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China’s social security system

During the era of China’s planned economy, social welfare, especially for the elderly, was primarily dependent on two pillars, the “iron rice bowl” of state-owned enterprises that provided workers with employment, healthcare and pensions, and the firm belief of parents that their children would provide for them in their old age.

With the reform of state-owned enterprises, growth of the private economy, and implementation of strict family planning policies in China, those pillars began to crumble. The promise of lifetime employment was replaced with performance-based labour contracts at state-owned and private enterprises, while the one child policy severely limited the ability of children to care for their elderly parents in the future. These policies brought about immense societal changes and clearly amplified the need for a new, wide-ranging and effective social security system.

This need will become even more pressing in the near future as China attempts to place a greater emphasis on domestic consumption in a bid to offset its reliance on the export market. The currently ineffective social security system actively discourages households from spending. Unconvinced that the government’s social programs can isolate them from the costs of old age, medical care or unemployment, Chinese households, if they can afford to, tend to set aside a sizable proportion of their income in bank savings in order to secure their future and shield them from adversity.  However it is also important to note that many of the poorest working families in China have next to no savings because their income is so low.

Since the advent of market reforms, provisions for social insurance have been scattered throughout a patchwork of rules and regulations implemented at the national, provincial, and local level, including the 1995 Labour Law and 2008 Labour Contract Law. The passage of the Social Insurance Law in 2010 established the first comprehensive social insurance law in China, aiming to consolidate existing rules and regulations under a standardized national social security framework. Although some specific implementation details are established in the law, such as the contribution terms required in order to be eligible for pension and unemployment benefits, the Social Insurance Law functions more as a statement of broad principles, leaving most of the implementation details for future clarification via additional regulations at the national and local level. The law repeatedly affirms the policy established in the Labour Contract Law, that social insurance benefits remain with workers if they move to different locations, however as is discussed below, this principle has proved very difficult to implement on the ground. And enforcement of the law in general remains very lax, meaning that many workers are denied the social security benefits they are legally entitled to.

The different types of social insurance in China

The Social Insurance Law is administered by the Ministry of Human Resources and Social Security and covers five types of social insurances: pension, medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance. The housing fund, although administered in a similar manner, and regarded by workers as a form of social insurance, is not covered under the Social Insurance Law, and is administered instead by the Ministry of Housing and Urban-Rural Development.

Pensions

Both workers and their employers are required to make payments to the pension system. The basic framework for payments was established in the State Council’s Document 38, on Strengthening Pension Reform in Enterprises, in 2005. Workers contribute based on their individual wage, at a uniform rate of eight percent, while employers contribute based on a percentage of the total wage of their workforce, usually around 20 percent.

Workers’ contributions are paid into a personal account; at retirement, the balance of the account, including interest, is divided into 120 installments to be paid out monthly to the worker over a ten-year period. In addition to the benefits paid out from the personal account, the worker also receives general pension payments, payable until death. The amount of the general pension payments is to be determined by such factors as the number of years worked, the average wage in the locality, and life expectancy. These general pension payments are ostensibly funded by the employer’s contributions, but the government is legally obligated to cover any shortfalls.

Workers only become eligible for pension benefits at retirement if they have participated in the scheme for at least 15 years. Those who fail to do so may delay retirement until they have contributed for 15 years, pay the remaining required premiums (under limited circumstances), transfer their pension plan to one for non-employed rural or urban residents, or receive the entirety of their individual account, including interest, in a lump sum payment.

Under regulations enacted in 1978, the current statutory retirement age in China is 60-years-old for men and 50-years-old for women workers (female civil servants retire at 55). Despite widespread public opposition, in 2012, the Ministry of Human Resources and Social Security proposed raising the retirement age at some point in the future, stating that demographic trends made such an increase “inevitable.” Policy makers argued that greater life expectancy, coupled with a diminished workforce, will very soon place a tremendous strain on pension funds unless the official age of retirement is deferred. But many commentators have pointed out that migrant workers in particular deserve to retire early with a decent pension because they have already worked excessively long hours without proper medical care.

Public opposition to the proposed increase in the retirement age has been heightened by the fact that there is a separate and much more beneficial pension system for civil servants and other deskbound government employees who do not need to pay pension premiums at all but still draw a government-subsidized pension on retirement.

