Strengthening Social Security System in China
Introduction
Alongside with the significant economic performances in the last 15 years, major progress has been made in the development of social security system in China. In 2006, the Chinese government set the goal of achieving “universal social security coverage” in 2020. With the fast expansion of coverage in recent years, China already has the world’s largest social security system in terms of the covered population. At the same time, the modern social security system in China, with a history of only 30 35 years, is also faced with major challenges such as demographic change, fast urbanization, and increasing expectation of the people and most recently emergence of the “new normal” economic situation.
As a productive factor, social protection can promote productive employment and inclusive growth, improve productivity and aggregated demand, and stabilize labour market and the economy. This chapter will discuss the role of social security in the labour market, the progresses and the challenges. Given the limited space of the report, this chapter will review only the old-age pension, health care and unemployment insurance schemes. Based on an assessment of the progresses and challenges, suggestions will be put forward on the development of the social security system in the 13th five-year period and the time beyond.
1. Policy: Why does social protection matter to productive employment creation?
1.1 Interaction between social protection and labour market
As illustrated by the Universal Human Rights Declaration (article 22), 1948 and a number of relevant ILO standards, social security is one of fundamental rights for all member of a society. It provides for the protection and income security in case of events occurring along the life, e.g. maternity, unemployment, illness, working injury, old age and loss of the family breadwinner, invalidity, and family responsibilities such as childcare.
Social protection is not only a human rights’ component. It plays a major role in creating access to full and productive employment and decent work for all through cash transfers, active labour market measures, health insurance, and family support policies. Effects of these measures in encouraging labour market participation have been witnessed in low- and middle-income countries[1]. Income support and various kinds of social services could promote people’s ability to seek for jobs and get recovery from ill health or other losses, thus improving their employment statusemployability. The effects of enhancing better access to food and nutrition, education and health care contribute to fostering a more productive and more readily employable workforce, leading to higher labour market participation rates and higher productivity. It preserves and promotes human capital and hence enhances the functioning of the labour market. A well-developed social security system, with easily transferrable benefits, can contribute to the development of a fully integrated labour market.
Social protection, as a productive factor and an automatic stabilizer, also plays a key role in boosting domestic demand, stabilizing aggregate consumption, and driving the economic growth. The counter-cyclical function of social protection can help to smooth consumption in economic downturns. Social protection plays a supportive role to the structural transformation of national economies. This is because the increased consumption, as a result of the social protection measures, will boost growth and contribute to the economic restructuring, which will be eventually reflected in the adjustment of the employment structure and transfer of workers to the tertiary industry.
A better understanding of the interactions between labour market and social protection is crucial for the analysis of any social security system and the design of related public policies. Social security programmes are based on labour market conditions and interact with employment policies. Factors of labour market, such as the informality of employment, minimum wage, the job security regulation and flexibility of employment policies, could have major implications on the design of social security systems. To develop a social security system which shall contribute to reducing poverty and vulnerability, promoting decent work, and fostering inclusive and sustainable growth, it is important to fully integrate and combine the social security policies with the fiscal, wage, employment, and skills policies.
1.2 Challenges from the changing labour market
In the transition from planning economy to market economy in the last three decades, the labour market in China went through fundamental changes. The trajectory of the development of the social security system reflects the changes of the labour market in different periods. In fact, the establishment enactment of the social insurance schemes was intended to accompany major economic reform process, characterised by decreasing importance of SOEs and replacement of comprehensive employers’ liability towards workers and their families by collectively financed mechanisms. Social insurance was also expected to for the purpose of supporting the large number of workers that might be laid off by State Owned Enterprises (SOEs) in the early phase of market-oriented reforms in 1990s. As one of the measures to facilitate SOEs’ reform, the social insurance schemes introduced at that time were largely marked with “SOEs” features, covering mainly urban workers in SOEs and collectively-owned enterprises.
