- _The system is stillfragmented._ By mid-1999, only 5 (the provincial level municipalities Beijing, Chongqing, Shanghai and Tianjin, plus Hainan province) of the 27, had achieved full pooling or unification. In 17 provinces small provincial adjustment funds were established using 1- 2 percent of total contributions sent from city pools. No such adjustment funds were possible for 5 provinces because of the lack of funds in municipal pools. It is reported that all 11 sectoral pools (existed until September 1998; see State Council Notice 28 of 1998) have been dissolved and are now participating in local social pooling. It is not clear, however, whether the accumulated reserves were transferred to the local pools.

- _Social pooling is incomplete._ In most localities, pension services are not socialized; that is, contributions and pension expenditure are not administered separately by different agencies. An enterprise submits a net amount to the municipal pool, which equals the total contribution minus the total pension payments to retirees of that enterprise. Contribution rates vary significantly across provinces and cities and in some cases even across different enterprises.

- _Coverage is narrow and uneven across regions._ By the end of 1998, the basic pension insurance system covered only 78.4 percent of workers in state-owned enterprises, 16.2 percent of workers in collective enterprises, and 5.4 percent of workers in other urban enterprises (Hang, 1999). There is no pension scheme for the urban self-employed or individual entrepreneurs. In some rural areas there is a pension scheme designed and managed by the Ministry of Civil Affairs, but the coverage is small, and will be incorporated or merged under the MOLSS system.

- _Individual accounts are largely notional._ Reserves accumulated in these accounts over the past five years have been used to pay current retirees, as the government has not made a clear decision on how to finance the transition cost.

- X _The funding problem is acute._ Many local pension pools are financially bankrupt as compliance rates are low and declining and the issue of how to finance the transition cost is unresolved. According to MOLSS statistics, state enterprises owe the government RMB 38 billion in pension arrears. Local governments have been using the reserves in pillar 2 to pay pensions to current retirees, leading to notional or empty individual accounts. And where funding has still been inadequate, local tax revenue has been used. The Ministry of Finance data indicates, in 1999, the MOF also transferred RMB 17 billion to 25 provinces to cover pension shortfalls in localities. The central government is in effect bailing out local pension pools, many of which are bankrupt. This trend, if unchecked, will become a threat to the fiscal sustainability of the central government.

# **Implicit Pension Debt and Transition Issues**

_Implicit pension debt (IPD)_ refers to the benefit promises a pension scheme makes to workers and pensioners and is measured by adding the present value of benefits that have to be paid to current pensioners plus the present value of pension rights that current workers have already earned and would have to be paid if the system were terminated today. IPD usually is calculated under the termination hypothesis that the unfunded system is to be terminated immediately and that all pensioners and workers must be compensated for their future pensions and accrued rights. IPD, a stock concept, represents the direct and implicit liabilities that a government can predict with certainty and must include in its fiscal plans. Unlike a government's contingent liabilities (such as bailing out state banks), IPD poses no unexpected demand for fiscal expenditure.

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