Pensions dumped into the stock market?

 Kennedy Chan

Recently, news about the Chinese government’s plans to invest its national public pension scheme funds into the stock market has triggered a lot of concerns. The stock market turmoil this year has slaughtered a countless number of small investors, thus naturally people are worried that this move may put hundreds of millions of working people’s retirement security at risk.

The government’s explanation is that in order to offset the devaluation caused by inflation, they have to appreciate the amount of the fund. Otherwise, there will be huge holes in the future. Moreover, only a small proportion of the fund will be used for purchasing stocks and shares. 

However, speculation in the financial market is like gambling and no one can guarantee the money will be absolutely safe. Take Australia's superannuation system as an example. Although the government stipulates that companies have to pay superannuation for their employees, the funds are run by private fund management companies. If those companies fail their investments, workers’ pensions will be directly cut back. A large number of superannuation investment companies experienced losses during the 2008 global financial crisis, which eventually became a workers’ burden. Similarly, in the United States, private pension funds such as 401K and IRA were also severely impacted by the 2008 crisis.

It is true that China's national public pension scheme is different from private pension insurance. A worker’s pension payment is calculated according to the local social average wage at the time of receiving it, the recipient’s average contribution index and how many years the recipient has contributed. It is nothing to do with the profits or losses of the investment. In other words, in theory the outcome of this speculation will not increase or decrease anyone’s pension income. 

Nevertheless, based on the performance of the Communist Party of China in the past, to believe that the government will fulfil its promises absolutely is overly optimistic. One of the slogans about the One Child Policy in the 1980s was ‘it’s good to have one child, and the government will take care of you when you’re old’. But the reality is the national basic pension system for urban workers was established as late as 1997. Besides, workers themselves still have to contribute substantially to the fund. The situation in rural areas is worse. The so-called "new rural social pension insurance" won’t cover all the rural population until 2020. In recent years, the government also intends to expand the original 15 years of contribution period pension payment. Therefore, if the pension investment fails, it could become a ‘legitimate reason’ for the government to adjust its pension policies and eventually transfer the losses to the accounts of workers. 

In addition, the potential corruption in the related market operations is also quite worrying. How can officials be prevented from using insider information to profit? Can the institutions that manage the investment be effectively monitored? How can it be ensured that profits won’t be pocketed by executives? Social security fund related corruption cases are not rare in China. The most well-known case was committed by former Shanghai’s Party Secretary Chen Liangyu. Therefore, the government also has to ensure that the investment of the pension fund into the stock market can really be beneficial to the people, rather than become a new way for the privileged class to generate their wealth.

At present, over 100 million people in China have begun to receive a government pension. If these people’s livelihoods are broken, large-scale social unrest may take place as well. Then who should be responsible? The government's move seems like another improvisational experiment and the consequences of its failure have not been considered carefully.