In addition to the pension systems for civil servants and urban employed workers, the Social Insurance Law also affirms the government’s intention to establish additional pension systems for rural and urban residents who are not employed by enterprises and have not paid into the basic pension system. The plans are similar to the basic pension plan, requiring residents to pay premiums accumulated in an individual account for at least 15 years, and receiving pension payments upon retirement. In addition to the funds in the individual account, pension payments are subsidized by government funds. However, as of 2012, only about one third of the elderly in rural areas of China had such a pension, and the average pension was still just 74 yuan per month.

Medical insurance

The State Council established the basic framework for the current medical insurance system for workers in 1998.  Workers and their employers are required to make payments to the basic medical insurance system which, like the pension system, combines an individual account with pooled funds. Though the amounts vary from region to region, workers typically contribute two percent of their individual wages - all of which goes directly to their individual account - while employers usually contribute between seven and 12 percent of their workforce’s salary, a proportion of which (usually 30 percent) goes into the workers’ individual accounts while the remainder goes to a public pool.

The worker’s individual account is supposed to cover the cost of any medical treatment that amounts to ten percent or less of the local average annual wage. The pooled insurance funds cover any costs above ten percent of the average annual wage, up to 400 percent of the average annual wage. If the worker does not have sufficient funds in his individual account to cover ten percent of the average annual wage, he has to make up the shortfall out of his own pocket. In other words, based on the percentages above, an employee earning the local average wage would have to work for about two years to ensure he had sufficient funds in his individual account to reach the ten percent threshold. Most factory workers in China earn about half the average wage, if that. If medical expenses are greater than 400 percent of the average wage, the extra cost is expected to be borne by the individual, or by other plans, such as commercial insurance plans, or via additional social insurance schemes. For instance, in the city of Zhenjiang, the pooled social insurance funds may pay up to 65 percent of the extra cost after the 400 percent threshold is passed, with the worker paying the remainder.  Once the worker has paid into the system for the requisite number of years, they may retire and continue to enjoy the system without additional premium payments.

The Social Insurance Law stresses that social insurance agencies should pay medical providers directly, rather than demanding that workers pay up-front and request reimbursement later - which is usually the case at present. The law also directs agencies to create systems to better allow for the usage of medical insurance throughout China, aimed at the complications workers face when attempting to use their medical insurance in areas outside of their work location. In 2012, a pilot project began to create a national database of medical providers to help accomplish such a task.

The Social Insurance Law also codifies the responsibilities of the state to provide basic medical care for rural residents and non-employed urban residents (such as non-working spouses and children). These programs, the Rural New Cooperative Medical Scheme and the Urban Resident Basic Medical Insurance, involve a combination of individual premiums with local and central government subsidies to pay for insurance coverage. Rates vary from region to region, but the goal is to cover the large majority of inpatient medical care costs for participants.

A major point of contention in the current system, however is that the various medical insurance schemes on offer put too much emphasis on hospital and inpatient care. Moreover, to be eligible for public insurance funds, inpatient treatments must be on a pre-approved government list - treatments outside of the pre-approved list must be paid out of either the worker’s individual account or their own pocket. Coverage for outpatient treatment and medicines is even more limited. Since hospitals and doctors can earn additional money from uninsured treatments, there is a perverse incentive wherein doctors prescribe tests and marked-up drugs that are excluded from insurance coverage; indeed, in 2010, a study found that the insured still had to pay 60-70 percent of outpatient costs.

And a 2012 survey commissioned by the People’s Bank of China showed that those with insurance, on average, still needed to pay more than 60 percent of medical costs by themselves, with rural residents paying a much higher proportion than urban residents. See table below:

Monthly average expenditure on healthcare in China (yuan)

 

Rural average

Urban average

Overall average

Monthly expenditure on healthcare

750.51

1,177.48

936.56

Monthly expenditure by those insured:

792.15

1,166.77

958.35

      Proportion  covered by insurance

220.36

549.26

366.75

     Proportion  borne by the individual

571.79

617.51

591.59

Monthly expenditure by uninsured

438.01

1,306.06

7,44.03

The government has pledged to tackle the issue as part of ongoing health reform efforts.

Work-related injury insurance

The Social Insurance Law sets out broad policies for work-related injury insurance. Insurance premiums are paid solely by the employer, based on total workforce salary, with rates (usually between 0.5 percent and two percent) varying according to the health and safety risks of specific industries and locations. The law delineates the expenses paid by the employer and those covered by insurance funds in the event that a worker suffers from a work-related injury or occupational illness. The law specifically excludes from its remit any injuries at work that were incurred during the commission of a crime or through an intentional act of self-harm.

