Historical Debt: A Critical Issue in Financing Policy on Unemployment Insurance and Pension under Economic Transition

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Abstract

This paper examines problems in financing pension and unemployment insurance under China's economic transition. Before the economic reform, the state government provided social safety programs that were financed through an economic plan. Contributions to these social programs were implicitly transferred to the State through profit of state-owned-enterprises (SOEs). The economic reform shifts financial responsibility of these programs from the government to enterprises. Because many SOEs are unable to finance pension and unemployment insurance, middle-aged and retired SOE employees lost benefits from those programs although they contributed before the economic reform. This created a historical debt. This paper shows that historical debt is the key to solve financing problems in unemployment insurance and pension. Without wealth redistribution through both central and local governments, a large number of middle-aged and retired SOE employees would become victim of the economic reform.

Introduction

Since 1978 when economic reform began, China's economy has been growing rapidly. From 1981 through 1990, the annual average increase in Gross Domestic Product was 10.1%; from 1991 through 1995, the average increase was 11.6% (China National Statistics Bureau, 1996: p. 30). Although reform has improved considerably the average standard of living, it also profoundly changed the country's industrial structure. State-Owned Enterprises (SOEs) have declined in productivity while other types of enterprises (private, collective, foreign investment) have grown dramatically (Tian, 1997: pp. 219-231). Among the enterprises registered at township or higher government levels, SOEs accounted for 72% of total output in 1985, but only 47% in 1995. During the same period, the total share of output by enterprises with foreign investment, including investment from Hong Kong and Taiwan, jumped from almost zero to 16.5% (China National Statistics Bureau, 1996: p. 30).

Implications under such a sharp change in economic structure are far beyond the boundary of economic reform. The political legitimacy has shifted from communist ideology to economic performance (Wu, 1999: p. 1). The unemployment and social security programs discussed in this paper reflects one of many aspects affected by changes of political legitimacy. Under the old socialist regime, financing social safety programs was built into the central planned economy. The political legitimacy was very simple: everyone contributed to the State and the government would take care of everyone through a centrally planned economy. When the political legitimacy is shifted, financing policy for social safety programs was completely changed. The middle-aged and older generations suffered substantially from such a sharp policy shift.

The major policy change in financing social safety programs is shifting financial responsibility from the government into enterprises. Because enterprises owned by private, collective, or foreign investors are new and have much younger employees than SOEs, this policy shift created a heavy burden to SOEs. According to Xinhua News, in Shanghai, for every 100 yuan paid to an employee by SOEs, the SOEs must pay 46 yuan for fringe benefits including pension contributions, unemployment insurance, health insurance, housing fund contribution, public transportation restructuring, etc (Zhong and Luo, 1997: p. 1). Management of the government and SOEs in Shanghai is the most efficient in the nation. If SOEs in Shanghai can barely support the social programs, other SOEs across China may not be able to afford such a system at all.

Under the new economic policy, many SOEs are in financial insolventy and unable to support social safety programs for their employees (Li, 1998: pp. 4-7). A large number of middle-aged and older employees are laid off and many retired SOE employees are left without pension (Yang, et al., 1998: p. …