China’s pension reserves have fallen below a key government threshold in a majority of provinces, as growing deficits from a rapidly aging population threaten the system’s long-term viability.

China has two main pension schemes that together cover 1 billion people. One is compulsory for urban employees and public servants, while the second serves other urban residents and the rural population. The urban employee pension system, the far larger of the two, received 16% less income in 2020 than the year before.

In normal times, employees pay 8% of wages into the system, and employers pay 16% of wages, but last year the government waived contributions from small and midsize businesses hit hard by the coronavirus. Meanwhile, payouts rose 4% as the population continued to age.

As a result, the urban employee system’s reserves fell around 10% to 4.83 trillion yuan ($754 billion), the first year-on-year decrease since comparable data became available a decade ago. Its capacity to increase payouts is shrinking as well. The system held reserves enough to cover 11.3 months in payouts during 2020, compared with 16.4 months five years ago.

The state-affiliated Chinese Academy of Social Sciences considers nine months of payouts to be the standard, and views three months as a sort of red line. Though the pension system remains above the nine-month mark nationally, 16 out of 31 provincial-level regions, including highly developed areas like Shanghai, have dipped below the threshold.

With China’s working-age population shrinking, the pension system is running on an ever-increasing deficit. Payouts have outpaced contributions since 2014 among urbanites with corporate jobs or who are self-employed. The government last year poured 1.17 trillion yuan — the equivalent of about 40% of regular contributions — into the system to plug the shortfall.

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