Pension Reforms in China

China is beginning a reform of its pension system to overcome an expected shortfall in retirement payments. Under the new scheme, all businesses in the country, including foreign-invested ones, will have to increase their contributions to pension funds for employees. It is compulsory under the current system for an employee to set up a special account, called an individual pension account, into which both the employee and his or her employer have to make a monthly contribution.

The amount varies in different regions right now. The employee cannot withdraw any money from the account until he retires. Upon retirement, he receives a monthly stipend from the account. The crux is setting up of community pension funds. Instead of going into employees' individual accounts, employer contributions will go to these community funds set up in regions where their businesses are located.

Employees will still have to pay a certain percentage of their monthly salaries into their individual pension accounts. It is hoped that this would help ease the deficit in the current pension funds.

11% of an employee's salary goes into his personal retirement account. Of that, 8% comes from the employee himself and the rest directly from the company. Under the reform proposal, the employer's contribution - 3% - will go directly into the community pension funds. The employees will maintain the individual funds alone.

Now China has three main ways of obtaining social-security funds: through government allocation, welfare lotteries, and investment funds. Across China now, only 170 million urban workers have taken part in the pension scheme, accounting for less than 15% of the pop China.

Analysts say that while workers who are already retired may immediately benefit from the new scheme, those employers and employees who are still working may have to contribute more to make both ends of the pension funds meet in the future.

While current retirees don't have to worry about getting their pension, it is widely suspected that 20 years down the road, retirees will not get their promised pensions.

Because of the one-child policy and with more people living longer, the aging segment is claiming an ever-larger proportion of the population.