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Social Security in China: Government White Paper

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Page 1: Social Security in China: Government White Paper

P O P U L A T I O N A N D D E V E L O P M E N T R E V I E W 3 1 ( 1 ) ( M A R C H 2 0 0 5 ) 185

DOCUMENTS

Social Security inChina: GovernmentWhite Paper

The largest financial problem faced by many aging societies is how to support their older,retired members. That support was once wholly a matter for individual families, with per-haps a minimal safety net offered by charitable institutions. Increasingly, in the usual courseof economic development, the requisite transfers become a responsibility of the state—financedeither through tax revenues or by pensions offered by (or required of) employers. The combi-nation of lengthening life expectancy at later ages and falling fertility, however, makes thosetransfers ever more onerous as fewer workers are expected to support greater numbers ofretirees. The situation is often likened to the approaching collapse of a Ponzi scheme. Notsurprisingly, governments see an attractive solution in what is in effect a reprivatization ofresponsibility—not back to the family but right to the individual, through a system of indi-vidual retirement accounts (albeit with considerable state supervision). The financial trans-fers—savings and later dissavings—then take place over each person’s life cycle.

Establishing a social security system—through pay-as-you-go transfers, individual re-tirement accounts, or some combination of the two—is a major institution-building and ad-ministrative task for a developing country, the more so in the context of rapid populationaging. China is certainly a case of rapid aging, with the proportion of the population overage 60 projected to rise from 10 percent in 2000 to 20 percent by 2025 and 30 percent by2050. The document excerpted below, a 2004 White Paper issued by the government of China,describes China’s current social insurance provisions and the proposed expansion of cover-age (beyond government employees and the urban formal sector) over coming years. In ur-ban areas, it envisages pension coverage of “all eligible employees,” with an increasing em-phasis on personal accounts. (Not mentioned is the situation of the large “floating population”of informal rural-to-urban migrants.) In rural areas, reliance on family support perforcecontinues: in 2003, only 2 million farmers are reported as drawing old-age pensions. A safety-net provision for the destitute elderly with no family provides for another 2.5 million. Thedocument mentions various experimental schemes in rural areas. One, for medical insur-ance, covers 95 million residents; another offers an annual “reward” to those over 60 whohave only one child (or two girls).

The excerpts comprise sections I (Old-age Insurance) and X (Social Security in RuralAreas) and the Conclusion of the White Paper, China’s Social Security and Its Policy, is-sued by the Information Office of the State Council, Beijing, September 2004.

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186 D O C U M E N T S

Old-age insurance

China is now an aging society. As the agingof the population quickens, the number ofelderly people is becoming very large. Thistrend will reach its peak in the 2030s. Toguarantee the basic living standards of theelderly and safeguard their legitimate rightsand interests, the Chinese government hascontinuously improved the old-age insurancesystem and reformed the fund-raising modein an attempt to establish a multi-level old-age insurance system marked by sustainabledevelopment.

Promoting the development of abasic old-age insurance system foremployees in urban areas

Reforming the basic old-age insurance system forenterprise employees in urban areas. In 1997, theChinese government unified the basic old-ageinsurance system for enterprise employees inurban areas across the country by implement-ing a social-pool-plus-personal-accountsscheme. Enterprise employees who havereached retirement age as provided by law (60for male employees, 55 for female cadres and50 for female workers) and who have paidtheir share of the premiums for 15 years ormore shall be entitled to collect a basic old-age pension every month after retirement. Thebasic old-age pension consists of two parts:base pension and pension from personal ac-count. The monthly sum of the base pensionis tantamount to about 20 percent of anemployee’s average monthly wage in that areain the previous year. The monthly pensionsum from the personal account is 1/120 of thetotal accumulated sum in the personal account(11 percent of an employee’s wage being de-posited every month in the pension section).The state adjusts the level of the basic old-agepension with reference to the price index ofliving expenses for urban residents and em-ployees’ pay increases. In 2003, the monthlybasic pension for enterprise retirees coveredby the basic old-age insurance scheme was 621yuan on average.

