Enterprise Pensions in China: History and Challenges*

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ABSTRACT

Since the establishment of the People's Republic of China by the Communist Party in 1949, the government has introduced a social welfare system for both urban and rural populations. Before the economic reform and the open door policy that started at the end of the 1970s, enterprises were not concerned about the effect of their payments because their budgets were not completely separated from the government budget. After more than 50 years of changes and reforms to the pension system, the current system in China is still dominated by the public pillar, a largely urban-based, contributory, partially funded and defined contribution system. For the mainstream of the urban working population, the social security system provides the main source of assistance for maternity, medical service, unemployment, work injury and old-age pensions. This paper focuses only on the old-age pension scheme. The evolution of the Chinese insurance-based state pension system is described. As readjustments and restructuring are taking place in politics as well as in the economy, the current pension system faces many challenges, which are also discussed and suggestions are made for further reforms for addressing these challenges.

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1. THE STATE PENSION BEFORE THE ECONOMIC REFORM

There were no formal arrangements for retirement in China until after 1 October 1949, when the People's Re-public was established. This section describes the evolution of the state pension system from the first regulation in 1951 to the late 1970s.

1.1 THE CREATION OF THE LABOR INSURANCE IN THE 1950s

The first regulation about labor insurance was issued by the State Council in 1951. It introduced an old age al-lowance, disability and survivor benefits as well as other insurance benefits for employees. The 1951 regulation only covered a few service sectors and industrial enterprises with more than 100 employees. The pension benefits were about 35 to 60 percent of individual employee's wages, de-pending on the length of service in the enterprises from which they retired.1 This benefit level increased from 50 to 70 percent in 1953, the first year of the First Five-Year Plan.2 The pension benefits and other insurance benefits were entirely financed by enterprise contributions at a rate of 3 percent of the wage bill. Because of the small number of retirees in relation to workers, the contributions were, of course, sufficient to finance the system on a pay-as-you-go basis. For example, in 1952, one year after the start of the program, there were only 8 million enterprise workers and 20,000 retirees, or over 400 workers per retiree. In 1958 the coverage was extended to enterprises with less than 100 employees and also to government employees. However, few collective-owned enterprises joined the system because of a limited number of workers and small-scale of produc-tion.

The social insurance system was supervised by the Ministry of Labor and jointly administered by the Ministry of Labor and the All-China Federation of Trade Unions (ACFTU). In 1954 the administration was unified and to-tally transferred to the latter. It was required that 70 percent of the contributions were retained by the trade unions of individual enterprises while the remaining 30 percent were transferred to a national master fund and managed by the ACFTU. Pensions and other social insurance benefits were firstly paid from the enterprise funds while the fund man-aged by ACFTU was used as a last resort. Under this ar-rangement, the fund could be balanced at the national level.

1.2 THE PENSION PROVISIONS DURING THE "CULTURAL REVOLUTION"

The state pension system created in the 1950s con-tinued its operation until the beginning of the "Cultural Revolution" that lasted for ten years from 1966. During the period of "Cultural Revolution", the social insurance sys-tem, including pension insurance, was suspended. …