The two-week strike by around 40,000 workers at the Yue Yuen shoe factory in Dongguan in April 2014 was a watershed moment in Chinese labour relations. Not only was it the largest strike in recent history, it, crucially, highlighted the numerous problems endemic in China’s social security system.
The strike was triggered when workers discovered that the company had been underpaying social insurance contributions for years on end, leaving thousands of employees, who had spent much of their working lives at the company, with a much smaller pension than they were entitled to.
In some respects, the Yue Yuen workers were lucky to have any kind of pension: Despite government attempts to increase pension and other social insurance coverage, the majority of workers still lack an effective welfare safety net. Official figures show that in 2013, only 242 million workers, less than one third of China’s total workforce of around 770 million, had a basic pension. See the graph below.
Source: China National Statistical Yearbook 2014
The problems in China’s social security system can be traced back to two key events: The break-up of the state-run economy, which had provided urban workers with an “iron rice bowl” (employment, housing, healthcare and pension), and the introduction of the one-child policy in the 1980s, which meant that parents could no longer rely on a large extended family to look after them in their old age. In other words, as the economy developed and liberalized in the 1990s and 2000s, both the state and social structures that had supported workers in their old age, ill-health and during times of economic hardship gradually vanished, leaving a huge vacuum to fill.
The Chinese government sought to create a new social security system based on individual employment contracts that would make employers, rather than the state, primarily responsible for contributions to pensions, unemployment, medical, work-related injury and maternity insurance. In addition, the government established a housing fund designed to help employees, who no longer had housing provided for them, buy their own home.
The new system emerged piecemeal through a series of specific regulations and provisions in the 1994 Labour Law (劳动法) and 2008 Labour Contract Law (劳动合同法) etc. It was not until 2011, however, that these separate parts were codified into a comprehensive national framework in the Social Insurance Law (社会保险法). The basic principles of China social security system, as outlined in the Social Insurance Law are as follows:
- All employees, including rural migrant workers, should be covered by the social insurance system.
- Both employers and employees are required to make contributions (at different rates) to a pension fund, unemployment insurance fund and medical insurance fund, as well as the Housing Provident Fund. Employers, but not employees, are also required to contribute to the work-related injury and maternity insurance funds.
- The various insurance funds are managed by local governments and are pooled into provincial or municipal funds. Usually it is the local labour or human resources and social insurance departments that manage the social insurance funds, while the Housing Provident Fund is managed by the local government’s Housing Provident Fund Management Committee.
- The funds collected must only be used for the specific purpose intended, namely the provision of social insurance for workers and retirees.
- The pension and medical insurance funds are composed of pooled components, which can be used to benefit any eligible employee, and personal accounts that benefit the individual employee concerned, when they become eligible.
- Social insurance benefits should remain with workers when they move. However this provision has proved very difficult to implement because of the highly localized nature of the social welfare system in China. Getting different jurisdictions to share information is fraught with bureaucratic and technical difficulties, especially for workers coming from rural areas of China.
In general, as with nearly all labour legislation in China, enforcement of the Social Insurance Law, even its most basic provisions, has been very lax, and the majority of workers are still denied the social security benefits they are legally entitled to.
There follows a detailed look at each separate component of China’s social insurance system and the particular problems and challenges they face. In addition, we look at the specific problems encountered by rural migrant workers in getting their legally mandated welfare benefits.
The basic framework for the pension system was set up in 1997 under the State Council Decision on the Establishment of a Unified Basic Pension System for Enterprise Workers (国务院关于建立统一的企业职工基本养老保险制度的决定). Both employees and employers are required to make contributions to the pension system. Workers contribute based on their individual wage, at a rate of up to eight percent, while employers contribute a percentage of the total wages paid to their workforce, usually around 20 percent. There is usually a cap on contributions for both employers and employees and exact contribution rates vary from region to region.
Workers’ contributions are paid into a personal account. On retirement, the balance of the account, including interest, is divided into 120 instalments to be paid out monthly 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 general pension payments are determined by the number of years of employment, 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.
Retirees in the shade. Chashan, Dongguan.
Workers become eligible for pension benefits when they reach the statutory retirement age (see below), but only if they have participated in the scheme for at least 15 years. Those who have participated for less than 15 years may delay retirement until they have contributed for 15 years, pay the remaining required contributions, transfer their pension plan to a plan for non-employed rural or urban residents, or receive the entirety of their individual account, including interest, in a lump sum payment.
For decades in China, there was a separate pension system for civil servants and other government employees such as teachers, who did not need to pay pension contributions and were entitled to a generous government-subsidized pension on retirement. However, in January 2015, the State Council in its Decision on the Reform of the State Employee Pension System (国务院关于机关事业单位工作人员养老保险制度改革的决定) introduced a new pension plan designed to equalize the private and public-sector systems. Under the new scheme, public sector employees will also have to make their own contributions to the pension fund. However, the authorities have stated that the basic salaries and pension benefits of civil servants and employees of public institutions will be augmented accordingly to offset any financial losses for employees under the new system.
