Systematic Considerations for the Development of Elderly Finance
As the trend of aging in China becomes increasingly severe and family structures become smaller, the way of elderly care in China is inevitably shifting from family to society, with pension finance being the main pathway for socialized elderly care.
At the central financial work conference, pension finance, as one of the "five major articles," has become a national strategy for China to actively respond to the challenge of population aging.
The guidance issued by the National Financial Regulatory Administration also clearly stated: "Pension finance.
The third pillar of pension insurance is developing in a standardized manner, pension financial products are becoming richer, and the financial support for the silver economy, health, and elderly care industries is continuously increasing to better meet the needs of pension finance."
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The pension finance system includes three major parts: pension finance, elderly service finance, and elderly industry finance, which is a three-dimensional elderly care market established from the national, enterprise, and individual dimensions with individual elderly care needs at the core.
The institutional systems, characteristics, and development practices of pension finance in major aging countries abroad can provide a reference for the development of pension finance in China.
In the past, Chinese people mainly used the intergenerational support thinking of "raising children to prevent old age" to solve the elderly care problem, while the West relies on society.
With the trend of aging in China becoming increasingly severe and family structures becoming smaller, the way of elderly care in China is inevitably shifting from family to society, with pension finance being the main pathway for socialized elderly care.
According to data released by the National Social Security Fund Council and the Ministry of Human Resources and Social Security, by the end of 2022, the total scale of China's three-pillar pension system was 14.59 trillion yuan, accounting for 12.11% of the GDP (Gross Domestic Product) of that year, with more than 1.053 billion participants.
The first pillar is 9.61 trillion yuan, mainly based on the pay-as-you-go system, among which the average annualized return rate of the social security fund from 2001 to 2022 was 7.66%, and the average annualized return rate of the basic pension insurance fund from 2016 to 2022 was 5.44%; the scale of enterprise annuity investment operations is 2.87 trillion yuan, adopting a fully funded system, with an average annualized return rate of 6.58% from 2007 to 2022; the scale of occupational annuity investment operations is 2.11 trillion yuan, adopting a fully funded system (some are notional accounts), with an average annualized return rate of 5.29% from 2013 to 2022, and the above investment returns have achieved the preservation and appreciation of assets; the third pillar of individual pension has been implemented in 36 cities and regions.
Data from the Ministry of Human Resources and Social Security shows that by the end of May 2024, more than 60 million people have opened individual pension accounts.
By the end of 2022, the first and second pillars of China's three major pillars of pension accounted for a high proportion, and the third pillar is still in the initial stage.
Looking at international development, the pension replacement rate is the ratio of the income people can obtain after retirement to the salary before retirement, and it is also an important indicator to reflect the difference in the level of living security before and after retirement of workers.
It is generally believed that a pension replacement rate of more than 70% can maintain the living standard before retirement.
The pension replacement rate in the United States is more than 80%, and the pension replacement rates in Australia and Canada are more than 70%, while China's pension replacement rate is 56%.
Developed countries have developed pension finance earlier, with a larger overall pension reserve scale, and have now developed into a three-pillar pension financial system mainly based on individual pensions, with characteristics such as large tax incentives, wide coverage, a variety of investment varieties, smooth transfer mechanisms, and multi-departmental joint promotion.
Among them, tax incentive policies are one of the main reasons for the growth of pension scales.
In the United States, individual retirement accounts (IRAs) have increased significantly through various tax policies such as EEE (tax-free at the payment and investment income stages, and personal income tax at the withdrawal stage) and TEE (personal income tax at the payment stage, and tax-free at the investment income and withdrawal stages).
In Germany, individual pensions can enjoy large amounts and high proportions of government tax rebates, without a minimum limit and with tax deferral policies, and can also replace the mandatory pensions of freelancers, providing supplementary protection for those who have not obtained the first pillar of protection.
Japan's third pillar is also the main financial support for the elderly, including individual DC pension plans and individual savings account plans (referred to as NISA), among which the tax-free investment amount of NISA accounts is 1.2 million yen per year, and due to Japan's capital gains tax reaching 20.315%, the tax-free policy for NISA accounts is very attractive.