Expanding the coverage of basic old-age in-surance. Initially, China’s basic old-age insur-ance covered only state-owned enterprisesand collectively-owned enterprises in urban

areas and their employees. In 1999, this cov-erage was expanded to include foreign-in-vested enterprises, private enterprises andother types of enterprises in urban areas, aswell as their employees. All provinces, au-tonomous regions and municipalities directlyunder the Central Government can makeprovisions to include persons engaged in in-dividual businesses of industry or commercein the basic old-age insurance in accordancewith the specific conditions in their localities.In 2002 China expanded its basic old-age in-surance coverage to all those who were em-ployed in a flexible manner in urban areas.In 2003, the number of people participatingin the basic old-age insurance scheme acrossChina reached 155.06 million, 116.46 mil-lion of whom were employees.

Undertaking experimental reforms in selectedareas to improve the basic old-age insurance sys-tem. In 2001, the Chinese government beganto carry out pilot projects along this line. Thereform includes: gradually establishing per-sonal accounts so that funds can be accumu-lated, and probing ways of preserving and in-creasing the value of the funds; changing theway the base pension is calculated and paid,whereby the amount of base pension is moreclosely linked to the length of time of theemployee’s premium payment, and if an em-ployee has participated in the basic old-ageinsurance program and paid the premiums for15 years, he or she will be entitled to a higherrate of pension for every additional year ofpayment; unifying the procedures of premiumpayment by those who are employed in a flex-ible manner, whereby the base of their pre-mium payment is uniformly set at 20 percentof the average wage of local employees. Thepilot project was first conducted in LiaoningProvince, and has been expanded to Jilin andHeilongjiang provinces in 2004.

Probing the reform of the retirement systemof government agencies and public institutions. InChina the retirement and pension system ingovernment agencies and public institutionsis different from that applied in enterprises.In 2003, there were 670,000 retirees who hadjoined the revolutionary ranks before Octo-ber 1949 and 9,310,000 other retirees fromthese agencies and institutions. In the 1990s,some localities in China began to probe theprocedures of reforming the retirement sys-

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tem in such agencies and institutions. Pilotprojects were conducted to raise the retire-ment pension funds through the social poolprogram. By the end of 2003, some 11.99million employees and 2.58 million retireeshad participated in such pilot projects.

Raising funds for basicold-age insurance throughmultiple channels

As the aging of the population quickens andthe number of retirees increases steadily, thepressure on the payment of funds for basicold-age insurance is becoming ever greater.In order to make sure that basic pensions arepaid in full and on time, the Chinese gov-ernment is raising such funds through mul-tiple channels.

Practicing joint premium payment by both en-terprises and employees. Generally the premiumspaid by enterprises will not exceed 20 percentof the total wage bill of the enterprise, withthe specific proportion being determined bythe people’s governments of provinces, au-tonomous regions and municipalities directlyunder the Central Government. Individualemployees pay eight percent of their wagesas premiums, whereas self-employed indi-viduals and those who are employed in a flex-ible manner in urban areas pay an amountequal to about 18 percent of the average wagein their locality. In 2003, the basic old-age in-surance premium paid by enterprises nation-wide totaled 259.5 billion yuan.

Increasing the subsidy outlay from the govern-ment financial budget for basic old-age insurancefunds. The state has called upon governmentsat all levels to increase the momentum of re-structuring their financial expenditure andraise their input into social security. In 2003,state budgets at all levels contributed 54.4 bil-lion yuan toward basic old-age insurancefunds, of which 47.4 billion yuan came fromthe central budget.

