BEIJING - The State Council, China's cabinet, has announced the integration of rural and urban pensions as part of efforts to unify the varied pension systems across the country.

The audacious reform step, taken on the first work day after the annual Spring Festival in February, was lauded by foreign observers and media as a measure conducive to realizing social equality in China and a crucial step in its comprehensive social reforms.

As the State Council explained, the new policy would facilitate the free flow of people, boost the sense of social security, stabilize people's expectation of life improvement, promote consumption, and encourage innovation and business start-ups.

Yao Shujie, professor and head of the School of Contemporary Chinese Studies at the University of Nottingham, said: "The new Chinese government eyes a major breakthrough in urban-rural integration. Developing a unified pension system would help the new leadership to eliminate major obstacles in the urban and rural integration process."

Under the half-century-long urban-rural dual structure, rural residents' access to basic public resources and benefits had lagged far behind urban residents, which had become a bottleneck for China's sustained economic growth, hindering the free flow of human resources as well as the optimal allocation of resources in urban-rural areas, Yao said.

The World Bank estimates two thirds of Chinese will live in cities by 2030, meaning about 400 million of the agricultural population will move to urban areas in less than 20 years.

The migration process will create huge demand in investment and consumption, becoming a driving force for China's future economic growth.

Andrey Ostrovsky, deputy director of the Institute of Far Eastern Studies at the Russian Academy of Sciences, said the social insurance system on the one hand was a quite costly exercise requiring big capital investment, while on the other hand, it could greatly expand the consumer market.

"Today, one of the main directions of the development of the Chinese economy is to expand domestic consumption. If we look at the Chinese domestic consumer market, we will find that two thirds of the market are urban residents and one third are rural residents," he said.

In rural areas, people prefer to save money for their old age; therefore, a social insurance system with full coverage could release peasants' purchasing potentials, he said.

In 2013, consumption contributed some 50 percent to the growth of the Chinese economy, a little bit lower than the 54.4 percent contribution of investment.

While supportive, foreign observers also recognize the challenges that China will confront on its way to reforming the pension system.

The Chinese system consists of at least four different pension programs, according to a report by Paulson Institute, a Chicago think tank that focuses on China.

In fact, the multi-layer Chinese pension system covers civil servants, public institution staff, urban employers, urban residents and rural residents but with varied treatment.

China's ultimate target is to establish an integrated pension system that is impartial to where people live or work.

One of the challenges ahead is the big proportion of aged. The number of Chinese older than 60 neared 200 million in 2012. It is expected to top 240 million by 2020.

Wang Qinwei, a Chinese economist working for Capital Economics, said the recent policy was another discretionary step toward reducing the distortion in the country's social security system caused by the household registration system.

Yet much more needed to be done. For example, the regional difference was still big, as fiscal transfer to the scheme partly depended on the fiscal situation of local governments. Meanwhile, migrants might still face difficulties transferring their pension income between regions, Wang said.

The success of the US pension system may serve as a model for China.

For starters, the American pension system has three pillars, namely personal savings, pensions from enterprises and social security funds, which clearly shows the new pension system should not solely rely on the government but the concerted effort of individuals, business and government.

Second, China could draw useful lessons on management of the system from the integrated management model of the United States, which dates back to former president Franklin Roosevelt.

And third, in terms of maintenance and increase in value of old-age pensions, the approach adopted by the United States to make use of market forces can also be drawn on by China. The latest decision of the State Council to integrate the urban and rural endowment insurance systems in China means a giant step toward eliminating the outdated dual urban-rural endowment pension insurance structure, which has been in existence in China for decades. Such a dual urban-rural endowment pension insurance structure has exerted considerable pressure on central government and local government finances. Therefore, how to maintain and even increase the value of endowment pensions will be a totally new and hard nut for China to crack in the future.