ANOTHER LARGE BLACK HOLE, PART II

By Gordon G. Chang

How much are China’s pension and other social welfare obligations? Some say they approach a trillion U.S. dollars. Give or take a couple hundred billion dollars and you define the range of what Beijing will have to pay out to its urban workforce in the years and decades ahead.

The real story is not the total magnitude of funding shortfalls. True, the full amount of social security obligations is astounding, but the central government still has time to figure out what to do–many of the pensions and other benefits will not have to be paid until far into the future. So it appears that Beijing can cope. As Finance Minister Xiang Huaicheng says, “There is a rough balance between social welfare contributions and expenditure, but a disparity from one region to another.” Xiang should be able to iron out dislocations of this sort by dipping into the central treasury, as they increasingly do these days.

The real trick for the technocrats will be avoiding a substantial deterioration in the financial condition of the social security system. As an initial matter, they must implement their plans well. Some foreign experts believe that the amount of unfunded obligations could double in two decades if Beijing fails in this task.

It’s not hard to see why. As an initial matter, the central government’s plans are ambitions. With programs of this scope, even small mistakes of administration could be expensive.

Moreover, China is already falling behind in extending coverage: Not all employees are receiving their “guaranteed” payments today. In each of Jilin and Hunan Provinces as many as half a million eligible workers are not being provided for. The problem exists to a slightly lesser degree in other areas across China. More than 28 percent of the long-term urban unemployed, about 5.45 million workers who need help most, do not benefit. Poorer provinces simply do not have the money to distribute payments.

And China is not immune to welfare abuse. Now that the social security system is being put into place, crafty state enterprises are taking advantage of the situation as much as they can. To lighten their payrolls, these firms are encouraging early retirement to employees, some as young as 29. Shedding young employees helps those firms, but burdens the national system.

The real problem is not clever manipulation of state programs, however. It is demographics. In China it is called the “silver tide,” the wave of elderly that poses one of the most important long-term challenges to the central government. The People’s Republic has an aging crisis as a result of population engineering–the one-child policy. As Simon Pritchard of the South China Morning Post points out, other nations like Japan may be older, but China is poorer and aging more quickly.

Bank of China International estimates that in 2030 22 percent of the population will be over 60, compared with about 10 percent today. That 10 percent today translates into 132 million people.

In 1997 there were about eighty people on pensions for every 100 children below the age of five. By 2025 the number of the pensioners will balloon to 250 for every 100 children. China’s birth rate has already fallen below the replacement rate of 2.1 (it’s now about 1.8). With a gender imbalance favoring males, birth rates will decline faster than the replacement rate suggests.

One child will therefore not only have to take care of elderly parents, but perhaps grandparents as well. No matter how filial a son or daughter may be, the state will ultimately have to take responsibility for the elderly. The state is now planning to spend US$483 million over the next three years for facilities for the aged. That amount is just a drop in the bucket with what must ultimately be spent.

Finally, the leaders in Beijing will be under pressure to broaden eligibility. Many urban workers, such as the migrants, are shut out of the system, as are most peasants. There are hundreds of millions of people who want in.

Beijing is running out of options. Economic growth could alleviate the stress of unfunded obligations, but if it is not evenly distributed it may not help much. Taking more money from the workers is not under discussion. Their contributions are already a sky-high 20-30 percent of salary. Technocrats can make the problem look better by adjusting the simple things like the discount rate, but that is simply cosmetic. Some have suggested decreasing benefits to make the system solvent. But, as a political matter, that is unlikely to work in a workers’ paradise.

The central government had better perfect the social security system soon because the proletariat is not about to wait another five decades. Bo Xilai, governor of Liaoning Province, is reported to have said this March that, despite all the unemployment and the severance of xiagang workers from state enterprises, society had remained stable.

Events during the rest of the month proved him wrong, however, as his Liaoning Province experienced the worst worker unrest in recent memory, maybe even since the founding of the People’s Republic. Some 30,000 to 40,000 workers protested in the city of Liaoyang over unpaid benefits and other grievances. The massive demonstrations in Bo’s province and in nearby Heilongjiang shows the truth of the following assessment from Simon Pritchard: “Pensions–or the lack of them–are the soft underbelly of reform as Beijing jettisons cradle-to-grave socialism in favor of ‘user-pays’ capitalism.” If anything, benefits in the future must go up, not down if the People’s Republic is to have a tomorrow. Increasing payouts will put even more stress on the system.

In the meantime, state media tells us that the situation is not so bad: Most Chinese get their payments on time. But technocrats don’t have too much room to maneuver. While Beijing figures out what to do next, the funds in the system are running down fast. In the beginning of this year Lehman Brothers estimated that social security fund assets were in the neighborhood of US$15 billion, though official figures say that the figure was slightly less, about US$12.7 billion. In April of this year those assets were about US$7.0 billion. Arithmetic, and common sense, tells us that the state has only a few more months to figure out what to do.

The central government could fund its array of promised payments if it pushed forward with its program to sell shares of the state-owned enterprises on the domestic equity markets. Despite efforts to implement its plan this year and last, it has failed to make any progress. Stock investors have resisted the sell-down because it means that stock prices will fall as state-held shares flood the exchanges. “The problem is that the voice of laid-off workers is not heard at the decisionmaking levels, but retail investors in the A-share market make a big noise when the government tries to sell its stock,” says Shawn Xu, an economist at China International Investment Corp. “That’s why we see a slowdown on the decision to sell state shares.”

It was perhaps inevitable that, while deciding whom to shortchange, Beijing selected the workers. Those who have been disadvantaged by reform of the ailing state sector are mostly old and defenseless. So leaders in the Chinese capital have ignored their plight. Yet the times are changing, as Bob Dylan would tell us if he were a China watcher. Workers are impatient as they realize that only street demonstrations can get their government to act. More protests mean that, whatever they say, the paymasters in Beijing will begin funding even more benefits from general revenues.

Of course, central leaders just wish the proletariat would become patriotic and sacrifice more for the Motherland. Maybe that’s why Liaoning Province, which cannot afford to make social security payments to some 300,000 workers, does have nearly Rmb85 million (about US$10.3 million) to spend on the renovation and expansion of the memorial to Lei Feng, the revolutionary hero epitomizing the ideal of selflessness in the People’s Republic.

Gordon G. Chang is the author of The Coming Collapse of China, published by Random House.

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