With the shift of urban employment from SOEs to private enterprises and self-employment since mid-1990s, the challenge of providing social protection for workers in private enterprises and self-employment became prominent in early 2000s. The government made major efforts to extend the social protection coverage. The adoption of the Labour Contract Law in 2008 and the Social Insurance Law in 2009 has expedited this process, as shown in the increasing proportion of the private sector workers in the covered population of the Pension Scheme for Urban Workers. In 2012, the proportion of employees of SMEs and the self-employed surpassed 50% of all the participants of the Pension Scheme for Urban Workers[2].
Figure 1: Structure of participants of the Pension Scheme for Urban Workers in 2012
Source: Zheng Bingwen, China Pension Report (2011, 2012 and 2013), Economy & Management Publishing House.
2. Assessment of social security systems
2.1 A brief history of social security evolution in China
China began continued to develop its modern social security system after adoption of the “reform and opening up” policy in the early 1980s. Prior to 1990, the actual operation of social security programmes was principally the responsibility of the enterprise. In early 1990s, to support the jobless workers laid off by unprofitable SOEs, five kinds of social insurance schemes including pension, health care, unemployment, work injury and maternity were gradually set up. These five social insurances, combined with a dozen of social assistance programmes developed in rural and urban areas, constitute the social security framework in China. In 1990s, these programmes mainly covered urban workers in SOEs and the collectively-owned enterprises. In later years, the schemes were gradually extended to cover urban workers in the private economy, including those in informal sectors, flexible employment and self-employment.
With the arrival of the 21st century, the pace of social security development gained momentum. In order to build a nation-wide social security system, the central government launched a pilot reform for urban social insurance system, starting in Liaoning Province in 2001. In 2003，New Rural Cooperative Medical Insurance was created to cover rural residents. In 2006, the goal of “Universal coverage for urban and rural residents by 2020” was put forward by the central government, and reaffirmed at the 17th National Congress of the Communist Party of China (CPC) in 2007. Following that, major progress has been made with the extension of coverage of pension schemes. In 2009 and 2010, the new rural pension programme and urban resident pension scheme were launched, providing pensions for the non-wage earner residents. A social-insurance type pension programme for employees of public institutions was launched in five pilot provinces in 2009. The Social Insurance Law, coming into force in 2010, was a milestone of the development of the social security system in China. In 2012, the government announced the realization of the goal of “institutional universal coverage” (universal legal coverage). In 2014, the originally separated pension schemes for urban residents and rural residents were merged together. In January 2015, the State Council released the decision to establish the pension plan for civil servants and employees of public institutions.
2.2 Assessment on public pension systems
In 2009, less than 240 million people in China, including both the insured and the pensioners, had old age pension. At the end of 2013, 820 million people were covered by the old age pension scheme. This number has increased by 2.4 times in only four years. Currently, China’s public old-age pension system consists of the following three schemes:
The Pension Scheme for Urban Workers, as shown in its name, target the urban workerssalaried employees. The self-employed and flexibly employed are also encouraged to participate in this scheme. The contribution structure is composed of two parts: a PAYG-DB plan of 20% of the payroll (in most areas) financed by employers into the social pooling fund and a funded defined-contribution (FDC) plan of 8% of the wage contributed by employees to their individual accounts. Upon retirement, covered workers receive monthly benefits derived from both parts of this scheme. The average monthly pension for urban workers has increased from 700 yuan in 2005 to 1900 yuan in 2013 (as show in Figure 2). The Ministry of Human Resources and Social Security (MOHRSS) supervises the system, while local agencies in provinces are responsible for collection of contributions, benefit payments and fund administration. Figure 3 shows the trend of average replacement rate of the Pension Scheme for Urban Workers. The calculation is based on data of MOHRSS and NBS on the average monthly pension and the average wage of employed persons in urban units.
