Scholars Tell China to Privatize Its Pension System

November 27, 2001

Experts from both the United States and China advised the Chinese government to privatize its public pension system at a conference in Beijing, November 8, co-sponsored by the Cato Institute and the China Center for Economic Reform. The conference drew a capacity crowd of Chinese government, academic, and media officials, who agreed that pension reform was one of China’s top economic priorities.

Sun Jian Yong, deputy director-general of the Social Insurance Fund Supervision at the Ministry of Labor and Social Security, presented the keynote address to open the conference on Thursday morning. In his speech, Sun argued for establishing an independent private pillar with fully funded pensions, calling for the "marketization of retirement," a term he prefers to "privatization."

Guo Shuqing, deputy governor of the People's Bank of China, gave an excellent talk during the session on "Prerequisites for Pension Reform." He emphasized the importance of stable money as one prerequisite, but also said that radical reform of the economic structure is necessary to create competitive capital markets in China. He favors eventual free convertibility of the Yuan on the capital account and thinks a floating exchange rate would be best for China. On the same panel, Mao Yushi, director of the private Unirule Institute in Beijing, argued for "a return from Social Security to individual security." In the heart of the Middle Kingdom's communist stronghold, he declared, "The contributor himself should have the right of choice to determine in which financial institution to apply his contribution."

Still discussing prerequisites for reform, Jim Dorn, Cato’s vice president for academic affairs and a noted China scholar, pointed out the obvious fact that without clearly defined private property rights-- and thus stock shares that are fully transferable--there can be no real capital markets in China. Economic reform must come first but, as Deng Xiaoping said in 1987, "Without political reform, economic reform cannot succeed." China's accession to the World Trade Organization will help advance both economic and political reform.

The luncheon address was given by José Piñera, co-chair of Cato’s Project on Social Security Privatization and, as Chilean Minister of Labor and Social Security, architect of that country’s successful system of privately invested, individually owned accounts. Piñera gave an inspiring luncheon address on "What China Can Learn from the Chilean Success Story." He wished China success in the 2008 Olympiad and hoped China would be first across the finish line in the race to create fully funded accounts.

Michael Tanner, director of Cato’s Project on Social Security Privatization, followed Piñera's talk and gave an update on the privatization effort in the United States and why that effort is so important for the future of freedom and prosperity. Fred Hu, managing director of Asia Pacific Economics Research at Goldman Sachs in Hong Kong, argued that China's capital markets can benefit by pension reform. Creating individual accounts and allowing a range of investment options will increase investment returns and strengthen China's capital markets. The elderly will have a higher standard of living as a result.

The final paper of the conference was a very innovative study by Zhao Yaohui, associate professor of economics at the CCER. She built a persuasive case that China could make the transition from the current pay-as-you-go system of Social Security to a fully funded system and reduce taxes in the process. (The current system costs 24 percent of payroll; the transition and the new private accounts would cost 15.8 percent of payroll.) A graduate of the University of Chicago, Zhao argued:

The best alternative in solving the financial crisis is to give individuals incentives to participate. The best way to give incentives to individuals is to put all pension contributions (from both employer and employee) into individual accounts and make sure that the investment earns competitive returns. This gives individuals the property rights to these accounts.

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