Reuters has an article by Aileen Wang and Koh Gui Quing called Analysis: China Slides Faster into Pension Black Hole. The problem facing China in terms of pension obligations will have an impact on the US as well. The authors write:
Policy makers and economists have long been worried about the financial burden of China’s expanding patchwork of pension schemes, but those concerns have recently escalated as its rural pension scheme took off in the past three years.
The funding shortage is daunting: economists say it could blow out to a whopping $10.8 trillion in the next 20 years from $2.6 trillion in 2010, towering over China’s $3 trillion onshore savings, the biggest hoard of domestic savings in the world.
This is bad news for the US. The federal government has been able to incur trillions of dollars in additional debt over the past four years at very low rates for two reasons: (1) the willingness of high-saving countries like China to finance the debt; and (2) the Federal Reserve’s readiness to purchase government securities.
In a recent report by the Congressional Budget Office (CBO), outlays for Social Security will exceed revenues by ten percent over the next decade and reach twenty percent by 2030. Under current conditions, Social Security will exhaust its “trust fund” in 2038.
The US can’t expect to continue to borrow trillions of dollars at near zero interest rates. If this article is true about the $10.8 trillion shortfall, it means China will need to start to look inward, using its vast savings to cover the retirements of its own citizens. If this happens, interest rates in the US will need to increase substantially in order to attract the financing needed to cover the government’s shortfall—adding tens of billions of dollars each year in interest payments. Nor can the Fed continue to finance the debt without severely downgrading the value of the dollar and sparking large increases in inflation.
Thus, it is more imperative than ever for the US to reform today both Social Security and private pension plans.