Figure 2: Growth of the average pension for Urban Workers
Source: updated based on the data from Annual Report on Chinese Labour and Social Security Industry (2014) p.132
Figure 3: Average replacement rate of urban worker pension system from 2004-2013 (%)
Source: Author’s calculation based on data from MOHRSS and NBS （2004-2013）
The Pension Scheme for Rural and Urban Residents covers residents who are outside of the Pension Scheme for Urban Workers. This scheme has two components: a basic pension financed by local and central government[3] and a personal account for contribution from enrolled individuals. A flat-rate basic pension of 70 Yuan per month is the minimum benefit. In terms of the annual contribution to the personal account, participating residents select one of 12 contribution levels ranging from 100-2000 Yuan. Local governments are required to subsidize no less than 30 yuan per year for the individual contribution. For the very poor groups including the disabled, local governments subsidize part or the whole of the bottom level of individual contribution. The average pension for urban and rural residents was 81 yuan/ month in 2013[4], which is about 11% of the per capita net income of rural households[5]. Currently, county social security agencies are responsible for setting up the personal accounts, managing the local pension funds, and paying the benefits to retirees.
In addition to these two major schemes, there is the pension scheme for civil servants and employees of public institutions. Traditionally, the pensions of civil servants and employees of public institutions are regarded as “final salary” after retirement, with generous benefit provisions financed entirely by public revenue. At the beginning of 2015, the State Council released the decision to establish the pension scheme for civil servants and employees of public institutions that are managed according to the Civil Servants Law. The contribution structure is the same as the Pension Scheme for Urban Workers: 20% from the payroll and 8% of the wage from employees. The method of benefits payment is also similar to the principles of the Pension Scheme for Urban Workers. The annuity fund for the civil servants and the employees of public institutions will be established as a supplementary pension scheme. The contribution plan is 8% from the payroll and 4% from individuals.
Apart from these social pension schemes, social assistance programmes play an important role in reducing poverty among the poor elderly. The Minimum Living Subsidy Scheme (Dibao), established in 1999, provides regular cash and/or in-kind support to poor households up to a locally defined poverty line which is based on a means test. The funding of urban Dibao is shared by both central and local government[6]. Wubao Programme is a social assistance programme introduced in 1950s for Wubao households, which mainly refer to the elderly, disabled and juveniles in rural areas who have no ability to work, no source of income, and no one to depend on. By the end of 2013, the Dibao programme covered 10.97 million households/20.64 million people in urban areas and 29.31 million households/53.88 million people in rural areas. In 2013, the average minimum living standard was 273 yuan/person/month in urban areas and 2434 yuan/person/year in rural areas, while the average monthly subsidy rate was 264 yuan/person in urban areas and 116 yuan/person in rural areas. In the same period, the Wubao Programmme covered 5.37 million people. The average annual subsidies under the Wubao Programme were 4685 yuan/person for the Wubao beneficiaries supported by the care centres and 3499 yuan/person for those supported by the village councils.[7]
Table 1 Three public pension programmes in China
Plans / Pension Scheme for Urban Workers / Pension scheme for civil servants and employees of public institutions / Pension Scheme for Rural and Urban ResidentsMandatory/ voluntary / Mandatory / Mandatory / Voluntary
Covered population / Urban employees / Public employees / Urban & rural, non-wage
Administration / Local MOHRSS / MOHRSS, Ministry of Finance / County government
Finance / I – PAYG / II –Unfunded IA / I – PAYG / II – UnfunedUnfunded IA / I – PAYG / II – Funded IA
Contribution / Employer: 20% of salary / Employee: 8% of salary[8] / Employer: 20% of salary / Employee: 8% of salary / Central and local government / Members can choose any of 12 different contribution levels (in units of RMB100) between RMB100 and RMB2000/year
Benefit / DB: linked to social wage of local provinces and individual contributory wages [9] / DC[10] / DB: linked to social wage of local provinces and individual contributory wages / DC[11] / Flat DB: minimum 55 yuan[12] / DC[13]
Eligibility / At least 15 years of contributions (60 for men, 55 for women in white-collar jobs, and 50 for women in blue-collar jobs) / At least 15 years of contributions (60 for men, 55 for women in public sectors) / 15 years of contribution at age of 60[14].
On the basis of the major progress achieved, the following issues are to be addressed in the future: