Comparative analysis and prospects of sovereign pension funds: the window period for establishment of foreign exchange-based sovereign pension funds

ZHENG Bingwen1,2

(1.Institute of American Studies, Chinese Academy of Social Sciences)
(2.World Social Security Research Center, Chinese Academy of Social Sciences)

【Abstract】The paper divides sovereign pension funds into contributory funds and non-contributory ones. The contributory ones are derived from the balance of the basic old-age insurance system operated by the state, while non-contributory ones can be divided into resource-based funds and foreign exchange-based funds. Resource-based sovereign pension funds consist of the yields from a certain kind of exclusive natural resources, such as oil, while foreign exchange-based funds consist of foreign exchange reserves. On the basis of identifying the “sovereignty” characteristics of different pension funds, this paper analyzes the functional positioning of China’s non-contributory sovereign pension fund, the National Social Security Fund, and analyzes the underlying reasons why it is infeasible to build a contributory sovereign pension fund. Finally, the paper argues that China should establish a foreign exchange-based sovereign pension fund as soon as possible for three main reasons. First, with the transformation of China’s economic development, foreign exchange reserves are currently at a turning point, and the window for establishing a “foreign exchange-based” sovereign pension fund is becoming narrower. Second, compared with that in developed countries, the scale of asset reserve of China’s old-age security is too small, and the establishment of foreign exchange-based sovereign pension funds can bridge the funding gap. Third, the current scale of foreign exchange reserves has exceeded the desired level of their specific functions, and the establishment of a “foreign exchange” sovereign pension fund can ensure the goal of repaying the people to improve their well-being can be achieved.

【Keywords】 sovereign pension funds; sovereign wealth funds; old-age insurance; foreign exchange reserves; repaying the people;

【DOI】

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    Footnote

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    [2]. [1] Zheng, B. International Economic Review (国际经济评论), (2): 43–53 (2008). [^Back]

    [3]. [1] In previous studies of sovereign pension funds, the author called “non-contributory” sovereign pension funds as “reserved” sovereign pension funds, which means that sovereign pension funds are divided into “contributory” and “reserved” sovereign pension funds. Since the sovereign pension fund itself is a type of strategic reserve, the “reserved” is shifted into the “non-contributory” in this paper, in order to avoid the repetition of synonyms. The relevant papers of Zheng Bingwen are as follows: Zheng, B. International Economic Review (国际经济评论), (2): 43–53 (2008); Zheng, B. Journal of Liaoning University (Philosophy and Social Sciences Edition) (辽宁大学学报(哲学社会科学版)), (3): 1–25 (2017); Zheng, B. International Economic Review (国际经济评论), (5): 5–29 (2009). [^Back]

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    [7]. [2] As for the content of the innovation as the “DB fully funded system” created by Canada and the review on its “additional CPP,” please refer to: Zheng, B. Comparative Economic & Social Systems (经济社会体制比较), (6): 87–117 (2017). [^Back]

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    [37]. [1] In a sense, the reform of the U.S. federal Old-Age, Survivors, and Disability Insurance Program in increasing the contribution rate in 1990 does not really pertain to a DB partially funded system, but merely a prelude to the DB partially funded system created by Canada in 1997, because the United States did not raise its contribution significantly in 1990 and failed to change the traditional investment system of treasury bonds purchase, so that the contribution of investment income to the financial sustainability of the system was far less than that of the reform in Canada. [^Back]

    [38]. [1] Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, The 1989 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds Communication, Washington, D.C., April 26, 1989. [^Back]

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    [40]. [3] The average interest rate on deposits held by pension funds across the country is around 3%, well below 8.44% the annual rate of return of the National Social Security Fund since its establishment. [^Back]

    [41]. [1] The following information is quoted from the official website of South Korean National Pension Service: http://fund.nps.or.kr/ [2019-01-03]. [^Back]

This Article

ISSN:1007-0974

CN: 11-3799/F

Vol , No. 03, Pages 9-30+4

May 2019

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Article Outline

Abstract

  • 1 Concept and classification of sovereign pension funds
  • 2 Analysis on sovereign characteristics of various pension funds
  • 3 Realistic requests for establishing foreign exchange-based sovereign pension funds in China
  • 4 Brief summary: review and prospect
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