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The social security circus

By Kristen Mcavoy: 0 Comment(s)Print E-mail China.org.cn, June 13, 2012

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With the two biggest economies in the world, one would think that the United States and China would have all of the answers to caring for their elderly populations; that assumption, however, has proven to be false.

Both governments are currently beginning to sweat over the topic of social security.

Kristen McAvoy is an intern for China.org.cn and recently graduated from the University of North Carolina at Chapel Hill.

The Social Security program in the U.S. was created in 1935 by then-President Franklin D. Roosevelt. Over the years, it has become the country's largest entitlement program, consuming over 20 percent of the federal budget. A similar system was created in China in the late 1990s as marketization increased and the "iron rice bowl" system of guaranteed lifetime welfare benefits was no longer viable.

Now, however, both countries are quickly running out of money.

In preparation for a future shortfall, the U.S. created an account in 1982 after a tax increase created a substantial surplus. This fund is known as the Social Security Trust Fund, and the plan was to use this money if the system ever began paying more than it was bringing in. Unfortunately, this became a reality in 2010 after the U.S. was hit by a recession in 2007, and fewer taxes were being collected. The U.S. social security system is a pay-as-you-go program that currently has a deficit of approximately 25 percent. At this rate, it is projected that the Social Security Trust Fund will be depleted by 2036.

China has a similar dilemma. The pension scheme was introduced in 1997 and many retirees who started working before its founding depend on the government to help pay for their pension accounts. In order to do this, many provinces have been borrowing money against future earnings of younger generations, producing a huge deficit. Like in the U.S., younger generations of Chinese citizens do not know if they will be provided for in their old age.

The aging of its population is another issue that China has to take into account. In 2010, 177.6 million people - or 13.26 percent of the population - were over the age of 60; this number is estimated to reach over 200 million by 2050. Not only is the elderly population increasing, the younger population is decreasing due to China's one-child policy, which was instituted in 1978. Census data reveals that five workers supported one pensioner in 2010. By 2020, three workers will have to fulfill this responsibility.

A similar trend is taking place in the U.S., but on a much smaller scale. By 2030, the population of its senior citizens is expected to reach 72.1 million - double the size of current retirees.

Because of the one-child policy in China, Chinese women have an average of 1.55 children compared to women in the U.S. who have an average of 2.06 children. If social security were to fail in the future, that would leave one couple caring for four retired parents in China opposed to two couples caring for four retired parents in the U.S. This projection puts a lot of pressure on the young and middle-aged Chinese both financially and emotionally.

So how did this happen and what can be done to fix it?

Retirement age in the U.S. ranges between 65 and 67 depending on the retiree's birth year, although a person may claim early retirement at 62 and receive fewer benefits. All citizens and their employers have to pay social security taxes - it is a compulsory universal tax. Social Security is run by the federal government in the U.S.

In China, the retirement age is 55 for women and 60 for men. In addition, the social security system in China is not universal or required. It is composed of a three pillar system: the public pillar, which includes a pay-as-you-go plan that funds individual accounts, the enterprise annuities pillar, which are voluntary occupational pensions, and the voluntary private savings pillar. This system is not centralized and is usually run by the provincial government.

Both countries have considered various plans for reform.

Under President Barack Obama, a panel in 2010 discussed raising the retirement age from 67 to 69 by 2075, raising payroll taxes for the wealthy, and reducing future benefits in order to secure social security benefits for the next 75 years. However, these plans never became a reality after the Republicans took control of the U.S. House of Representatives in 2011 and avoided the debate regarding social security.

Reforms to the pension system in China are also up in the air. Some suggestions include raising the retirement age and reforming the public pillar. The public pillar is similar to the U.S. social security system: An employee pays a specific percentage into their individual account and their employer also puts a specific percentage into the individual account. A potential reform would be for the employee to continue paying into their individual account, while the employer's percentage would go into a community pension fund to help pay for current retirees.

Of course, the reforms suggested in both countries have been controversial. Many Chinese and Americans do not want to work longer to receive social security benefits, but the reality of the situation is that people are living longer and the public has to pay for it.

The average life expectancy in the U.S. is 78.2, and the average life expectancy in China is 73.3, according to World Bank data. The U.S. already has one of the highest retirement ages in the world. I do not think that the retirement age should be raised. If people retire at 65 and live until 78, they will on average receive 13 years of retirement benefits. If people in China retire at 60 and live until 73, they will also receive approximately 13 years of retirement benefits. Therefore, I think that one solution to China's problem would be to raise the retirement age for women to 60. This way they will be contributing to the pension system for five more years. It makes no sense for the female retirement age to be lower than the male retirement age, especially since women live longer than men. If the age limits between sexes must be different, women should technically have the higher retirement age.

I also think that the Chinese pension plan should be universal and mandatory. Everyone puts something into the system in order to benefit from it. That seems logical and more streamlined. The current system is incredibly confusing and inefficient, especially due to the fact that it is decentralized. The central government should take charge of its pension system in order to avoid regional deficits, which have caused a lot of the current problems.

However, the U.S. social security system already has a higher retirement age, is mandatory, and is centralized. Yet those have not solved its troubles. Social security in the U.S. not only covers retirees, but their dependents, children of deceased workers, and the disabled. I think that the major problem in the U.S. is the number of people that are not retired who enjoy social security benefits. I believe that the laws constituting a disabled or dependent person are too lenient, and the country must do a better job of regulating who actually needs social security before retirement. A lot of people want something for nothing, and I think that U.S. government allows a lot of people to get away with getting unnecessary help. Social security needs to have more stringent rules concerning who is eligible under the retirement age.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.