Liu Shijin's Advice on Reforming Rural Pension System

Former Deputy Director of the Development Research Center of the State Council Calls for Tripling Rural Pensions in Three Years

Hello, my readers! For today’s pieces, I bring the latest policy advice from Liu Shijin, a renowned economic policy advisor who previously served as the Deputy Director of the Development Research Center of the State Council, with decades of experience in economic policy research. Liu also served as the Vice Chairman of the Economic Committee of the 13th Chinese People's Political Consultative Conference (CPPCC).

Today’s piece comes from Liu's presentation at the Parallel Forum of the 2025 CF40 Annual Conference on April 19, 2025, talking about policy options and prioritization for expanding consumption. Liu’s speech titled "Boosting Consumption and Stabilizing Growth Requires Focusing on Root Cause Solutions"

Liu Shijin

In short, he argues that China faces a significant "structural deviation" in consumption, with consumption's share of GDP about 20 percentage points below global averages. This is caused by four key factors: inadequate basic public services with large urban-rural gaps, lagging urbanization quality, substantial income inequality, and a government balance sheet that holds unusually high proportions of national wealth.

Rather than short-term consumer subsidies, Liu advocates for structural reforms focused on the rural residents' pension system, proposing a three-pronged approach: allocating stimulus funds to increase rural pensions, transferring substantial state-owned financial capital (potentially 10 trillion yuan) to the rural pension system, and improving pension contribution systems. He calculates that investing 1 trillion yuan into rural pensions could generate 1.2 trillion yuan in GDP growth through consumption multiplier effects, helping China transition from an investment-driven to a consumption-driven economy.

Below is the full transcript:

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The Root Causes of China's “Structural Deviation” in Insufficient Consumption

Currently, there is much discussion about China's insufficient consumption. From a purchasing power parity perspective, compared to OECD countries at roughly the same development stage, China's household consumption, final consumption, and service consumption as proportions of GDP are significantly lower. Compared to OECD country averages, our gap reaches 1/4 or even 1/3. Additionally, looking at average levels, China's residents' actual final consumption as a proportion of GDP is approximately 20 percentage points lower than the global average.

I want to emphasize a concept here: China's insufficient consumption is not an acceptable deviation from international average levels, but a significant gap of 20 percentage points, which can be described as a "structural deviation." This structural deviation has formed due to four main reasons.

First, the overall level of basic public services is low, with large urban-rural disparities. The level of basic public services is closely related to development-oriented consumption such as education, healthcare, social security, and elderly care, forming an important component of this type of consumption. Despite the government's significant efforts to provide basic public services in recent years, the overall level remains relatively behind, directly constraining the growth of service consumption, which is mainly development-oriented. Urban residents face pressure from three major burdens: education, healthcare, and housing, but rural residents face even greater pressure.

Taking a recent example that has received much attention: current monthly pensions for retired government and institutional employees are about 6,000+ yuan, urban enterprise retirees receive an average of 3,000+ yuan, while those covered by urban-rural resident pension insurance (95% of whom are rural residents) receive only about 220 yuan per month. Furthermore, a significant number of migrant workers, flexible employment workers, and new forms of employment workers are not yet included in social security.

Second, urbanization level and quality still lag behind. From an economic perspective, urbanization and industrialization bring agglomeration effects and economies of scale, significantly reducing costs. Our consumption, especially service consumption, also strongly depends on economies of scale and agglomeration effects.

Without a certain level of urbanization, it is difficult to improve service consumption levels in education, healthcare, affordable housing, social security, elderly care, culture, and entertainment. In rural areas or underdeveloped county-level cities, it is difficult to obtain these services even with money. Even when available, the costs are high.

China's urbanization level is about 67% in terms of permanent residents, while OECD countries at roughly the same development stage as China generally had urbanization rates of 70% or even 80%. This largely explains why our consumption, especially service consumption, is relatively low.

Third, income inequality has a significant impact on the consumption rate. The impact of income inequality on consumption is reflected in: the relatively small proportion of middle or high-income groups with lower consumption propensity, with most of China's savings concentrated in their hands; while low-income groups, despite higher consumption propensity, lack consumption capacity due to low income. China's Gini coefficient is generally considered to be above 0.45, with some estimates even higher. Currently, China has about 400 million people in the middle-income group, with 900 million relatively low-income people below this level. With the middle-income group not exceeding half the population, international experience shows that insufficient demand easily emerges in the latter half of the medium-growth period.

