On November 4, 2022, the personal pension system began to be piloted in the pilot cities (regions), and it has been about a year and a half so far, and the number of account accounts has exceeded 50 million. The implementation of the pilot personal pension system has a positive effect on improving the current situation that the first pillar of the mainland pension system is dominant and faces a long-term imbalance between income and expenditure, and the coverage and development level of the second and third pillars are insufficient. At the same time, it also helps to improve the living standards of workers after retirement, increase their income sources, and thus better protect their quality of life.
However, statistics as of the end of 2023 show that less than 1/3 of the actual number of people who have saved funds after opening an individual pension account is only more than 2,000 yuan per capita, which is far from the upper limit of 12,000 yuan per person per year, and the total amount of actual stored funds is only more than 20 billion yuan. Obviously, there is still an obvious lack of residents' participation in the personal pension system.
There may be many reasons behind the insufficient participation of residents in personal pensions.
First of all, in terms of contribution capacity, personal pension is a personal financial expenditure in which residents voluntarily participate and are responsible for their own profits and losses. This means that it needs to be spent entirely from the resident's personal income, i.e. the level of an individual's income directly affects their ability to save for retirement. According to the data released by the National Bureau of Statistics at the end of February 2024, the per capita disposable income of residents nationwide is 39,218 yuan, the per capita disposable income of the low-income group is 9,215 yuan, and the per capita disposable income of the lower-middle-income group is 20,442 yuan. Low-income groups may struggle to save for their personal pension after meeting their current needs.
Secondly, the preferential tax policy for personal pensions has its own limitations for different groups of people. For low-income groups who do not need to pay individual income tax, the characteristics of pre-tax deduction have no advantages. The deferred 3% tax rate has the potential to create more tax burdens. For residents in the high-income range, the annual quota of 12,000 yuan is a bit insufficient.
In addition, the financial literacy of residents also affects the degree of personal pension participation. Financial literacy is an individual's ability to understand and effectively apply financial knowledge and skills to improve personal and social financial well-being and participate in economic life with the skills, motivation and confidence to make financial-related decisions. The Financial Literacy Report of Chinese Residents, jointly released by Shanghai Advanced Institute of Finance (SFI) and Charles Schwab (Schwab), evaluates and measures the financial literacy level of residents in six dimensions: money and banking, income and expenditure and credit, savings and investment, consumer rights and responsibilities, financial planning, and safety and security.
So, how does financial literacy affect the extent to which residents participate in personal pensions?
First of all, good financial literacy can help build a good sense of long-term planning, especially retirement planning. Some people may prefer to spend more quickly than saving and investing. Others may be more inclined to focus on immediate needs and ignore the importance of long-term retirement planning. Among the six dimensions of financial literacy, scientific financial planning includes long-term planning, especially pension planning.
The improvement of literacy is also conducive to changing the limitations of willingness caused by residents' distrust of the personal pension system. The sources of distrust are diverse, and some are not enough to understand the details of personal pension investment methods, yields, withdrawal conditions, etc., and are worried that their pensions cannot be effectively protected. Others have reduced trust in the personal pension system because of the historical problems of the pension system, such as poor management and investment losses. There are also those who believe that the return on pensions is not attractive enough, so they lack the willingness to supplement the pension through a personal pension system. The correct understanding of pensions and pension planning is also a very important part of financial literacy.
Secondly, financial literacy helps to establish the ability of scientific planning and practice of personal pensions. According to the 2023 Wealth and Health Index of the Newly Wealthy released by Gaojin and Jiaxin, a whopping 98.0% of respondents still have not yet developed a financial plan for themselves that meets industry standards. Pension planning itself is one of the most important goals in financial planning, and it is necessary to have a reasonable understanding of the goals and tools. At present, it seems that the ability of pension planning still has a lot of room for improvement.
In addition to the ability to plan, it is also necessary to have the ability to put the pension plan into concrete practice. How to better contribute to personal pensions is another issue. According to a report released by the Insurance Asset Management Association of China, about 40% of respondents have only heard of the personal pension system but do not know about it, and 12% of respondents have learned about it for the first time through the survey. Another set of data from the national social insurance public service platform shows that as of April 2024, there are 746 personal pension products to choose from, including 23 wealth management products, 465 savings products, 71 insurance products, and 187 fund products. These data point to another barrier to the ability to contribute to individual pension products, namely the ability to know and be informed and make appropriate decisions. Compared with the products of the whole market, the number of individual pension products is not much, but the absolute number is also quite large. How to choose the right product among these hundreds of products requires not only the ability of residents to plan their own goals, but also the ability to understand financial products.
Finally, financial literacy affects pension security. In addition to the ability to plan and practice, you also need to have the ability to maintain your long-term financial security, especially the security of the elderly. Worldwide, residents' financial literacy has the problem of "one old and one young", that is, the literacy score has the characteristics of "inverted U-shaped" distribution. The weak financial literacy of the elderly group is one of the reasons for the high incidence of pension fraud. The economic losses caused by financial fraud will also directly affect the payment of personal pensions and the living standards of residents in old age.
In general, the current lack of participation in personal pensions is not only a complex social and economic problem, but also an educational problem, and there is a lot of room for improvement. In view of the residents' willingness is not strong, from the outside can improve the environment and then enhance the degree of personal pension participation, such as: supporting some "default combinations" to reduce the difficulty of residents' portfolio selection, do a good job in policy optimization, for different income groups to introduce reasonable personal pension preferential policies, improve policy advocacy and financial literacy education, etc., to better promote the healthy and long-term development of the personal pension system.
In addition, how to improve the participation of individual pensions through residents' financial literacy education is also particularly important. In a word, cultivate ability and willingness. As the coordinator of financial literacy education, regulators should establish a framework to improve rules and provide materials to give full play to their guiding role. As the main force of financial literacy education, financial institutions improve residents' awareness of financial products, risks and returns, increase their understanding of financial planning, and attach importance to pension goals through the popularization of financial knowledge and participation in financial activities. Social service organizations should do a good job of connecting financial literacy "from the cloud to life" from the aspects of community anti-fraud publicity, supporting services for the elderly, and community financial practices, and promote the willingness and ability of individuals to participate in pensions.
(The author, Wu Fei, is a professor at Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University)