Both the US and Chinese systems are based on three pillars, but the model is much more developed in the American case. How do the pension systems of the United States and China, the two great powers of the planet, work?
Pensions in the United States
The US retirement pension system is built on three pillars: a mandatory public pay-as-you-go social security system managed by the Social Security Administration (SSA); the various voluntary individual retirement savings plans available to any worker; and the occupational pension plans offered by companies. US Social Security provides an average of 40% of pre-retirement income.
How does US Social Security work?
Administered by the US Federal Government, Social Security works through contributions paid into a trust fund from which benefits are generated not only for retirement but also for widowhood and disability. While a worker is active, the company and the worker contribute equally to Social Security.
However, the system by which a worker earns the right to receive a pension is different. For each year worked, people accumulate eligibility credits to receive a pension when one of the contingencies occurs. From the beginning of their working life, workers are informed that this system will only serve to receive a small pension in the future, which they must supplement with other forms of savings.
In the United States, to qualify for a public pension, you must accumulate at least 40 credits (10 years with a minimum income).
US Pension System Credits
Any worker can earn a maximum of four credits per year. These credits are based on total salary (if employed) or income (if self-employed). In 2023, you need to earn $1,640 to earn a credit, so in many cases, you don’t even need to work a full year to earn the maximum four credits. To qualify for a public pension, you must have accumulated at least 40 credits (i.e. 10 years with a minimum income).
Age requirements for retirement
In addition to the 40 credits, it is also necessary to have reached a certain age. In order to be able to access all the benefits to which one is entitled, one must have turned 67 years old. However, it is also possible to access early retirement from the age of 62, although with significant reductions in the benefits (between 25 and 30%). In addition, it is also possible to delay the retirement age. If this is done, the amount of the pension will continue to increase until the age of 70.
Pension amount and revaluation
The maximum amount that one is entitled to once one has access to the Social Security pension is calculated based on the earnings during the 35 years in which one earned the most money. This data is always available in the form of an online earnings history on the Social Security website. The final amount of the pension will also be influenced by the retirement age, as we have just seen.
As regards the revaluation of pensions, the United States has had a mechanism called Cost-Of-Living Adjustment (COLA) since 1975.
China’s pension system
China’s pension system has undergone several reforms in recent decades to adapt to the country’s demographic challenges, with the population experiencing its first decline in more than 60 years in 2022. These reforms have been aimed at building a multi-pillar pension system, based on a pay-as-you-go model reinforced by individual savings and employment plans managed by companies and other employers.
However, this system has a special feature, since the first pillar is divided into two parts :
- A basic state pension is supported by compulsory contributions from companies and public authorities. This fund generates a pension of around 30% of the individual’s pre-retirement salary.
- A system of notional, individual and compulsory accounts, to which workers contribute 8% of their monthly salary. Savings accumulate in accounts managed by Social Security at the provincial level and accumulate interest. They cannot be withdrawn until retirement. In the last decade, this system has generated a pension with a replacement rate of about 30% of the last salary, which is added to the 30% of the basic system.
Moreover, China’s pension system is not unified or coordinated by any central agency. It includes different pension schemes for urban workers, rural workers, public workers and workers in certain industries, and management is delegated entirely to provincial authorities. Thus, benefits vary widely depending on where one lives and what job one does.
The retirement age in China is among the lowest in the world.
What is the retirement age in China?
The age at which people can access a retirement pension in China is among the lowest in the world, according to the OECD. The standard retirement age is 60 for men and 55 for women, but many workers can qualify for early retirement (if they have performed physically hard work in certain industries) at 55 for men and 45 for women.
Earlier this year, China’s government announced that it is considering gradually raising the retirement age to address medium-term demographic challenges. The country’s current population of 280 million people over 60 is expected to rise to 400 million by 2035, as the working population begins to shrink. In 1990, there was one pensioner for every five workers, but the ratio has now fallen to one for every three.
How much are Chinese pensions?
The final amount of Chinese public pensions varies widely, depending not only on the length of time worked and the salary received but also on the pension system under which contributions are paid and the province from which it is managed. In general terms, the scheme that urban workers have access to generates a public pension with an average replacement rate of almost 60%, according to OECD data, while that of rural workers barely reaches 30%. On the other hand, the scheme for public workers has a replacement rate of between 80 and 100% of the last salary.
The challenges of pensions in China and the United States
China’s pension system, although it has three pillars, relies much more on the public pillar than on the two private ones. Despite having a mandatory notional account scheme, this makes the system more vulnerable to demographic pressures. Thus, the great challenge for pensions in China is the ageing of its population. To address this, the government is considering raising the retirement age and, at the same time, taking measures to encourage savings through private and occupational pension plans.
While not immune to demographic challenges, the U.S. pension system has proven resilient, with both individual and workplace plans showing solid returns in recent years. According to some analysts, the biggest challenge facing U.S. pensions is how to create a protective shield for the millions of workers who do not have or have been unable to participate in any of the private savings vehicles.