For non-employed persons in both urban and rural areas, the Social Insurance Law provides for a similar basic pension plan that requires residents to pay contributions into an individual account for at least 15 years before becoming eligible for a pension on retirement. The fund is subsidized by the government but monthly pay-outs, especially in rural areas, are generally very low.
One of the biggest problems with the current pension system in China is the statutory retirement age; 60-years-old for men and 50-years-old for women workers in enterprises, 55-years-old for women civil servants. These limits were established in the 1950s and are widely acknowledged by policy makers to be no longer realistic in a country where the average life-expectancy is now 75 and there are already about 200 million people over the age of 60. Government officials have stated openly that the retirement age will have to rise if the pension system is to be sustainable in the long-term. An increase of five years for both men and women is the most likely increase but no definitive plans have been put in place yet. The government’s procrastination on this issue is largely due to popular opposition from workers who understand how difficult it is to get a job in their 50s. See Employment in China for more details. In order to gain more popular support for an increase in the retirement age, employers will have to adopt much more flexible attitudes towards elderly workers and the government will have to reconsider what are the optimal pension contribution rates for both employers and employees.
For the time being at least, pension fund revenue still exceeds expenditure in most provinces, particularly in coastal provinces like Guangdong, which had a yearly surplus of nearly 80 billion yuan at the end of 2013. However, provinces in the northeast of China that have an excess of retirees and a shortage of young people are already feeling the strain. In Heilongjiang, for example, pension pay-outs exceeded revenue by four billion yuan in 2013, with the overall account balance standing at just 43 billion yuan.
The State Council’s 1999 Regulations on Unemployment Insurance (失业保险条例) established a framework for contributions to and payment of unemployment insurance that was largely affirmed by the Social Insurance Law. Both workers and their employers pay into the unemployment insurance system, usually at rates of one and two percent respectively. Workers are eligible for benefits, including continuation of medical insurance, in the event that they become unemployed. The duration of benefits depends on the length of time the employee has paid into the system, with a maximum of 24 months of benefits for those who have been employed for ten years or more.
Job seekers outside a recruitment office in Dongguan
Although employee contributions are based on salary, the benefits paid out are very low. The 1999 Regulations state that unemployment benefits must be lower than the local minimum wage, which is already set at a very low level and can in no way be considered a living wage. See Wages in China. Although the Social Insurance Law stresses that unemployment benefits are transferable and can be claimed in any location, structural reforms will be necessary for such a policy to become a reality, especially in rural areas that currently do not have a system for disbursing urban unemployment benefits. At present, many local authorities address the issue by providing migrant workers with a one-time payment amounting to much less than they are legally entitled to.
The framework for China’s employee medical insurance system was first set out in the 1998 State Council Decision on the Establishment of a Basic Medical Insurance System for Urban Staff and Workers (国务院关于建立城镇职工基本医疗保险制度的决定). Both workers and employers are required to make payments to the basic medical insurance scheme which, like the pension scheme, 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 six 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 the public fund. Once the worker has paid into the system for the requisite number of years, they are eligible for benefits without having to make additional contributions.
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, capped at five times the average annual wage. If an employee does not have sufficient funds in their individual account to cover ten percent of the average annual wage, they have to make up the shortfall out of their own pocket. It can take low-paid employees several years to reach the ten percent threshold and as such many insured workers still end up paying for their own minor treatments regardless. Likewise, at the other end of the scale, employees have to pay for any medical expenses in excess of five times the average wage.
The Social Insurance Law stresses that the medical insurance fund should cover workers’ medical costs by paying service providers (usually hospitals and clinics) directly. However, in most cases, workers have to pay up-front and request reimbursement from the authorities later. Moreover, to be eligible for public insurance funds, hospital 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. This means that people who need outpatient treatment and medicine often have to buy additional private medical insurance, pay for treatment out of their own pocket or forego treatment altogether.
The number of workers and retirees covered by the basic medical insurance scheme has doubled over the last decade but still only stands at about 270 million. A similar number of urban residents (mainly non-working spouses and children) are now covered by the Urban Resident Basic Medical Insurance Scheme, which was introduced in 2007 and aims cover the majority of inpatient medical costs for participants. See chart above. The new scheme is based on individual contributions together with local and central government subsidies. A similar program, the New Cooperative Medical Scheme operates in rural areas and individual contributions are usually set at a very low level. However, the vast majority of rural residents will still have to travel to major cities for treatment in serious cases because of a lack of high-quality medical facilities in their home area.
Work-related injury insurance
The number of workers covered by work-related injury insurance has increased by nearly three times in the decade from 2004. See chart below. However, the current figure of 199 million employees is still only about a quarter of the entire workforce.
Contributions to the work-related injury insurance fund are paid solely by the employer at rates of between 0.5 percent and two percent of payroll; varying according to the health and safety risks of specific industries and locations.
