The Chinese government has launched a new retirement program for self-employed workers and those with insufficient savings.
The new plan, which Beijing will run as a one-year experiment to start, offers tax deductions to beneficiaries to put away money. This program joins two others set up for Chinese retirees—one for government workers and another for corporate employees—as part of the overall $317 billion retirement system.
The new plan, which the Chinese call “the third pillar,” allows enrollees to purchase insurance-based pension products up to either 1,000 yuan ($157) or 6% of their salary, whichever is higher, allowing a tax break: When pension withdrawals begin at age 65, the first 25% will be tax free.
A study by KMPG shows that the new plan has the potential to grow at a 21% annual rate with a projected value of $1.5 trillion by 2025, according to the IPE news service.
This is the first time that the Chinese government has used tax breaks for individuals to drive retirement savings, IPE noted. There are tax breaks for the other two retirement programs, but beneficiaries don’t receive them.
The one-year experiment for contract workers is available in Shanghai, Fijian province, and the eastern Jiangsu province’s Suzhou Industrial Park.
China’s pension system is facing issues as the aging population continues to chip away at its assets. It is facing a multi-trillion-dollar gap by 2050, a paper from the World Economic Forum said. China’s total pension assets are roughly 14% of the country’s GDP.