Today retired life is referred to ¡°a new period in life without the exigence to work¡±, while the most essential condition for guaranteeing this ¡°new period¡± is that a sum of adequate income will be provided on retirement. According to a popular opinion at present, old-age security system in China is built upon three pillars: of basic pension, occupational annuity and individual savings. [i] It is generally accepted that only if the overall income after retirement reaches above 70 percent of the level before retirement a stable and comfortable lifestyle, both before and after being a pensionary. In comparison with the current income status of retirees in China, the substitution rate of the basic pension is diminishing year by year. For middle-aged personnel in most enterprises, basic pension may reach a substitution rate of about 50 percent while for new employees basic pension may only reach an ultimate substitution rate of approximately 35 percent. As a result, employees of Chinese enterprises cannot just rely on payments through basic pension to guarantee leisure when being pensioned off. Thus it is very essential to build other forms of pension fund reserves. How shall an enterprise and its employees handle occupational annuity, the second out of three pillars?

Occupational annuity, just as its name implies, is an annuity built by an enterprise for its employees during their working period. The purpose thereof is to provide a sum of considerable income for employees after retirement. This article will make a comparative cost-benefit analysis of company pension as an institutional arrangement so as to reveal the significance of establishing such an employee retaining program betimes.

Units affected and involved in operating EA are divided into three classes: enterprise, employees and society.

1. Costs and benefits of an enterprise

As most important part the establishing enterprise is to be mentioned. An enterprise, paying various wage compensations for its employees during their working period, shall also assume a part of retirement security, according to the government. Therefore, if the EA plan is built, one item of enterprise contribution will be added to the labor cost on an original basis. In consideration of the prevailing tax allowance policy, the following example calculates the effect of occupational annuity contribution on an enterprise¡¯s current costs and profits. In the following you¡¯lll find an example calculation based on the occupational annuity tax policies in Beijing.

An enterprise¡¯s annual income reaches 10 million RMB, pretax deductible cost amounts to 6 million RMB and the gross profit is 4 million RMB.
¡¡¡¡The income tax = 400¡Á33% = RMB1.32 million
¡¡¡¡The net profit = 400£­132=RMB2.68 million

The enterprise plans to establish annuity and decides that enterprise contribution is defined as 4 percent of the gross payroll of last year. Suppose that the human costs account for 50 percent of the total costs and gross payroll of last year was 3 million RMB. Then,
the enterprises¡¯ contribution to occupational annuity = 300¡Á4% = RMB120,000

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[i]Including individual bank deposits, housing, life insurance, intergeneration transfer and any other type of individual-centered income sources