Secondly, the interconnection between the second and third pillar pension accounts helps to expand the source of funds for the third pillar.
In the United States, when employees change jobs or retire, they can roll over the second pillar pension into an IRA.
According to the survey data of the Investment Company Institute (ICI) in 2020, among residents who transfer funds between the second and third pillar accounts, 70% are due to job-hopping, layoffs, or dismissal, and 27% are due to retirement.
In addition, the flexible investment range of individual pensions and the long-term return on investment income also make residents willing to hold pensions for a long time, indirectly promoting the long-term stable development of the U.S. stock market.
The statistical data of the retirement market by the Investment Company Institute (ICI) in 2023 show that the investment of the third pillar IRA in the United States is: mutual funds account for 43.4%, life insurance products account for 4.4%, and ETFs and other assets such as personal bonds account for 48.7%.
Analyzing the allocation of underlying assets of mutual funds, equity investment accounts for 56%, fixed income investment accounts for 16%, diversified asset investment accounts for 18%, and cash accounts for 10%.
Data from the "2023 U.S. Fund Industry Yearbook" show that the first pillar of pensions is mainly invested in special government bonds, and more than half of the second and third pillar pensions are invested in the capital market.
Looking at the data of U.S. pensions and the S&P 500 index in recent years, the synchronization between the two is very high.
System support: Industry and institutional improvement Many countries are supporting the development of the elderly care industry and elderly service finance through the improvement of systems.
The French government implements various preferential policies to promote enterprises to invest in the elderly care industry.
Taking the preferential policy of enterprise tax reduction as an example, if an enterprise meets the conditions of providing home-based elderly care services for people over 60, the enterprise value-added tax is reduced to 5.5%, and if it meets the conditions of providing services for people over 70, the relevant services are exempted from enterprise value-added tax and social security tax.
The Japanese government has established the "Silver Mark Certification Committee" to certify enterprises serving the elderly, and directly provide management and technical guidance, as well as tax preferential policies.
The Dutch government has defined the elderly care industry, overall planning, and guidance, and has established a standardized service model that conforms to the characteristics of elderly people's home-based elderly care, specifying the content of elderly care services.
There is a certain difference in the definition of the elderly care industry among countries.
One of the largest elderly care industry exhibitions in the United States, the Leading Age Annual Meeting & EXPO (more than 8,000 elderly care industry enterprises participate in the exhibition every year), classified the participating organizations in the 2022 exhibition, and the elderly care industry involves more than 40 sub-areas such as household appliances, construction, educational organizations, bathing systems, billing accounting systems, rehabilitation training, communication systems, continuous care services, insurance, retirement plans, etc.
According to the analysis and forecast of the "Longevity Economic Outlook" released by the American Association of Retired Persons (AARP), a non-profit organization that speaks for the middle-aged and elderly group over 50 in the United States in 2022, in 2020, the annual consumption of products and services by the global population in this age group reached 35 trillion US dollars (accounting for 50% of the total consumption of all age groups worldwide), and it is expected that the consumption will reach 52 trillion US dollars, 72 trillion US dollars, and 96 trillion US dollars in 2030, 2040, and 2050, respectively (the growth trend is shown in Figure 3), and the middle-aged and elderly group constitutes the core of the global consumer industry.
The elderly care industry cannot be separated from the support of a sound institutional system, especially the support of the financial system.
Specifically: First, there is a multi-level elderly care service system composed of the government, public welfare organizations, and private institutions.
Government funding includes subsidies for elderly housing, medical assistance, and home-based elderly care projects.
At the same time, the government actively introduces laws and tax policies to guide the development of the elderly care industry, and reduces the burden on elderly care industry enterprises through measures such as tax reduction.
In addition, non-profit elderly care institutions and a certain number of volunteer teams provide meal and nursing services for home-based elderly people, which also constitute a beneficial supplement to the government and commercial institutions.
Second, the development of financial support tools for the elderly care industry ensures the scale and standardization of the development of the elderly care industry.
Real estate investment trust funds (REITs) are one of the main financing methods for elderly real estate; many listed companies abroad also have several listed companies with elderly real estate and rehabilitation as their main business, obtaining development funds through direct financing in the capital market.
