The Origin of China's Partially Funded Social Security Scheme and Its Future Direction

Zheng Bingwen

Chinese Economy, 2007, vol. 40, issue 4, 6-28

Abstract: This article discusses the evolution of the social security system in China since the opening-up policy of 1978 and reviews the framework of the partially funded scheme or what is known as the system of combining a social pool with individual accounts. It argues that, although the partially funded scheme during the past ten years has been improved, taking both sustainability and redistribution into account, it still faces some dangers that might devolve into defined benefit (DB) pay-as-you-go (PAYGO) because of the lack of transition costs. Some lessons are also drawn in that the partially funded scheme has not been well designed, both in its transition schedule and in many of its subsystems, such as the limited scale of individual accounts. This means that it is a loser as a policy choice but a winner as a strategic arrangement, which may cause moral hazard and adverse selection in many respects, such as contribution collection and early retirement. Finally, the "888 solution" is offered as a proposal with partial notional defined contribution (NDC) design.

Date: 2007
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