China goes from red to gray

If you thought the U.S. had a looming pension crisis, consider the situation in China, where the population is growing older at an even faster pace and more than half-a-billion rural and urban workers don't participate in state-run social security schemes.

Because China generally limits each family to one child, the percentage of its population that is working will peak by 2010 and the ratio of workers to retirees will decline dramatically, from six to one in 2000 to two to one in 2040. But China has not had time to build up enough assets in public or private plans to finance retirement benefits. And it is saddled with unfunded pensions from the pre-reform era, when industrial workers enjoyed a cradle-to-grave security system.

As China began to restructure its state-owned enterprises in the 1990s, millions of employees were laid off and allowed to retire early. The responsibility for paying these so-called legacy pension benefits was left to the 31 provinces. China's implicit pension debt is now some $1.5 trillion, according to the latest estimates by the World Bank, including all legacy pensions as well as accrued obligations under China's more market-oriented pension system for urban workers adopted in 1997. Under that system, employers pay about 20% of wages toward a guaranteed schedule of benefits and employees contribute 8% of wages into personal accounts that are supposed to be invested in government bonds and bank deposits. The normal retirement age is 60 for men and between 50 and 55 for women.

But most of those payroll taxes have not gone to fund the new pension system. Instead, they were often "borrowed" by the provinces to pay the legacy benefits due retired workers from the pre-reform era. This borrowing of payroll taxes is particularly troublesome for the 8% of wages contributed by employees to personal accounts.

Imagine what would happen if millions of Chinese workers found that their personal accounts contain no actual assets, only notional credits—entries in a ledger based on a bank-deposit rate.

To help the provinces meet these legacy obligations, the central government created the National Social Security Fund in 2000. This fund receives monies from state-run lotteries as well as 10% of the proceeds of initial public offerings of state-owned companies listed overseas.

The fund has also financed pilot programs to help provincial governments put actual assets, rather than notional credits, into personal accounts. But even in these pilot programs the personal accounts have been only partially funded. And the total assets of the fund are less than $30 billion.

So what can be done?

First, the government should finance all legacy benefits out of general tax revenues on a pay-as-you-go basis. Paying these legacy benefits is part of the national cost of transitioning from a socialist to a market-based economy, and China can afford these transition costs given its high rate of economic growth.

Second, Beijing should take over the administration of the new pension system from the provinces. With 31 provinces, the pension system is a maze of disparate rules. It would be more efficient and effective if payroll taxes were collected by a national agency devoted to this task. If pension benefits were calculated and distributed by one national agency, taking into account regional income differences, that would increase the portability of benefits, so workers could move easily from one province to another.

Third, the Chinese government should continue to develop other pension vehicles to help those workers with insufficient or no retirement benefits. The level of monthly pension payments is modest, especially in light of rapidly rising standards of living in many parts of China.

To augment these benefits, Chinese firms have recently been allowed to offer their employees enterprise annuities—similar to defined-contribution plans in the U.S.— in which workers choose payroll deductions during their careers and receive benefit payments at retirement. But few such enterprise annuities have been offered because regulatory and tax rules have yet to be clarified.

In contrast to the limited distribution of enterprise annuities, sales of life insurance products have been growing rapidly in China, where savings rates are much higher than in the U.S.

These products are often bought by Chinese families outside the government pension system. In rural areas, for example, many farmers buy insurance products in lieu of participating in the government's voluntary social security schemes.

In urban areas, some state-owned companies have bought group pension insurance to supplement the modest benefits from the government's mandatory pension system. If all these types of retirement programs were better funded and invested, they could be important factors in deepening China's capital markets. In turn, better capital markets would increase the returns to Chinese retirement programs.

The National Social Security Fund, which has earned slightly more than 3% per year, has the potential to become a major institutional investor, monitoring the performance of Chinese public companies. But even with higher returns, the pension gap in China is not likely to be fully closed. As the number of workers per retiree declines, normal retirement age should be moved back in China, especially for women, who have a life expectancy of 74, compared with 71 for men.

In short, China must grow rich before it grows too old. While the Chinese government has introduced some programs to meet this challenge, it is not yet clear whether they will provide adequate retirement benefits to most Chinese workers.

Beijing to shoot down Olympic rain

Using an arsenal of rockets, artillery and aircraft, China will try to blast the clouds out of the sky, a meteorologist told a Beijing magazine, through a technique which falls under the umbrella of "cloud seeding."

"We can turn a cloudy day into a dry and sunny one by shooting the clouds less intensively than when we make rain," head meteorologist Mian Donglian for the Beijing municipal weather bureau told Time Out.

By shooting shells containing chemicals like silver iodide, or dry ice into the sky, scientists say they can create rain. China has gone so far as to set up a weather modification office that is in charge of such an endeavor.

When the guns go off, they scatter crystals that attract water droplets in the cloud, making them grow faster, said climate and weather expert Johnny Chan from the City University of Hong Kong. The crystals become heavy and fall as raindrops, he said.

Planes, too, can be used to drop chemicals onto clouds to manipulate the weather.

In the case of the Olympics, climate experts will pore over satellite images to find ways to dissolve the clouds rather than make it rain.

"Scientists fly an airplane, sampling the cloud ... to see if there is potential for it to work, and if it is likely to work, they will shoot the gun," Chan said.

Giving Mother Nature a helping hand is not a new phenomenon for China.

For decades China has been a rainmaker for its northern regions, where winds from the Gobi desert leave farmers high and dry and coat the parched capital of 15 million people with frequent sand storms.

But the Weather Modification Office is charged with among other things, dousing the city with rain to get rid of pollution, sandstorms, hail and fires and getting water to arid areas.

Just last Thursday the office claimed to have opened the heavens by firing off 163 cigarette-sized sticks and seven rockets into the sky, bringing as much as 11.2 millimeters of water to a parched, dusty and polluted Beijing, in the heaviest rainfall so far this spring.

The United States started making rain in the 1950s, but later gave up because they could not work out whether the seeding produced more rain , Chan said. China now boasts it is the world's leading rainmaker.

It has created enough rain during the past five years to fill the Yellow River, the nation's second largest, four times over, State-run news agency Xinhua says.

Between 2001 and 2005, nearly 3,000 flights triggered 210 billion cubic meters of water over an area making up nearly a third of China's territory, an official from the National Meteorological Bureau told Xinhua.

An army of more than 3,000 rainmakers have at their disposal 7,000 cannons and 4,687 rocket launchers to coax more rain from clouds across China.

Amid these staggering figures, Chan warns the science for cloud seeding is difficult to prove scientifically, because experts don't know how much rain would have fallen without it.

"The problem is you don't have two identical clouds, where you seed one and not seed the other to compare the result," he says.

But he adds, if you do want rain, you might as well try to get it.

"You have nothing to lose. China wants rain, the cloud is in the sky and it could give them some water. It's not strictly scientific but it's a strategy to take."

China's meteorological office has announced in its latest five-year plan it wants to produce more rain in the future.

And if all goes to plan, none of it will be falling when the Olympics will be held two years from now.