Third, special elderly care products and elderly care investment advisory services enable individuals to pay for elderly care expenses.
Financing-type elderly care financial products are mainly based on reverse mortgage loans and reverse mortgage pension insurance.
In recent years, due to considerations of market risk, longevity risk, moral risk, and other aspects, the development of reverse mortgage loans has become more cautious, and the proportion of reverse mortgage loans with variable interest rates has increased; investment-type elderly care financial products are the fastest-growing area of elderly care finance in recent years, such as target date funds for the elderly, ESG investments, diversified growth funds, etc., with a very rich variety of products; wealth management is based on pension products issued by financial institutions such as insurance companies, banks, and funds, relying on mature investment advisory services, and has developed rapidly.Here is the translation of the provided Chinese text into English: **Four Suggestions for China's Pension Finance** Many developed countries have entered the stage of moderate to super-aged society and have accumulated certain practical experience, reflections, and insights in pension finance, which will also provide more references for the development of China's pension finance.
1.
Further improve the tax incentive policies for the second and third pillars.
For the second pillar, it is suggested to increase the proportion of enterprise contributions exempt from corporate income tax from the current 5% to 8%, aligning with the upper limit of enterprise contributions.
Currently, China has not levied capital gains tax, and it is suggested that the investment income part of the pension should not be taxed during the collection phase.
Additionally, during the collection phase, it is recommended to include the collection amount of the second and third pillar pensions in the personal tax exemption to reduce the tax burden during the collection phase.
For the third pillar, it is suggested to change the 3% tax during the collection phase to 3% tax during the payment phase to avoid taxing the investment income part; at the same time, to exempt the middle and low-income groups, flexible employment groups, and others from taxes throughout the process, enhancing the inclusiveness and attractiveness of the tax incentive policy.
Personal should be allowed to voluntarily transfer funds from the second pillar account to the third pillar account when changing jobs or retiring, to enhance the enthusiasm of enterprises and individuals to contribute.
2.
Integrate the functions of individual pension information accounts and capital accounts.
It is suggested to combine the registration processes of information accounts and capital accounts, automatically completing the registration of information accounts when users register capital accounts, achieving integrated management of account information.
Through this integration, users will be able to manage their pension accounts on a unified platform, whether it is to check account balances, track investment performance, or transfer funds in and out, all can be completed within a single interface.
This integrated management not only improves the convenience of account management but also enhances users' control and transparency over their pension accounts.
3.
Break through the bottlenecks in the development of the elderly care industry and financial services for the elderly.
First, establish standards and specifications for the elderly care industry, suggesting the classification and statistical standards for the elderly care industry and related catalogs, and improve the data information sharing mechanism.
Timely sorting out the catalog of elderly care industry enterprises and projects will help provide information services for financial institutions to support the development of the elderly care industry.
Second, provide financial support for the elderly care industry.
The elderly care industry mostly faces common problems such as long cycles, difficulty in making profits, but with broad prospects.
The early stage requires policy support through fiscal interest subsidies, tax exemptions, and other policies to reduce the financing costs of enterprises and facilitate corporate credit support.
Next, establish and improve the credit system for financing in the elderly care industry.
It is possible to explore the establishment of specialized elderly care industry financing guarantee institutions, elderly care industry loan risk compensation funds, etc., to enhance the credit for the elderly care industry and enterprises.
Finally, give full play to the role of direct financing, guide social funds to invest in the elderly care industry, and blend with financial institutions' credit and bond financing to jointly support the development of the elderly care industry and service finance.
4.
Encourage more asset management institutions to launch more high-quality pension financial products and increase the proportion of long-term investments.
In terms of expanding the investment range, it is suggested that each asset management institution include major assets that are suitable for the product's risk preference to achieve optimization of asset allocation and risk diversification.
In terms of research and strategy development, it is suggested that each asset management institution increase the research and development efforts for corporate and individual pension products, increase the pension attributes of the products, and develop investment strategies that are consistent with the characteristics of long-term accumulation, cross-period payment, and value preservation and appreciation of pension funds, providing customers with more stable and long-term pension financial product options.