For these simulations we start with<sup>World Bank population projections for</sup> China, 1995-2100.1 Our baseline and alternative assumptions<sup>about the rate of</sup> real wage growth, interest rate and<sup>other economic and policy parameters over</sup> this period are given in Table 2 . In most countries the interest rate tends<sup>to</sup> exceed the rate of wage growth by more than<sup>2%, over long periods. But in China</sup> the opposite is true at present. China's rate<sup>of real wage growth over the past</sup> decade has been almost 6% annually, while<sup>the real interest rate available to</sup> domestic savers in recent years has<sup>been negative, due to controlled nominal</sup> rates that are less than the inflation rate<sup>(1994 Statistical Yearbook of China,</sup> Beijing: State Statistical Bureau). In<sup>our baseline simulations we accordingly</sup> use a rate of wage growth that exceeds<sup>the interest rate initially and vice versa</sup> after 2011, assuming that financial<sup>markets have been reformed and wage growth</sup> has slowed down in the interim. We<sup>also carry out sensitivity analysis to these</sup> variables by experimenting with scenarios in which wage growth is<sup>lower and</sup> financial market reform faster or slower.<sup>2</sup> The continuation of current evasion<sup>and exemption rates of 25% are also</sup> assumed. Enforcement techniques will probably<sup>improve in the future, reducing</sup> these leakages, but the expansion of the nonstate<sup>and informal sectors will have</sup> the opposite effect, so as a baseline the<sup>continuation of the 25% noncompliance</sup> rate is probably not unreasonable. It is<sup>also modest by comparison with other low</sup> and middle income countries, where workers<sup>often qualify for benefits despite the</sup> fact that their enterprises have not paid<sup>the full contributions; this raises the</sup> break-even contribution rate, possibly inducing<sup>greater evasion. Obviously, if</sup> China is able to reduce its noncompliance rate, this would correspondingly improve the financial situation of its<sup>pension system. One of the best ways to</sup> do so is to choose a system that costs<sup>less and reduces incentives to evade.</sup>

**1** These projections assume increasing<sup>life expectancy, while the Chinese</sup> have used projections which do not take this<sup>into account. Therefore, our data</sup> show a continuing increase in the demographic dependency<sup>rate (Table 1) while the</sup> Chinese data imply a levelling off after 2030.

2 In addition to the economy-wide wage<sup>growth, which is uniform for all</sup> cohorts, we assume that for the first<sup>30 years of working life the worker</sup> receives a wage increase for experience and on-the-job<sup>training of 1% per year.</sup> While age-earnings profiles have been realtively<sup>flat in China in the past, they</sup> will probably become steeper in the future, as the<sup>transition to a market economy</sup> proceeds. Thus the average wage of the retiring<sup>cohort will be higher than the</sup> average economy-wide wage. The same pension<sup>amount will then yield a lower</sup> proportion of final year's wage (called the replacement rate) than of the economy-wide wage (herein called the benefit<sup>rate).</sup> 10