Because of continued cuts in interest rates and central government policy changes on rural pension insurance, the number of policy holders is still small and insurance funds are in shortage.

To cope with the situation, there should be an effort to put old-age security on the right track.

The first thing that is needed to promote a good rural pension system is unchanging government policies.

It was first suggested that rural pensions should be handled the same way as commercial insurance. But high costs and difficulty in collecting money deterred many commercial insurance companies from getting involved.

When civil affairs departments took on the task, there was a debate as to whether the government's involvement added to farmers' economic burden.

As a result, in 1998 the rural pension insurance scheme was transferred from civil affairs departments to labor and social security departments.

But the transfer did not go entirely to plan.

Moreover, constant changes in running the system has dampened people's enthusiasm for the scheme and caused uncertainty.

In order to have a successful pension system in rural areas the government should stick to a few basic rules.

Pension funds should be made up mainly of money contributed by individual rural people with additional contributions from local communities. The government should encourage voluntary participation with favorable policies.

After 10 years of reform, China has built up its urban social security system and an urban social aid system is taking shape.

But the system should also cover rural people.

Industrialization has led to many rural people leaving their homes and moving to towns and cities where some of them might be lucky enough to be looked after by the urban social security network if they can find stable jobs.

But the status of rural pensions needs more definition and should be given more protection.

Under the present rural pension system, all the money put into individuals' accounts is theirs. This allows policy holders to have their money returned or transferred if they move out of the area. This offers great flexibility and prevents the pension funds being used by other departments or organizations.

A sound pension system also requires a good management structure to ensure the funds do well.

Since 1996, constant decreases in interests rates has made it difficult for pension funds to meet promised return rates.

As a result, many policy holders' pension funds have depreciated, which has caused distrust and resentment towards the scheme.

Priority should be given to making sure the premiums are managed well. Treasury bonds should always be bought first.

There should also be a mix of investments so funds can have as broad a base as possible.

The pension schemes allow part of the fund to be assigned to special investment companies who offer higher return rates.

Rural social pension systems adopted since early 1990s are, however, only one way of providing security for older people.

The different economic levels of different regions means other channels should be explored.

In better-off areas, commercial insurance could be introduced and old people's homes could be built by the business sector.

In less developed areas, besides traditional family care for older people, mutual aid groups could be set up through which every individual could make a contribution by handing over items such as food to support older people in the community.

The author is a researcher with the Institute of Industrial Economics under the Chinese Academy of Social Sciences.

(China Daily)