Correspondence: Brian P. Cozzarin, Department of Management Sciences, University of Waterloo, 200 University Avenue West, Waterloo ON N2L 3G1, Canada E-mail: bpcozzar@uwaterloo.ca

¹is pursuing a BASc in Systems Design Engineering, with an option in statistics from the University of Waterloo. His major interests are economic history, business cycles and the effect of demographics on economic growth.

²is an associate professor in the Department of Management Sciences. His current research pertains to financial aspects of biotechnology alliance formation, estimation of complementarities in training and innovation and modelling technology adoption as a constrained shortest path problem. His PhD in Agricultural Economics is from the University of Illinois.

Received 17 December 2008.

Abstract

China is transitioning from an unfunded pay-as-you-go to a funded pension system. Because of a rapidly ageing population, this transition is vital in maintaining the state's ability to fund its future pension liabilities. To complete this transition, China must be able to fund current pension liabilities owed to workers who did not contribute to funding the system. Furthermore, it must fund the asset accumulation for the accounts of future retirees. This puts China under substantial strain, which can only be dealt with by tightening fiscal policy and speeding up sales of state-owned enterprises. Sustaining a funded system in the long term provides China with several challenges and opportunities. The pension system should be privatised, and the government's role reduced to monitoring fund managers. To function properly, transparency must be increased, allowing authorities to monitor risks taken by pension firms. The pension funds should be given flexibility to invest in whatever financial market they see fit; hence, China's investor protection laws should be reformed. As stable long-term and possibly activist investors, the growth of pension funds will lead to more efficient financial markets, and more venture capital funding, allowing China's growth to continue.