Population at lower ages is smaller– May cause increasing dependency ratio problem
• We should consider different dichotomy of the population
2000 Chinese Population2000 Rural Population (in Millions)
10 8 6 4 2 0 2 4 6 8 10
0
7
14
21
28
35
42
49
56
63
70
77
84
91
98
Ag
e
Rural-M Rural-F
2000 Han Population (in Millions)
15 10 5 0 5 10 15
0
7
14
21
28
35
42
49
56
63
70
77
84
91
98
Ag
e
Han-Male Han-Female
2000 Minority Population (in Million)
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0
7
14
21
28
35
42
49
56
63
70
77
84
91
98
Ag
e
Minor-M Minor-F
2000 Urban Population (in Millions)
6 4 2 0 2 4 6
0
6
12
18
24
30
36
42
48
54
60
66
72
78
84
90
96
Ag
e
Urban M Urban F
Source: 2000 Population Census of People’s Republic of China
Dichotomy of Chinese Population
• Consider percentage of population at younger ages– Percentage for Urban population much smaller
than that for rural population– Old age crisis more imminent in cities
• Fewer young people among Han population than in minorities– Old age crisis more imminent among Han
population
Social Security for China
• Wide differences among provinces– Geographical– Economical
• Many differences between cities and rural areas
• Xinjiang is an example
• Begin with study of economic factors
Basic Statistics of Xinjiang 2003Xinjiang China
Area 16,650,000 sq km 96,000,000 sq km
Population 19.3 million 1,292.3 million
Productivity Increase
2001 8.1% 7.5%
2002 8.1% 8.0%
2003 10.8% 9.1%
Income (Yuan) Urban Rural Urban Rural
2001 6,590 1,710 6,860 2,366
2002 6,940 1,863 7,703 2,476
2003 7,221 2,106 8,472 2,622
Xinjiang Population Trend
0
2
4
6
8
10
12
14
16
18
20
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Calendar Year
Po
pu
lati
on
in
Mil
lio
ns
Population Urban Rural
Source: Xinjiang Lingdao Ganbu Shouce 2004
Average Annual Income In Xinjiang
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Calendar Year
An
nu
al
Inc
om
e
Urban Rural
Source: Xinjiang Lingdao Ganbu Shouce 2004
Engle Quotients for Xinjiang
30
35
40
45
50
55
60
65
70
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Calendar Year
Qu
oti
ent
%
Urban Rural
Source: Xinjiang Lingdao Ganbu Shouce 2004
Birth Rate Vs Death Rate in Xinjiang
2
4
6
8
10
12
14
16
18
1978 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Calendar Year
Bir
th/D
eath
Rat
e %
Birth Rate (‰) Death Rate (‰)
Souce: Xinjiang Statistical Yearbook 2003
Death Rates for Xinjiang Population
0
50
100
150
200
250
300
0 1-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
Age Ranges
Dea
th R
ates
per
100
0
Urban M Urban F Village M Village F
Source: Xinjiang Statistical Yearbook 2003
Urban Population of Xinjiang
2000 Urban Population of Xinjiang
500,000 400,000 300,000 200,000 100,000 0 100,000 200,000 300,000 400,000 500,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Urban M Urban F
2010 Urban Population of Xinjiang
500,000 400,000 300,000 200,000 100,000 0 100,000 200,000 300,000 400,000 500,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Urban M Urban F
2020 Urban Population of Xinjinag
500,000 400,000 300,000 200,000 100,000 0 100,000 200,000 300,000 400,000 500,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Urban M Urban F
2030 Urban Population of Xinjiang
600,000 500,000 400,000 300,000 200,000 100,000 0 100,000 200,000 300,000 400,000 500,000 600,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Urban M Urban F
Source: Results of author’s population modeling
Rural Population of Xinjiang2000 Rural Population of Xinjiang
800,000 600,000 400,000 200,000 0 200,000 400,000 600,000 800,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Village M Village F
2010 Rural Population of Xinjiang
800,000 600,000 400,000 200,000 0 200,000 400,000 600,000 800,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Rural M Rural F
2020 Rural Population of Xinjiang
800,000 600,000 400,000 200,000 0 200,000 400,000 600,000 800,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Rural M Rural F
2030 Rural Population of Xinjiang
600,000 400,000 200,000 0 200,000 400,000 600,000
0
5-9
15-19
25-29
35-39
45-49
55-59
65-69
75-79
85-89
95-99
Ag
e
Rural M Rural F
Source: Results of author’s population modeling
Demographic Trend in Xinjiang
Urban• Lower fertility• Decreasing mortality• Rapidly aging
population• Dependency ratio
increases to 38.5% by 2030
Rural area• Higher fertility• Decreasing mortality• Migration to Urban
increases aging• Dependency ratio
increases at slower rate to 32.7% by 2030
Dependency Ratio for Xinjiang
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2000 2005 2010 2015 2020 2025 2030
Calendar Year
Dep
end
ency
Rat
ios
Urban Rural
Source: Results of author’s population modeling
Additional Problems for Xinjiang
• Water scarcity– Limited amount of surface water,
• Only 60% available for cultivation
– Only 8% of underground water has been developed
• Expanding desert: – Covering 42.4% of province
– Scarcity of forest, further depleted by • Unplanned expansion of cultivated land,
• Over grazing
– 20% of good farm land destroyed since 1980
Additional Problems (continued)
• Mountainous areas– Many rural areas not easily accessible
• Low education level, especially in rural areas– Over 25% have not finished primary education
• Over 11% have not been to primary school
– Migrants from Rural areas to cities are unskilled, uneducated, and poorly employed
Possible Solutions?Four necessary improvements1. Improved education level, especially in rural
areas• Better job opportunities for migrants to cities• Better agricultural techniques for farmers
2. Improved utilization of water sources• More water means more arid farm lands
3. Better farming techniques• More productivity and better conservation of land
4. Better roads• Easier communication and migration into cities
Impact of Improvements
• More farm lands• Better farming technology
– In industrial countries: 5% population are farmers
– In Xinjiang: 2/3 of population are farmers
– With better technology, fewer farmers can produce more
– Higher productivity in Rural areas
• More migration to cities– Migration helps dependency ratio in cities
Impact of More Migration
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2000 2005 2010 2015 2020 2025 2030
Calendar Year
Dep
end
ency
Rat
io
Current Migration More Migration
Source: Results of author’s population modeling
Comments - Impact of Migration
• Migration can provide temporary relief on dependency ratio
• Long-term solution for Urban must come from two sources:– Increase in productivity of Urban population– Increase in retirement age of Urban population
Concluding Remarks
• Aging is a worldwide phenomenon– Need to adjust retirement age continually in proportion
to increasing life span
• Increase in dependency ratio must be matched with increase in productivity
• To produce reasonably retirement income using defined contribution plan: – Combined employer-employee contribution rate of
over 15% is required
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