Academic journal article Contemporary Economic Policy

Social Security Reform in China: The Case of Old-Age Insurance

Academic journal article Contemporary Economic Policy

Social Security Reform in China: The Case of Old-Age Insurance

Article excerpt


On February 26, 1951, the People's Republic of China (PRC) promulgated its first labor insurance regulations (Laodong Baoxian Tiaoli), which created a social security system for state-sector employees. Under these regulations, male workers retired at age 60 and female workers retired at age 55. Employees of state-owned enterprises were tied to their respective work units (danwei) and enjoyed cradle-to-grave benefits, including lifelong wages and housing. Work units administered all aspects of social security programs from determining eligibility to paying benefits. For the urban collective sector, benefits varied from trade to trade and from locality to locality, depending on financial resources. No social security programs existed for the then negligible private sector (Chen, 1990; World Bank, 1990; Niu, 1991; Lee, 1993).

This social security system has become obsolete and is even obstructing the ongoing economic reform and development in China. Within the old system, enterprises bore sole responsibility for providing retirees with pension benefits and other welfare services. There was much disparity in pension burdens borne by older and those borne by newer enterprises because older enterprises had relatively more retirees. Some old enterprises had more retirees than active workers and even those with good performance had difficulty allocating sufficient funds to pay for pension benefits. Consequently, enterprises with a large pension burden might not be able to pay their workers the going market wages and also might default on their future pension obligations. This seriously damaged workers' morale.

The highly decentralized administration also lacked an established mechanism for portability of eligibility and benefits. This situation discouraged workers from moving across enterprises, industries, or sectors and thus indirectly hindered development of collective and private enterprises. Under the enterprise-tied social security system, a worker could not carry his old-age insurance with him when he changed his job. Thus, this conflicted with the labor contract system of the early 1980s, which aims to improve labor mobility and efficiency.

The large size and rapid growth of retiree population further challenge the old social security system. The number of retirees increased from 3.14 million in 1978 to 27.80 million in 1993. As a result, the ratio of retired people to employed workers increased from 0.033 in 1978 to 0.185 in 1993 (State Statistical Bureau, 1994b, p. 664). This ratio is expected to increase faster due to longer life expectancy and the one-child policy. In China, life expectancy increased from 35 years in 1949 to 69 years in 1990. The one-child policy results in a one-two-four family structure: one child has two parents and four grandparents. The 710 Institute of the Ministry of Space and Aeronautics (1990) estimated that the retired/worker ratio will increase to 0.195 in 2000, to 0.439 in 2030, and to 0.559 in 2060.

Intense pressure on enterprises facing inordinately heavy financial burdens of pensions is a primary reason the Chinese government has focused on reforming its social security system. Reform of the old-age insurance system in China started in 1984, with experiments on pension pooling in some cities and counties. Since then, pooling has progressed rapidly. By 1991, 2,270 cities and counties established pension pools at city or county level for state-sector enterprises, covering more than 50 million permanent workers, 12 million contractual workers, and 10 million retirees. In addition, 1,076 cities and counties had pension pools for collective enterprises. Pools of some provinces, such as Jiangxi and Fujian Provinces, were at the provincial level, and broadening the risk-sharing base (Anyang Shehuibaoxian, 1991). By 1994, more than 80 million employed workers (about 53% of total workers) and 18.5 million retired people (about 60%) joined pension pooling programs (The State Statistical Bureau, March 1995). …

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