Further Reform of China’s Pension System: A Realistic Alternative Option to Fully Funded Individual Accounts

Wei Zhang
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Wei Zhang: Faculty of Oriental Studies, University of Cambridge, Sidgewick Avenue, Cambridge CB3 9DA, United Kingdom

Asian Economic Papers, 2007, vol. 6, issue 2, pages 112-135

Abstract: China's newly established three-pillar pension system consists of: basic pension; fully funded individual account; and voluntary commercial pension insurance. The second component faces immense financial difficulties caused by transitional costs in the short term and demographic changes in the long term. In addition, the inefficiency of the current capital market and the lack of fund management skills mean that these financial problems are unlikely to be solved within the existing framework of the fully funded individual account. This paper suggests another option-changing the fully funded individual account to a notional defined contribution individual account that operates on a pay-as-you-go basis. This change will keep the advantages of the individual account and avoid the huge risks caused by China's immature capital market. (c) 2007 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

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