China's Pension Reform and Its Discontents*

By Frazier, Mark W. | The China Journal, January 2004 | Go to article overview

China's Pension Reform and Its Discontents*

Frazier, Mark W., The China Journal

Protests by pensioners in Chinese cities have arisen over specific, largely local demands over the past decade, but they possess an abstract, nearly universal grievance as well. This arises from the fact that pension reform often threatens to undermine an implicit social contract between the state and a specific, usually loyal, group of beneficiaries. John Myles and Paul Pierson, writing about pension reforms in the American and West European welfare states, observe that "Pension systems are essentially a code of laws stipulating who may make claims on the state and under what conditions. Reneging on past contracts by unilaterally reducing benefits creates a profound problem of legitimacy for governments".1 In their study of Chinese pensioners and laid-off workers, William Hurst and Kevin O'Brien offer empirical support for the notion that public pensions in China carry an implicit social contract. The authors conclude that pensions "appear to be considered a truly sacred right in the eyes of both workers and the state".2

When the Chinese government in the 1990s introduced fundamental changes in how pensions were financed and distributed, it changed the unstated "code of laws" regarding who may claim benefits and who pays for these benefits. In effect, pension reform transferred the costs and responsibilities for financing and distributing retiree benefits from the "work unit" or state enterprise to "society". This term is routinely used by officials and ordinary Chinese to emphasize that pensions are no longer administered, as they were for almost fifty years, by state enterprises on behalf of their retirees. Instead, pension reform has spread the financial and administrative burdens from state enterprises across a broad swath of employers, workers, national agencies and local governments. Successive regulations issued since the early 1990s have done little to resolve a fundamental problem that emerged with this shift: the diffusion of powers and responsibilities over pension fund collections and administration to local governments that face incentives both to comply with and to evade national pension regulations.

The abundant and growing literature on China's pension reform has stressed the difficulties of financing benefits for retirees from a dwindling base of state firms, as well as problems associated with collecting sufficient social security revenues. With few exceptions, most analyses of pension reform have tended to understate the critical fact that China's pensions come under, not a single institution, but rather an agglomeration of some 2,000 "social pools" (shehui tongchou) under the local control of provincial, city, county and prefectural governments.3 Nelson Chow and Yeubin Xu have discussed in broader studies on social welfare in Guangzhou how the evolution of pension reform in the 1980s and 1990s created fragmented coverage and benefits depending on ownership categories (state, collective, etc.) and on employment status (full-time, temporary, etc.).4 This fragmenting of pension administration, and of social welfare more broadly, occurred in virtually all urban areas of China. It was a legacy of the planned economy, which created sharp regulatory divides between rural and urban areas, across state and non-state enterprises and between permanent and temporary labour. As Linda Wong has shown, the pattern of social welfare reforms closely mirrors in its coverage these categories created under the planned economy.5 Only registered urban residents, for instance, remain eligible today for pension coverage.

The fragmented, locally-based structure of pension administration evolved gradually over the course of the 1980s and 1990s, when municipal governments began pooling the funds of local enterprises in order to spread the costs of retirement benefits across large groups of firms. Given the financial straits that so many state enterprises are in, substantial deficits exist in the new pension pools. …

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