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Will the House for Pension Scheme Succeed?
 NO. 25 JUNE 23, 2016

(Li Shigong)

China is now home to more than 200 million people above the age of 60. Generally, the elderly are either supported by their children or live on pensions. In recent years, a new idea for senior care, the house for pension scheme, has become a hot topic. This option was officially proposed by the Central Government in September 2013 and comes at a time when China's social safety net is not strong enough to ensure decent living standards for all senior citizens.

According to this scheme, an elderly person signs over ownership of his or her house or apartment to a bank or insurance company in return for a monthly payment for the rest of his or her life as well as the right to continue living there until death. This person can meanwhile collect a pension, and the combination of the two sums may provide for a more comfortable lifestyle.

However, two years after this scheme was pushed forward in four pilot cities, the policy has not been shown to be popular, with only 78 people participating. As a result, debates on this scheme have heated up after the figure was released in late May. Traditional concepts such as the transfer of property to one's children after death formulate major hurdles for the scheme's success. Moreover, deficiencies in the plan and a volatile property market have also contributed to its lackluster reception.

An unattractive policy

Dong Fang (Henan Economic Daily): Why has the house for pension policy failed to gain traction? This can mostly be attributed to a staunch adherence to traditional concepts by the elderly.

For most Chinese, houses are their most valuable property, so they are very cautious when dealing with such assets. They tend to hand down houses to their children due to traditional norms. However, the house for pension scheme seems to encourage homeowners to use their houses for investment instead, exposing them to unknown risks. Who dares to place bets on their own home? How can you expect people to develop an interest in such a risky scheme?

There is another big reason for the policy's setback: It only targets homeowners in cities, but neglects the vast majority of seniors in rural areas, where housing prices are not as high as in cities. Even if the latter have an interest in this scheme, it may not be of much help.

Ma Da (Henan Economic Daily): The house for pension scheme is ultimately a type of trade. Since it's a trade, the elderly, as investors, look for investment returns. What are the returns at this stage?

According to current regulations, an apartment worth 1 million yuan ($152,000) as evaluated by insurance companies, will bring a man aged above 60 around 2,514 yuan ($381) per month, while the return for a woman is only 2,082 yuan ($316) a month. The difference in monthly payment is derived from the assumption that females tend to live longer than males.

However, if the senior man or woman were to sell the house to live in a rented home, he or she could get a sum of 1 million yuan.

When the money is used to buy bonds or other financial products with fixed yields, after rent is deducted, the return is roughly equivalent to the yield under a house for pension scheme. More importantly, they can leave 1 million yuan to their offspring.

This is the comparison of the two possible ways that China's elderly can trade their houses, which explains why the house for pension policy is unattractive.

Mei Lian ( The house for pension policy is creating a dilemma. This policy has so far failed to some extent due to the lack of interest on the part of insurance companies. No one can predict the future of the property price trend—both the companies and the elderly will take risks if they choose this system. If housing prices begin to surge, these elderly people will feel that they have lost money, while if the prices drop, the companies will see their business suffer losses. Hesitation on both sides has made this policy unattractive.

Another factor for the current failure of this policy is the underdevelopment of China's social security system. The responsibility for supporting the elderly should be shouldered by the government, but now this ball has been kicked toward individuals and companies—neither are well prepared to do so.

Improvements needed

Zhu Yonghua ( The house for pension scheme is designed to benefit the elderly, but it has been found to be potentially risky for both policy holders and insurance companies.

Property prices in China have kept rising in the past decade. However, risks in the property market remain unpredictable. On one hand, unsold apartments are accumulating in large amounts in cities across the country, causing great pressure to destock inventories. On the other hand, the government's fervor for land revenues hardly seems to be cooling down, as reflected in a series of stimulus packages that boost the real estate market, causing a surge in housing prices.

People are hesitant to face such a volatile market. The implementation of the house for pension scheme is based on a stable property market, but the market in China is highly unpredictable.

Since clients often find it difficult to claim payments from insurance companies in China, most people believe that insurance products are always designed in a way favorable to insurance companies so that the companies can maximize their profit margins. In their opinion, when encountering market risks, policy holders, who are usually in a disadvantageous situation, will find themselves unable to argue with those companies. There is a general lack of confidence in insurance products.

The house for pension scheme is a "financial product" that will be traded in the market when support for the elderly is commercialized in the future. Meanwhile, it is closely linked to the stability of relevant pension policies. After years of debate on pension gaps and the delay of the retirement age, no one really knows how the government is planning to carry on with the pension issue. Some believe that the government is partly shirking its responsibility to take care of the elderly by introducing the scheme.

Obviously, the house for pension scheme at the present stage is not so welcome, but that does not mean there is no future for it. After all, this scheme is in itself a beneficial program—China's society is just not ready for it yet. When the overall environment is stable, it will be able to play a larger role in securing people's twilight years.

An Ning (Securities Daily): The house for pension scheme, also known as a reverse mortgage, is a common model used to support the elderly throughout the world. It originated in the Netherlands and was further developed in the United States. More than 20 countries have now adopted this model. This scheme is an important supplement to China's current pension system and also an opportunity for the elderly to attain larger incomes.

Why has this model been received so coldly in China? Deep-rooted traditional mentalities are partly to blame, such as the idea of transferring one's house to one's children as a legacy. Besides, there are some defects in the house for pension scheme. Nevertheless, it's also true that there is still demand for this style of support for the elderly, particularly for those who don't have children. The key now is to redesign and improve the scheme so that senior citizens can accept it while, at the same time, insurance companies can operate it profitably.

Copyedited by Bryan Michael Galvan  

Comments to yanwei@bjreview

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