Incentive Problems in China’s New Rural Pension Program

China’s new rural pension program (NRPP), a fully funded defined contribution plan among the rural residents with heavy government subsidy toward contributions, has expanded rapidly since its introduction in 2009, and is expected to achieve universal coverage by the end of 2012. Empirical evidence, however, shows that although those close to pension eligibility age are enthusiastic, take-up rate is low among younger people, and participants tend to choose plans with the least contribution requirements, threatening the long-term viability of the program. We calculate the net benefits of participation on behalf of rural residents and demonstrate that poor designs are responsible for these problems. A proper rate of return on individual investment is not only essential for encouraging participation and ensuring a higher replacement rate but will also require less government subsidy and relieve fiscal burdens on the government.