Seniors practice dancing in the newly built community square designed for elderly-friendly renovations. (Photo/Li Ran)

Chongqing - It has been one year since China fully implemented its private pension system. Data shows that the number of accounts has exceeded 150 million, with strong interest in account openings, but the actual contribution rate remains below 20%.

China is expanding its private pension system to ease mounting pressure on its retirement framework as the population ages. While the basic public pension provides broad coverage, rising demographic stress and limited supplementary options have exposed structural gaps.

The basic pension remains the system’s backbone, covering about 1.08 billion people as of November 2025. But sustainability risks are growing: by 2025, there are just 2.7 active workers for every retiree, putting increasing strain on pension finances.

Supplementary pensions offer limited relief. Enterprise pension plans cover only 33.32 million workers, held back by cost and administrative burdens, while occupational pensions largely serve public-sector employees, excluding most private and flexible workers.

Against this backdrop, China’s private pension system provides a voluntary, market-based supplement, allowing individuals to build personal retirement savings with tax incentives, helping diversify pension funding and reduce long-term pressure on public finances.

Currently, China’s private pension system faces a phenomenon where account openings are high, but contributions are low. Experts often interpret this as a lack of public awareness about retirement planning or insufficient financial literacy, but such an explanation may be somewhat one-sided.

The hesitation to contribute is not due to a disregard for the future, but rather because the benefits are not immediately clear. First, the opportunity cost of exchanging "certain cash flows" for "long-term commitments" appears too high.

For most salaried households, an annual contribution of 12,000 yuan (about 1718 U.S. dollars) is no small amount and could be used for more immediate needs, such as mortgage payments, children’s education, or emergency savings.

Moreover, the private pension requires locking up funds for decades. Given the uncertainty of external economic conditions, this long-term liquidity constraint becomes a high hidden cost for households already struggling with tight cash flows.

In practice, the perceived benefits of the policy remain limited. The system’s core feature, tax deferral, operates across three stages. During the contribution phase, individuals can deduct up to 12,000 yuan (about 1718 U.S. dollars) per year from taxable income, temporarily exempting that amount from personal income tax. Investment returns such as interest or dividends are not taxed while the funds remain in the account. A 3% personal income tax applies when the pension is withdrawn after retirement.

A more fundamental issue is product similarity. Current private pension products offer returns similar to ordinary financial products but provide much less flexibility. This mismatch between liquidity and returns has reduced investor participation and weakened overall demand.

The public is not opposed to private pensions, but they lack a sense of security. When a system places the majority of costs in the present while concentrating the benefits in the distant future, the willingness to participate inevitably faces challenges.

China is making its private pension system more flexible by allowing earlier withdrawals under a broader set of personal hardship conditions. Starting in September 2025, participants will be able to access funds not only at retirement, but also in cases of heavy medical expenses, prolonged unemployment, or receipt of minimum living assistance.

The changes address concerns that pension savings were previously too rigid and illiquid, making them less attractive to participants. By linking withdrawals to real-life financial pressures and simplifying access, the update is expected to improve confidence in the system and encourage sustained participation.