Fourth, the characteristics of the government's balance sheet. According to the government balance sheet released by the Chinese Academy of Social Sciences, at the beginning of reform and opening up, the government sector's wealth accounted for nearly 90% of society's total wealth. Although this has gradually decreased, in recent years it has stabilized at around 40%. In OECD countries, this proportion is usually lower, fluctuating around 5%, with some countries even having liabilities exceeding assets, showing a net debt position.

In 2022, the Chinese government sector's net assets accounted for 38.6% of society's total net assets, and state-owned equity capital accounted for about 20% of society's total net assets, significantly higher than other countries. The high proportion of government net assets and state-owned capital in society's total net assets, combined with low dividend yields from state-owned capital (mainly used for savings and investment), has led to corporate savings accounting for 50% of society's total savings, far higher than other countries.

Therefore, China's high savings rate and low consumption rate are related to the significantly high proportion of government net assets and state-owned equity capital in society's total net assets. This characteristic was advantageous when we were in the industrialization or investment-driven stage, but now that this stage has passed and the problem of insufficient consumption shows a structural deviation, we face a choice: should government net wealth and state-owned capital returns continue to be used for savings and investment, or should they be redirected to support consumption? Clearly, we need to achieve an important transformation, driving the economy from investment-driven to consumption-driven.

Addressing Insufficient Consumption Requires Clarifying Priorities and Pain Points

Insufficient consumption cannot be discussed broadly; priorities and pain points must be clarified:

First, in terms of consumption content, insufficient consumption is mainly insufficient service consumption, focusing on development-oriented consumption related to basic public services such as education, healthcare, affordable housing, social security, and elderly care;

Second, in terms of population groups, urban residents face pressure from the so-called "three major burdens," but the largest gap is still among rural residents, focusing on nearly 300 million farmers and nearly 200 million migrant workers;

Third, from a system, mechanism, and policy perspective, it is essentially the long-standing urban-rural dual structure problem, requiring solutions through structural reforms centered on people-oriented urbanization and urban-rural integrated development with equal rights.

Some may ask: China's consumption as a proportion of GDP being 15-20 percentage points lower than the international average is not a new problem—it was the same ten, twenty years ago—yet our economic growth rate has remained high all these years. How to explain this?

This involves the concept of "terminal demand." Terminal demand refers to the remaining portion of GDP after removing productive investment, including all consumption and non-productive investment. The latter mainly refers to real estate and infrastructure construction related to people's livelihoods, as well as some service investments.

For quite a long time, real estate and infrastructure grew rapidly, showing a certain degree of advancement or overdraft in terms of per capita development level from an international comparison perspective. The rapid growth of real estate and infrastructure masked the structural deviation problem in consumption.

However, in recent years, real estate has declined significantly, and infrastructure is also slowing down. The previously masked problem of consumption's structural deviation has been revealed, becoming the "bottleneck" shortcoming in terminal demand. If this shortcoming is not addressed quickly, the contraction in terminal demand will lead to economic growth rate decline.

Expanding Consumption Requires Distinguishing Root Causes from Derivative Issues

Expanding consumption requires clear thinking, and an important point is to distinguish root causes from derivative issues. Many of China's current economic problems, such as price depression, actual growth rate being lower than nominal growth, heavy local debt burden, and excess capacity, are all derived from insufficient terminal demand. Expanding consumption should focus attention on solving the root cause: the structurally low proportion of consumption in terminal demand.

Bringing terminal demand to a reasonable level provides a source of vitality for economic operation, allowing derivative issues to be easily resolved. This is the first principle for solving insufficient demand. Correspondingly, stimulus policy funds should focus on addressing root causes, achieving maximum results with minimum effort.

There are also some concepts and understandings that need to be clarified. For example, some believe that increasing income and consumption for low-income groups and improving basic public services should be measured according to capacity and implemented gradually, not hastily. This made sense in the past, but in a situation where consumption shortcomings cannot be addressed and terminal demand is declining, can we tolerate the resulting growth slowdown?

Understanding of expanding consumption and improving people's livelihoods requires new connotations and perspectives. This not only involves social moral fairness or sympathy for the vulnerable but is also a more urgent question of whether necessary economic growth rates can be maintained. For a long time, we have been bold in promoting investment and launching projects, often involving hundreds of billions, thousands of billions, or tens of trillions. But the current reality is that for stabilizing growth, consumption is more important than investment. We need to use the same intensity and input previously applied to investment to now tackle consumption. Moving forward, correcting the structural deviation of insufficient consumption and raising consumption's proportion of GDP to a reasonable level should be a prerequisite or hard task for stabilizing growth.

Specific Recommendations for Rural Resident Pension Reform

This year's government work report places boosting consumption at the top of its tasks, showing high importance for addressing insufficient consumption. The question is how to boost consumption. There are many viewpoints and discussions on this topic.