Work-related injury insurance funds are earmarked for medical and rehabilitation expenses, food subsidies while hospitalized, travel, room and board expenses incurred while seeking medical treatment, nursing care fees (if applicable), lump-sum disability payments, monthly disability allowances for severe injuries categorized as Grade 1 through 4 (See Compensation for Work-related Injury and Occupational Disease in China), work ability appraisal fees, medical subsidy if the employment contract is ended, and funeral subsidies (if applicable). 

In addition, employers still must pay the employee’s wages during medical treatment, as well as a monthly disability allowance if the worker’s injuries are categorized as Grade 5 or 6. The employer must also pay for an employment subsidy if the employment contract is ended. If an employer fails to pay the insurance premiums, they must personally cover all the costs outlined above.

The law states that an injured worker is still entitled to benefits even if the employer has not paid insurance premiums and has refused to pay the benefits due to the worker. In such a case, advance payments shall be made from social insurance funds, and it is the duty of the government to get the employer to reimburse the government.  However, an investigation by a legal-aid centre in Beijing in July 2012 showed that one year after the implementation of the Social Insurance Law, the vast majority of municipal governments still had not set up an advance payments system. Indeed, of the 287 cities surveyed by the Beijing Yilian Legal Aid and Research Centre, 190 (about 77 percent) said they would not accept applications for advance payment and about 13 percent said they were unclear about the provisions. Only 28 cities (10 percent) said they definitely would accept applications, and of these 28, only nine had issued detailed implementing regulations.

Unemployment insurance

The Social Insurance Law largely affirms the framework for unemployment insurance established by the State Council in the 1999 Regulations on Unemployment Insurance. Both workers and their employers pay into the unemployment insurance system, both contributing between one and two percent. Workers are eligible for benefits, including continuation of medical insurance, in the event that they involuntarily become unemployed. The duration of benefits depends on the length of time that the worker has paid into the system, with a maximum of 24 months of benefits for workers who have been employed for at least ten years.

At present, even though premiums are paid based on salary, benefits are largely uniform across individual jurisdictions. According to the 1999 regulations, unemployment benefits must be lower than the local minimum wage of the area. In nearly all parts of China however the local minimum wage is nowhere near a living wage and as such the unemployment benefits offered by the state are unable to support unemployed families. Even if an employee on a relatively high salary has paid contributions for decades, they will still only get the low mandated amount. In contrast, systems in countries like the United States provide benefits related to the unemployed worker’s prior salary, and the benefits can exceed the minimum wage.

The Social Insurance Law stresses that unemployment insurance benefits are portable and accompany the worker from location to location. Structural reforms will be necessary for such a policy to become a reality however, especially since most rural areas currently do not have a system for disbursing urban unemployment benefits. At present, many areas inadequately address the issue by providing migrant workers with a one-time payment amounting to much less than the unemployment benefits that workers are normally entitled to, despite the fact that the migrant worker and their employer may have paid all necessary unemployment insurance premiums.

Maternity insurance

Employers pay maternity insurance premiums as a percentage of their total workforce salary. Maternity insurance covers maternity-related medical costs, including birth control, for employees and their spouses. According to the Special Provisions on the Protection of Female Employees,  which went into effect on 28 April 2012, women are now entitled to 98 days of maternity leave allowances, which are paid out of insurance funds and are equal to at least the average wage at her employer. For employees who make higher than the average wage at their employer, some locations have implemented regulations requiring the employer to cover the difference. It has been suggested that the maternity insurance system may create some odd incentives for women to seek employers with high average salaries, even if the salary offered to the individual worker is relatively low.

Housing Fund

Although not covered by the Social Insurance Law, the Housing Fund, also known as the Housing Provident Fund, is often grouped with other social insurance programs since it functions in a similar manner, with benefits funded through premiums paid by employers and their workers. Broadly governed by the Regulation on the Administration of Housing Accumulation Funds, the system is administered differently throughout China, with tremendous variance in the contribution rates for employer and worker: Employers are required to pay at least five percent of a worker’s salary, and it is usually matched by an equal contribution by the employee.

The payments, which are tax-deductible, go into an individual account, which may only be used for housing expenses. Additionally, participants are entitled to apply for preferential housing loans. Once housing has been purchased, workers can continue to participate in the system and withdraw the accumulated funds on retirement. In this regard, the housing fund is often seen as a secondary pension. Furthermore, some regions have also experimented with allowing the use of housing funds for other purposes, such as medical expenses.

