The China 401k dedicates itself to the issue of retirement finance, a systemic construction of an analytic framework of retirement finance and a comprehensive evaluation of the Chinese pension system.
This cannot be further from the truth. Retirement finance is an topic of incredible depth that requires multidisciplinary insight.
From a pure finance perspective, it is mainly a practice of dynamic portfolio allocation that optimizes inter-temporal saving and consumption.
Let's start from a simple yet classy retirement finance scheme that involves an risk free annuity, social security, and a risky portfolio, a 401k. So here is a couple of questions that John the plummer may want to ask himself before he start putting his money into work:
(1) How much money shall I save for retirement
(2) How should I allocate between annuity and risky portfolio
(3) What asset should I choose to compose the portfolio and how much shall I put into each basket?
(4) In what time sequence shall I construct and subsequently adjust the retirement portfolio.
To adequately answer the questions above, John the plummer needs to know his own time preference and risk preference quite well, plus a working knowledge of modern portfolio theory possibly at PhD level. It is not quite likely that John the plummer is a well educated yet temporary unemployed financial PhD. It is much more likely that John the plummer will not be able to answer any of the previous questions, if he would ask in the first place, and just gamble his money with guts.
Even our dear John the plummer does turn out to be a PhD lost in an unfortunate labor market, he had better know quite a bit of law as well because the almighty nation state is coming for him. Retirement finance is also heavily influenced by the state intervention and thus succumbs to political logic manifested by the national decree. There is no doubt that the public part of the retirement finance has more to do with political discourse than individual optimization. However, even the private element of the retirement finance, such as how to invest in a private defined contribution plan, cannot escape the rule of tax code and regulation. After all these laborious constrained optimization, John the plummer must pray to GOD that the pension policy will not take 180 degree U turn on its course otherwise all his effort will go in vain.
Therefore, it is always amazing to me that why would not anyone wake up in the middle of the night, sweat on their back, just on the simple thought of : OMG, what should I do with my retirement account?
Therefore, it is always amazing to me that why would not anyone wake up in the middle of the night, sh*t on their pants, just on the simple thought of : OMG, what had the government do to my retirement account?
Thus this blog is setting up to piece all parts of these puzzle together so as to provide a systemic analytic framework of the retirement finance. Much as it is individually oriented, it serves as a micro foundation to the macro policy analysis.
The Retirement Finance Problem in China
Paul Samuelson once elegantly put it: a growing nation is the greatest ponzi scheme ever contrived.
Had Samuelson lived to this date, he might assert that the Chinese social security is the greatest ponzi scheme of the century .
Had Samuelson lived to this date, he might assert that the Chinese social security is the greatest ponzi scheme of the century .
Pause for a second to think how many troubles the Chinese pension system has.
(3) The current social security system is poorly managed. China does not have a unified central social security account as U.S. does. Instead, we have one pension system for each province. The fragmentation of the pension system proves to be a headache of central monitoring and auditing. Ordinary citizens, on the other hand, has little if any idea of the current financial status of the pension account neither because provincial government does not have a habit of reporting it. When the surveillance is absent, scandals breeds. It is exactly what China has witnessed in the past decade.
(4) Obligation of the Chinese Social Security is mounting due to the urbanization. Unlike universal coverage in most of the developed countries, China has a double layer social welfare system. Urban citizens are under the umbrella of the welfare state yet rural citizens are on their own. As the urbanization speeds up, hundreds of millions of rural farmers lost their land and joined their urban fellows. They do not pay adequately into the system to begin with and their bleak employment prospective suggests that they will not pay enough in the coming years as well. Nevertheless, as long as they are keeping up with the minimum, under current rule, they will be eligible for full benefit marked to average real wage. This spells nothing but a fiscal solvency disaster for the PAYG system.
Rick Perry called U.S. Social Security "a monstrous lie". I bet he had not seen how things are working in China. Sometime, a little bit of international perspective beyond the heaven of Texas Austin can carry you very far.
That being said I believe that not all hope is lost. Chinese government still has accumulated a massive equity capital in the state owned enterprise that can serve as the last resort. Chinese economy may still have a couple more years of booming growth. Last but not least, 401k is still absent from China. If we do it right, it will help to gap the deficit.
If nothing works out, we can invite Mexican workers to support the grand ponzi scheme of the century, which also comes with the side benefit of importing delicious Mexican food.
Jokes aside, this blog is also devoted to a comprehensive evaluation the current status of the Chinese pension system. After a glimpse of the reality, I intend to explore the merits and drawbacks of the available policy options.