Establishing a national social security fund.In 2000, the Chinese government decided tocreate a national social security fund. Itssources include: funds acquired from reduc-ing state shareholding, stock ownership as-sets, funds from the central budget, fundsraised by other means approved by the StateCouncil, and investment returns. The na-

tional social security fund is administered bythe National Social Security Fund ExecutiveCouncil, and is operated on market principlesin accordance with the procedures and re-quirements prescribed by the “Interim Mea-sures for the Management of the Investmentof the National Social Security Fund.” Thenational social security fund provides an im-portant financial reserve for the implemen-tation of old-age insurance and other socialsecurity programs. By the end of 2003, it hadaccumulated over 130 billion yuan.

Promoting the socialization ofmanagement and services for old-age insurance

In the past, Chinese enterprises were respon-sible for both the issuance of basic pensionsto their own retirees and the administrationof those retirees. Now, to ensure that all re-tirees receive their basic pensions in full andon time, and lessen the burden of social af-fairs on enterprises, the government is ac-tively practicing the delivery of basic pensionsby social service institutions. At the end of2003, the basic pensions of retirees from en-terprises were all delivered by social serviceinstitutions, and 84.5 percent of those retir-ees were under the administration of suchinstitutions.

In 2003, the Chinese government beganto implement an information-based labor se-curity project, or popularly called “goldensocial security project,” in order to raise theoverall management level of social insuranceand to meet the needs of the floating laborforce to continue with their social insurancecoverage once they change jobs. The goal ofthe project is to realize computer-based net-working of social security information acrossthe country. So far the networking of old-age insurance information between the Cen-tral Government and the provinces has beeninitially effected.

Establishing a multi-level old-ageinsurance system

In recent years, the Chinese government hasmade great efforts to build a multi-level old-age insurance system. In addition to partici-pating in the compulsory basic old-age insur-ance, enterprises with suitable conditions

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may set up annuities for their employees.Both enterprises and individuals will contrib-ute to this annuity, which will be accumu-lated wholly for that specific purpose andmanaged in the form of personal accounts.The enterprise annuity funds will be man-aged and operated in accordance with themarket mechanism. In 2003, nearly sevenmillion people participated in the enterpriseannuity program. In addition, the state alsoencourages personal savings for old age.

The first two decades of the 21st centurywill be a critical period in the developmentof China’s old-age insurance. The state willfurther improve the basic old-age insurancesystem that combines social pool and per-sonal accounts, and gradually consolidate thelatter. Basic old-age insurance will extend tocover all eligible employees in urban areas,and at the provincial level the establishmentand improvement of regulating funds for old-age insurance will be carried out. Social poolat the city level shall be improved and gradu-ally raised to that at the provincial level.

. . .

Social security in rural areas

The majority of the Chinese people live inrural areas, where the economic develop-ment level is comparatively low. In the ruralareas the land, as a means of both produc-tion and livelihood, is owned collectivelywhere the contractual household output-re-lated responsibility system is practiced. Un-der the influence of China’s traditional cul-ture, there is a time-honored tradition ofprovision by the family, security coming fromself-reliance and help from the clan. In ac-cordance with the characteristics of ruralsocio-economic development, the state’s so-cial security measures in rural areas are dif-ferent from those practiced in cities.

Experimenting to establish anold-age insurance system in ruralareas

The old-age security in China’s rural areas iscentered mostly on families. In the 1990s,China began to try out an old-age insurancesystem in some of the rural areas in accor-

dance with the actual level of local socio-eco-nomic development. In light of the principlethat “the premiums are paid mainly by indi-viduals themselves, supplemented by collec-tively pooled subsidies and supported by gov-ernment policies,” an old-age insurancesystem with the accumulation of funds tak-ing the form of personal accounts was estab-lished. By the end of 2003, the work of old-age social insurance had been carried out tovarious extents in the rural areas of 1,870counties (cities, districts). Some 54.28 mil-lion people had underwritten the old-age in-surance program, which had accumulated afund running to 25.9 billion yuan, with 1.98million farmers drawing old-age pension. In2004, the Chinese government began to ex-periment with a system that supports and re-wards households that practice family plan-ning by having only one child or two girls insome of the rural areas. Each person of suchcouple may receive a minimum of 600 yuana year from the age of 60 till the end of hisor her life. This reward will be providedjointly by the central and local governments.

