BEIJING (REUTERS) - China will merge its pension plans for rural and urban residents, the government said on Friday, a change that encourages labour mobility but does not address other deeper problems in the system.

The change will improve social security, allow workers to move around the country for the best job prospects, and buoy domestic consumption in the long run, the government said in a statement after a cabinet meeting.

But the reform does not tackle bigger challenges plaguing China's pension system, such as unequal payouts that have bred resentment, and a funding shortage that some economists say will be as big as 68 trillion yuan (S$14.2 trillion) by 2033.

China's highly fragmented pension system was previously loosely divided into four categories: for civil servants and state officials, for workers in the private sector, for non-employed urban residents and for rural residents.

The number of people covered in the last two categories, which offer only basic payouts, has risen quickly in recent years as China tries to strengthen its social safety net.

After 30 years of scorching double-digit economic growth that devastated its environment, China wants to overhaul its growth strategy by replacing polluting investment with consumption.

Economists say key to that goal is improving social protection so that consumers are encouraged to spend more without worrying about unaffordable retirement and healthcare costs.