Academic journal article International Journal of Economic Development

Worker Response to Chinese Pension System Reform

Academic journal article International Journal of Economic Development

Worker Response to Chinese Pension System Reform

Article excerpt

Abstract

This study examines workers' responses to the current reform of social security in China. Based on a survey conducted in June,1998 among 500 workers with various backgrounds in Guangzhou (Canton), the paper draws seven conclusions. First, over eighty percent of workers support the reform. Second, there is consensus that the responsibility for providing old-age insurance should be shared among individuals, society, and the government. Third, workers prefer a partially-funded pension system to either the pay-as-you-go system or a fully-funded system. Fourth, most workers do not want the government to increase the legal retirement age at the present time. Fifth, a majority of workers worry about their future retirement income adequacy and consider it a potentially serious social problem. Sixth, workers perceive that state-owned enterprises offer the best pension plans while foreign-owned companies provide the worst. Finally, the survey shows that most workers desire, and would participate in, a program that would educate them about investment alternatives. These findings provide important insights for both Chinese policy-makers and future research into China's social security reform.

Introduction

Before general economic reform started in the late 1970s, the Chinese employment system was often called "the iron rice bowl." Workers of state-owned enterprises were tied permanently to their respective work units and enjoyed lifetime benefits that included housing, medical care, and pensions. Work units took the sole responsibility for providing old-age insurance for their employees and retirees (Song and Chu, 1997; World Bank, 1997). Since urban pension reform started in 1984, the "iron rice bowl" has been broken and the employment system is moving to a labor contract system. Though this contract system improves labor mobility and efficiency, it makes pension benefits less secure. In fact, many Chinese workers believe that their retirement income security is threatened.

The older system was not sustainable. At the macro-level, China's population is aging rapidly due to the one-child policy and longer life expectancy. This aging of the population leads to a much higher dependency ratio, indicating a much heavier pension burden. Without reform, the old pay-as-you-go pension system would not be sustainable in the long term. At the micro-level, enterprises still carry a large share of pension responsibilities for their retirees. Hence, pension burden and benefits vary greatly across enterprises, especially between older and newer enterprises and between state-owned and other types of enterprises. This disparity not only reduces pension income security for retirees in older enterprises and private- or foreign-owned companies but also puts older and state-owned enterprises at a disadvantage when competing against newer and private- or foreign-owned companies.

China started its social security reform in 1984, with pilot pension pooling programs in some cities and counties. Many studies have documented this reform and its progress (e.g. Hussain, 1994; Wang, 1997; World Bank, 1990, 1997; Zhang, 1997; and Song and Chu, 1997). Most studies have focused on such issues as why the old system did not work or on how to build a new pension system to accommodate the structural changes and demographic trends in China. No study has investigated workers' responses toward the on-going pension reform. Yet workers' perceptions and opinions on pension reform have economic, social, and political implications for the long-term growth of Chinese economy. Workers will be affected most and directly by the success or failure of pension reform, which could result in a major political victory or disaster for the government. Understanding workers' preferences would help policymakers plan reforms that facilitate achieving the goals of economic reform. Workers' understanding and cooperation would reduce the social costs of the reform and speed up the reform process. …

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