Establishing a new ruralcooperative medical servicesystem

In order to guarantee that farmers’ basicmedical needs are satisfied, to alleviate theirmedical burdens and to address the problemof poverty caused by illness or prevent themfrom getting poor again because of illness, in2002 the Chinese government began to setup a new rural cooperative medical servicesystem based mainly on a financial-pool-against-serious-disease scheme. Farmers canparticipate freely in such a cooperative medi-cal system, which is organized, led and sup-ported by the government with funds com-ing from the government, collectives and thebeneficiaries. At present, the system is beingtried out in 310 counties (cities) in 30 prov-inces, autonomous regions and municipali-ties directly under the Central Government.By June 2004, the system had covered 95.04million rural residents, with 68.99 millionparticipants and 3.02 billion yuan in raisedfunds, of which 1.11 billion yuan was in theform of financial subsidies from local govern-ments at various levels, and 390 million yuan

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was in the form of Central Government sub-sidies to the central and western regions.

Practicing rural social relief

The “five guarantees” system was initiated inChina in the 1950s. In 1994, the State Coun-cil issued the “Regulations Concerning theWork of Providing the ‘Five Guarantees’ inthe Rural Areas.” It stipulates that elderlypeople, disabled people and minors meetingthe following conditions in rural areas canenjoy the “five guarantees” of food, clothing,housing, medicare and burial expenses (com-pulsory education for minors): Those whohave no legal guardian to provide for them,or whose legal guardians are unable to pro-vide for them; those who have no workingability; and those who have no source of in-come. To take care of elderly people in the“five guarantees” category who cannot lookafter themselves alone, homes for the agedhave been built, and have gradually becomea major form of providing the “five guaran-tees” for the elderly. By the end of 2003,there were 2.545 million people covered bythe “five guarantees,” and 24,000 homes forthe aged providing accommodation for503,000 elderly people in this category.

In view of the uneven economic devel-opment and the large disparity in financialconditions between regions, the Chinese gov-ernment encourages areas with adequate ca-pacity to establish a system that guaranteesthe minimum standard of living for rural resi-dents. In other areas, the basic subsistencerelief system covering destitute householdsis practiced under the principle of “govern-ment relief, social mutual help, offspring sup-port and stabilized land policy.” Meanwhile,medical relief is provided for sick farmerswho are in great difficulty. By the end of2003, there were 12.57 million poverty-stricken people in rural China who enjoyedthe minimum living allowance and subsis-tence relief for destitute households.

Conclusion

After years of experiments and practice, a so-cial security framework with Chinese char-acteristics has taken initial shape. However,China still has a long way to go to developits social security services to a satisfactorylevel. The aging of the population will putmore pressure on the old-age pension andmedicare expenditure, while the progress ofurbanization will make the establishment andimprovement of a social security system cov-ering both urban and rural areas more ur-gent. More employees of non-state-ownedbusinesses and people employed in a flexiblemanner will be covered by the social insur-ance system as employment forms becomemore diversified. All this will raise new re-quirements for the smooth operation ofChina’s social security system and for the es-tablishment of a long-term mechanism whichwill ensure the sustainable development ofthe social security services.

To press ahead with the improvement ofthe social security system is an important taskfor the Chinese government in its efforts tobuild a moderately prosperous society in acomprehensive way. The increase in China’soverall economic strength as a result of thesustained, rapid, coordinated and healthydevelopment of China’s national economy,the implementation of the scientific conceptof overall, coordinated and sustainable de-velopment, and a social security systemsuited to China’s national conditions and es-tablished after many years of exploration, willpave the way for China’s social security sys-tem to develop continuously. In the years tocome, the Chinese people will benefit morefrom the nation’s development and progress,and enjoy more plentiful fruits of its mate-rial civilization.