The pension system in China: an empirical study of the money's worth ratio of annuities

According to the World Bank, China has experienced the kind of fertility transition over the past 40 years that typically took more than 100 years in developed countries. With rising life expectancy and a sharp fall in the total fertility rate to around just 1.5, the country has "grown old before growing rich". The share of people aged 60 and over in the total population is set to rise dramatically in the coming decades, from around just 12 per cent in 2010 to almost one quarter by 2030 and over a third by 2050. By 2030, this would give China a population share over 60 only just under the OECD average. As a result, the old age dependency ratio in China will increase at an almost unprecedented rate over the coming decades, with the rural old age dependency ratio rising to over 34 per cent and the urban rate to around 21 per cent by 2030. The emerging "4-2-1" extended family pattern of four grandparents, two parents and one child will exacerbate the strains on family support networks. The ageing population will also present a challenge to social programmes, particularly pensions and health care. There is a three-pillar pension system in China, but the second and third pillar are in their incipient stages. A long list of improvements is required to reach the goal of a properly functioning three-pillar system set out by the government, with the development of an annuity market an especially necessary element. Annuities can hedge longevity risk but they are not popular in China. One of the key obstacles is the low level of annuity literacy; there is a real lack of consumer education materials in China, such as the Money's Worth Ratio of annuities. This study represents the first time that macro and micro data from the Chinese market are used to calculate the Money's Worth Ratio (MWR) of annuities. We found that: (1) according to the law that deems an annuity fairly priced if its MWR is no less than 0.9, annuities are fairly priced in China; (2) annuitants who reach the life expectancy estimated in some big cities can get the premium back; (3) there are some big differences in MWR among different annuity products and the highest MWR is for a life annuity without any guaranteed payment; and (4) there is an optimal age to buy the annuity which depends on the sex of the buyer and the type of product. An improved supply of annuities is highly recommended. / egún el Banco Mundial, en los últimos 40 años China ha experimentado el proceso de transición de la fertilidad