July 29, 2011

China Considers 401(k)-Style Retirement Plan

Program unlikely to appear in the near-term, would require political, economic reform

While the 401(k) model took some heat after the recession, it appears to have inspired at least one other country to consider similar plans. MarketWatch reported Friday that China is considering launching a retirement savings program that is similar to 401(k) plans.

Citing unnamed sources at the Shanghai Security News, MarketWatch writes that China’s goal in launching the program would be to attract long-term investors to the securities market, as well as to protect individual wealth from inflation.

It’s unlikely that a 401(k)-style program will be implemented in the near term, MarketWatch writes, due to the high level of coordination among several government entities that would be necessary.

Implementing a 401(k)-style program would require economic and political reform, but some of the suggestions put forth in a report on the program include:

  • Requiring companies to issue dividends to provide stable revenue for long-term investors
  • Drawing up tax incentives to encourage pension and insurance funds to invest more in domestic capital markets.

"The development of the U.S. capital market in recent decades has been completely reliant on the continued inflows of money from the country's long-term (investment) funds and long-term institutional investors," MarketWatch quoted the report.

Chinese law requires individuals to have a basic pension, which is managed by local government authorities, MarketWatch reports, although commercial insurance and voluntary pension plans available through employers are available.

But, like the United States, China’s pension system is also facing a shortfall. The World Bank predicted in 2005 that the country’s pension fund could face a shortfall of 9.15 trillion renminbi, or $1.4 trillion, by 2075.

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