One approach focuses on solving people's reluctance, fear, or inability to consume, such as helicopter money, consumption subsidies, and other promotional methods to increase consumption. These methods are effective in the short term but are not sustainable; giving money and subsidies also reaches billionaires, which is meaningless to them and lacks precision; even when reaching low-income groups, buying a few more loaves of bread is good, but it doesn't help with their real needs for education, healthcare, housing, and social security.

Another approach is to promote structural reform, focusing on solving some deep-seated structural issues. The goal is to increase consumption capacity for the low-income groups with the greatest consumption potential, focusing on development-oriented service consumption such as education, healthcare, affordable housing, social security, and elderly care. This is not a one-time solution but requires sustainable and stable growth arrangements.

From a short-term perspective, promoting rural resident pension reform is relatively easy to implement and can show results. Rural resident pension insurance mainly covers rural residents, accounting for more than half of all insured persons, representing the lowest income level group with the greatest potential for consumption growth. Pension reform should take multiple approaches.

First, use part of the short-term stimulus funds for pension expenditures. According to the 2022 Ministry of Human Resources and Social Security statistical bulletin, about 1.05 billion people nationwide participate in basic pension insurance, including 550 million in urban-rural resident basic pension insurance (95% are rural residents), with 170 million receiving pensions of 220 yuan per person per month, for annual fund expenditures of about 400+ billion. If 500 billion from the current 5-6 trillion stimulus policy funds were injected into the urban-rural resident basic pension insurance fund for expenditure, the average monthly pension could increase from 220 yuan to 400 yuan; investing 1 trillion would increase it to 600 yuan.

Second, explore transferring a significant portion of state-owned equity capital to urban-rural resident basic pension insurance. This involves a theoretical issue worth in-depth study. The Chinese economy has two structural phenomena: consumption as a proportion of GDP is structurally low, about 20 percentage points below the global average; and government wealth, including state-owned equity capital as a proportion of society's net assets, is significantly higher than international levels. There is a logical connection between these low and high figures.

In OECD countries, there are considerable pension accumulations, while our pension accumulation scale is small, but we have such large state-owned assets. From historical evolution and theoretical analysis, a considerable portion of these state-owned assets should be pension fund accumulations for all people (including rural residents). Therefore, a significant adjustment is needed, considering transferring a large scale of state-owned capital, primarily state-owned financial capital, to urban-rural resident basic pension insurance.

In 2023, China's total state-owned capital equity was 102 trillion yuan, and state-owned financial capital equity was 30.6 trillion yuan, totaling 132.6 trillion yuan. If 10 trillion yuan of state-owned financial capital were transferred to urban-rural resident basic pension insurance, referring to the investment return level of the National Social Security Fund Council (which has achieved annual returns above 7%), the resulting income could increase pension levels by more than double or nearly twice.

It's worth noting that this not only involves 170 million elderly people receiving pensions but also their children and more than 300 million urban-rural resident pension insurance contributors. If future pension levels are low, precautionary savings will be high, and this group also has a higher marginal propensity to consume. Through such adjustments, a large amount of precautionary savings can be converted into real consumption capacity, directly increasing consumption demand.

Third, improve the pension contribution system, focusing on areas where migrant workers are heavily employed.

Through these channels, it can be envisioned that within three years, rural pension levels could be raised to over 600 yuan (equivalent to the current rural minimum living standard), and within five years to about 1,000 yuan. Although the magnitude seems large, there is still a significant gap compared to urban retirees and government and institutional employees.

We have conducted preliminary calculations showing that rural residents, as China's lowest-income group, have a high consumption propensity (about 0.8). If 1 trillion yuan in funding is provided, about 800 billion yuan will be used for direct consumption. From a macroeconomic perspective, considering the consumption multiplier effect (about 1.5), this could drive GDP growth by about 1.2 trillion yuan. Calculating with a 2025 GDP growth of 5%, corresponding to a GDP increase of about 6.7 trillion yuan, this measure could contribute about 1+ trillion yuan to that increase. Among various stimulus policy measures, rural pension reform should be among the most effective in driving economic growth, playing a key role in stabilizing economic growth.

Overall, what we face today is an economic growth mode transformation issue, shifting from an economy primarily driven by investment and exports to one primarily driven by innovation and consumption. The shortcoming of consumption's structural deviation is a major challenge, but if solved well, it can be transformed into an important opportunity, providing new growth momentum possibly not inferior to what real estate once provided, thereby supporting China's sustained and stable medium-speed growth.