China will raise the retirement age in gradual steps, as proposed by the communique issued by the Third Plenum of the 18th Communist Party of China Central Committee, ending the debate on whether raising the retirement age is good for the country's labor market.

The retirement age is related to people's immediate interests, and most of the respondents to a recent online opinion survey said they were opposed to raising the retirement age. The government, nevertheless, has decided to go ahead with the plenum's decision because the basic pension insurance scheme cannot be sustained if the mandatory retirement age is not raised.

The existing pension scheme faces three main problems. First, the country's aging population is increasing at a rapid pace. By the end of last year, the population of people over 60 years of age in China had crossed 200 million, accounting for nearly 15 percent of the total. By 2030, the population of the elderly will add up to 26.5 percent of the total, and peak to 440 million, or 35 percent of total population, in 2051.

The large proportion of senior citizens in the population is the result of the family planning policy, which has been followed for the past more than three decades. China's aging population will ultimately surpass the global average, demanding more funds for senior citizens' welfare through endowment insurance and medical benefit schemes. And given the current wide gap between income and expenses, the existing insurance system faces a huge operating risk in the near future.

Second, that current income levels cannot cover expenses is already evident in some regions of the country, and their number is growing. By the end of 2012, 19 of the 32 provinces and regions failed to cover their expenses, which means many regions have to depend on financial aid to ensure that pension is paid to retirees on time.

Third, to a certain extent, the current basic pension insurance system has become "accounting on cash basis", increasing the cash payment pressure. China has been following the model of "combining social pooling and individual account", in which social pooling funds are used to pay the basic pension and the individual account pays for old-age insurance. This means the system is designed to work as a "partly funding" model, which is ideal for modern society to ease the pressure of cash payment.

But since the transformation cost or historical debt problem after the launching of reform and opening-up has not been fully solved, the collected social pooling funds cannot cover the expenses, and the authorities usually have to overdraw the individual account to pay pension, creating a huge "empty account".

Although the government has tried to solve the problem by increasing the pension premium amount that enterprises' employees need to pay - 13 provinces are part of the pilot project - its actual collection by the end of 2010 was just 339 billion yuan ($56 billion) when 2.95 trillion yuan was needed to balance the account. The planned "partly funding" system is, therefore, facing increasing pressure of payment.

It has thus become necessary to raise the retirement age in China, which is relatively low: 60 years for men, and 55 or 50 for women depending on their job profile. This would make 54 years the actual average retiring age.

The existing retirement age was fixed by the government in the 1950s. The average life expectancy then was less than 50 years, so the rules made perfect sense. But since life expectancy has increased to 74 years today, the retirement policy needs to be changed.

More importantly, considering China's current development stage and emerging problems, the retirement age certainly needs to be raised. In a reform experiment, the Shanghai municipal government has since Oct 1, 2010, deferred paying pension to certain groups of people by three years. The effect of the experiment is similar to raising the retirement age. But before replicating the model in other places, the authorities should study its pros and cons carefully lest it triggers social instability in the future.

In the final analysis, the government should focus on three aspects when raising the retirement age. First, it should follow the people-first principle by taking into account the real situations and needs of different groups, and respect people's legal rights.

Second, it should solicit public opinion from across the social divide before putting the policy into practice.

And third, it should consider the security problems of some special groups to ensure that the changed retirement policy runs smoothly.

The author is the director of Social Security Institute, affiliated to the Ministry of Human Resources and Social Security.

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