In this week's Economist there is a special report on China (subscription required). It talks about the myriad problems that China is facing, and one of them happens to be their social security system. Apparently, their pay-as-you-go system isn't working for the same reason that the US's pay-as-you-go system isn't: demographics.
Changing demographics make this all the more important. Over the next 10-15 years, the rapid ageing of the population will increasingly make itself felt. As the labour force begins to shrink, the current pay-as-you-go pension system will become unsustainable. Life expectancy in China is high by the standards of developing countries and is likely to go on rising...
The government has been trying to develop a new pension system, including elements of both pay-as-you-go and funding, whereby it invests on behalf of workers and then pays them pensions from their individual accounts. But it will be many years before China has a sufficiently mature bond and equity market to make this workable... With no expansion of pension coverage, liabilities for future pension payments could amount to 70% of current GDP.
One by one, countries all around the world are beginning to realize that pay-as-you-go is not a good way to structure a Social Security system. When will Congress wake up to this too?
