Social Security Reform in Transitional China

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Social Security Reformin Transitional China

• Mary OConnell
• March 3, 2005

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• Governmental expenditures on Social Security
  provide an important measure of social
  progressbecause social welfare programs must
  compete with other sectors for funds and for
  their share of finite national revenues, such
  expenditures can reveal the extent of a
  governments commitment to general welfare and
  the satisfaction of human needs.
• Goal of economic development social well-being
  of the people economics and social aspirations
  go hand in hand.
• Should be a feature of all developed economies.
  

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• 60.8 billion yuan (7.3 billion U.S. dollars)
  was spent on living expenses and old-age pensions
  alone, an increase of more than 13 from only the
  previous year. This figure totaled more than 23
  of Chinas GDP in 2003yet reached a far lesser
  percentage of the population.
• (Peoples Daily Online, March 6, 2004)

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Defining Social Security

• Very elusive concept hard to define precisely
• Program financed by government, employer, and
  employee payments
• Objective promote social well-being, especially
  for non-workers and the economically
  disadvantaged prevent social decline

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SS generally includes contingencies such as

• Medical care
• Sickness
• Maternity care
• Maintenance of children
• Inadequate housing
• Injury at workplace
• Social protection
• of all people

• Occupational hazards/diseases
• Unemployment
• Old age retirement
• Invalidity
• Death

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The Development of SS in China

• Poverty, unemployment products of a capitalist
  society that could not exist in China thus no
  provision to serve the needs of citizens of any
  sort were crafted little or no regard for
  retired workers
• ? responsibility for retired workers fell on
  families
• Peoples Republic of China (PRC) founded in 1949
  formal system of income security and social
  insurance established by the government
• Communist ideals focus on labor rather than
  social aspects
• Labor Insurance 1951 focus on workers
• enterprises continued to pay their employees
  their pre retirement salaries after they reached
  retirement age and stopped working. If making
  payments to retired employees resulted in a net
  loss to firms, the central government absorbed
  the cost.

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• February 1951 Labor Insurance Regulations,
  document on labor insurance ? Labor Insurance
  regulation
• Coverage includes workers staff in
  state-operated and joint state-privately
  operated
• factories and mines
• railway construction
• navigation operations
• Postal and telecommunications organizations
• Government Employees
• Regulation varies occasionally, coverage expanded
  with growing economy, but basic principles stay
  the same
• Regulations stressed the welfare of state-run
  enterprise workers, the backbone of Communism

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PAYGO v. Investment

• PAYGO (Pay as you go) current retirement
  benefits funded by current employees.
• Problems
• coverage of the traditional social security
  system was limited mostly to state-owned units
  (very little rural coverage inadequate urban
  coverage)
• enterprises were required to contribute 3 of
  gross payroll to social insurance, with another
  3 for social welfare, while employees
  contributed nothing. Given the accounting system
  for these enterprises, the expenses of social
  security were effectively paid by the government
• no accumulation of funds
• Link to work other people in need of relief
  excluded
• administrative costs ? social waste, distraction
  of employers from production

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• PAYGO positive real rate of return equal to the
  sum of population and productivity growth in an
  economy with no capital stock (Paul
  Samuelson,1958)
• Investment rate of return on capital stock and
  the rate of real wage growth ? lower long-run
  cost than with a PAYGO system provide the same
  level of benefits

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Big Reform!

• Circular on deepening reform of pension
  insurance system for enterprises employees
  March 1995 initiated a transition from PAYGO to
  partial accumulation of funds and introduced the
  practice of individual contributions for pension.
  
• Employees receive benefits equal to 25 of the
  regional average wage after 40 years of work
• Payroll tax 9 of wages
• Employees contribute 10 of wages into individual
  accounts managed by their municipality or
  province
• 80 of funds accumulated in this system are to be
  invested in government bonds, leaving 20 in bank
  deposits. In practice, however, some funds are
  diverted into investments into local projects in
  pursuit of higher returns

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Results of Combined SS System

• Real returns on government bonds and bank
  deposits have been staggeringly low or even
  negative
• SS coverage still very limited (Not all urban
  enterprises are covered, and the urban-rural
  divide is still significant only 2 of the
  countryside is covered by the new social security
  provisions expenditures on social security of
  farmers who account for 70 of the total
  population only accounts for 11 of total social
  security expenditures)
• System NOT financially sound due to the current
  imbalance of reduced birth rates, the aging
  nature of the population, and the expansion of
  benefits
• not all employees are contributing to the system
  a devastatingly low 1.8 made contributions in
  1999

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Results of Combined SS System

• Yet transformation still beneficial successful
  shift from PAYGO to a funded, investment-based
  system would
• Reduce the long-term cost of providing benefits
• Lower future taxes
• More efficient capital market would be developed
• Management and privatization of currently
  state-owned enterprises would be facilitated

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Results of Combined SS System

• Chinas social security transformations under the
  pressures of marketization, modernization,
  globalization, and an ageing population have
  been immense. In the future, the objective of
  reforms should be to continue to increase the
  scope of social insurance to establish and
  enforce a more equitable system of contributions
  by the state, enterprises, and individuals. The
  system should be fortified to guarantee basic
  living standards of the worker, and strengthen
  the link between social insurance and labor.
  Simultaneously, measures should be taken to
  continue expanding coverage equally and
  adequately to both urban and rural areas.

Social Security in China