Problems in the current system

Government fraud

There have been regular scandals related to government misuse of social insurance funds over the last decade or so, from straightforward embezzlement, to making use of funds to cover construction projects or other speculative investments. The most prominent scandal involved the misuse of an estimated 3.4 billion yuan from Shanghai’s social insurance funds in the mid-2000s, which led to the ouster and eventual imprisonment of the city’s Party chief Chen Liangyu. Investigators found that Chen and his allies had systematically siphoned off public funds for investments in real estate and infrastructure development.

Despite some improved management and oversight since the Shanghai scandal, the National Audit Office discovered, in its first thorough audit of the system in 2012, that over 1.7 billion yuan in funds had been misused by local governments. The office revealed how various governments had spent 595 million yuan on operating fees, 114 million yuan to balance official books and 294 million yuan to build training centres and stadiums.  In addition, 85.9 million yuan was used to build offices and 29.5 million yuan to buy cars. Nearly a third of the money was used for unauthorized financial investments, according to the report. 

Such scandals add to the worries of ordinary Chinese citizens about the stability of the system, and have led to calls for greater centralized management of social insurance funds.

Transferability

Although both the Labour Contract Law and Social Insurance Law state that social insurance benefits and entitlements are transferrable from location to location and employer to employer, the laws only broadly state the principle without establishing a system for exactly how such transfers are to take place. However, in late 2009, the State Council enacted two provisional measures instructing local authorities on how to handle the transfer of pension and medical insurances and several regions have implemented their own policies for the transfer of other social insurances, such as unemployment insurance.

When workers move to a new city or town, they should be able to transfer the entirety of their individual pension account over to the social insurance agency in the new work location. An additional amount equal to 12 percent of the worker’s former wages is transferred over to the new social insurance agency’s pooled funds, to cover the employer-funded pooled funds. Workers may also temporarily stop contributing into the system (if they return to their villages, for instance) and resume contributing later on, even in another city or town. The provisional measures maintain that the individual account will always be preserved for the worker, even if the worker does not return to the urban workforce, and states that the worker will still be able to enjoy urban retirement benefits if the worker had contributed for the required number of years. The worker also has the option to transfer their urban retirement account into the rural retirement system. The transference of medical insurance operates in a similar manner, allowing for the transfer of a worker’s individual account between different urban areas as well transfers into the rural medical scheme.

Putting these provisions into practice however can be extremely difficult. According to one expert, by the end of 2011, only 730,000 workers had successfully transferred their pension accounts even though the number of workers that had moved or changed jobs was much higher.  Many of the difficulties stem from the fact that social insurance has hitherto always been a locally managed affair; differing policies, incompatible systems and software, and bureaucracy have all been identified as problems that impede insurance transfers.  In May 2012, the State Council promised that as part of the 12th Five-Year Plan, rural and urban social insurance systems would become more integrated, and a centralized management system for social insurance, specifically targeting improvements in transferability, would be set up.

Implementation and coverage

According to statistics from the Ministry of Human Resources and Social Security (see Figure 1 below), participation in social insurance schemes, though increasing, is still at a relatively low level, particularly amongst migrant workers.

Figure 1: Individuals in China covered by social insurance (millions)

Note that the figures for pensions include already retired workers and that only around one half of those covered by medical insurance are actually workers.

In 2011, there were a total of 359 million urban workers but less than 215 million of them had pensions. And out of a total of nearly 253 million migrant workers, only 41 million had joined the basic pension system, 46 million had health insurance and less than 24 million had unemployment insurance.  However, 68 million migrant workers had work-related injury insurance, making up about 38 percent of all the 177 million workers covered by the scheme. The relatively high take up of work-related injury insurance can be explained to a large extent by the costs and benefits to the employer. Migrant workers tend to be employed in high risk industries and failure to buy work-related injury insurance could result in a substantial bill for the employer if an employee did get injured. However, the employer’s premiums for work-related injury insurance are negligible, even in high-risk industries. The premiums for pensions and health insurance on the other hand are relatively high, with little direct benefit for the employer. Moreover, because of the continuing problems with the transferability of pension, unemployment and health insurance plans, employers know that migrant workers can be less inclined to demand participation in these schemes.

Although the Social Insurance Law establishes penalties and fines for employers that do not comply with the law, the statistics indicate that one of the largest obstacles to China’s social insurance reforms lie in implementation and compliance. For China to accomplish its goal of providing a stronger safety net, it must solve large structural issues such as ensuring that benefits can actually be transferred between regions, and compelling greater compliance by employers.