The Social Insurance Law delineates the expenses to be paid by the employer in the event of an injury or occupational illness and those to be covered by the work-related injury insurance fund. Work-related injury insurance funds are earmarked for medical and rehabilitation expenses, food subsidies while hospitalized, travel expenses incurred while seeking medical treatment, nursing care, lump-sum disability payments, monthly disability allowances for severe injuries, namely those categorized as Grade 1 through 4 (See Compensation for Work-related Injury and Occupational Disease in China for definitions), disability appraisal fees, medical subsidies if the employment contract is ended, and funeral subsidies (if applicable). Employers should still pay the employee’s wages during medical treatment, as well as a monthly disability allowance if the worker’s injuries are categorized as moderately severe (Grade 5 or 6), and an employment subsidy if the employment contract is ended.
If an employer fails to pay the required work-related injury insurance contributions, they are legally obliged to cover all expenses themselves. However, in most cases, delinquent employers refuse to pay anything more than basic medical costs for the time the employee is in hospital, if that.
In the event that the employer has not paid into the work-related injury insurance fund and refuses to pay the employee any compensation, the Social Insurance Law makes provision for local governments to pay the due benefits in advance and collect the money owed from the employer later. However, an investigation by a legal-aid centre in Beijing showed that in July 2012, one year after the implementation of the Social Insurance Law, the vast majority of local governments had still not set up such an advance payments system. Indeed, of the 287 cities surveyed, 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 (ten percent) said they definitely would accept advance applications, and only nine had actually issued implementing regulations.
In reality, the payment of medical expenses and disability benefits from the work-related injury insurance fund is largely restricted to cases where the employer has made all the necessary contributions, the injury is obviously work-related, medical costs and the level of disability are uncontested, and there is a clear employment relationship at the time of the accident. If, at any stage, there is a dispute over the nature of the accident or the employment relationship, claims for benefit can be denied or delayed for years on end. Even when workers are killed in work-related accidents there is no guarantee their family will get any benefits from the work-related injury insurance fund. In 2012, for example, the State Administration for Work Safety reported around 72,000 deaths from work accidents. The same year, only 22,313 deaths were officially certified as work-related; thereby paving the way for state compensation. Most of the fatal cases that were not covered by the work-related injury insurance fund would probably be handled by a private agreements or state charity that precludes the bereaved family from taking any further action in the matter.
The mines of Ganluo, Sichuan, where thousands of workers contracted pneumoconiosis
Occupational disease cases are particularly difficult for workers to prove because the disease often manifests itself after the worker has already left their place of employment, and they are unlikely to have a contract with that employer anyway. According to the China Labour Statistical Yearbook only 15,941 workers were certified as suffering from an occupational disease in 2012 compared with just over one million workers who were certified as having been injured in a work-related accident. There are an estimated six million workers in China with the deadly lung disease pneumoconiosis but only about ten percent of them have ever been certified as having an occupational disease. See CLB’s research report Time to Pay the Bill: China’s obligation to the victims of pneumoconiosis for more details.
Employees are not required to contribute to the maternity insurance fund, while employers make contributions at rates determined by individual local governments. In the city of Beijing, for example, employers contribute 0.8 percent of total wages paid to eligible employees, in Guangzhou it is one percent of the average monthly wage in the city, while in Chengdu, the rate is 0.6 percent of the total wages of all employees. Maternity insurance covers all maternity-related medical costs, including birth control, prenatal check-ups, delivery and antenatal care, as well as allowances to be paid during maternity leave. According to the Special Provisions on the Protection of Female Employees (女职工劳动保护特别规定), which went into effect on 28 April 2012, women are entitled to 98 days of maternity leave allowances at a rate equal to at least the average wage at her employer. In addition, some local governments require employers to provide additional allowances for employees earning more than the average wage.
The number of employees covered by maternity insurance has nearly quadrupled over the last decade, increasing from 44 million in 2004 to 164 million in 2013, according to official figures. However, the number of employees actually benefiting from maternity insurance fund is limited. In 2013, for example, only about 5.2 million employees received maternity benefits totalling 28.3 billion yuan, an average pay-out of 5,418 yuan per employee.
It is still common practice for employers to screen out prospective employees who might get pregnant and find ways to get rid of employees who are pregnant. Employers often ask prospective female workers about their family plans or require them to agree to illegal contract conditions, such as taking pregnancy tests or signing guarantees they will not get pregnant. Many employers find ways to coerce pregnant workers into resigning by requiring them to work unreasonably long hours or by assigning them heavy or dangerous workloads. Other employers simply refuse to grant maternity leave and then fire employees on the grounds of absenteeism. However, more women are now taking legal action against such blatant rights violations. In August 2014, for example, a woman sacked from her job at a Guangzhou human resources company because she took “unauthorized” maternity leave accepted 6,000 yuan in compensation in a court mediated agreement. See Gender Discrimination in China for a more in-depth discussion of this issue.
The Housing Fund, also known as the Housing Provident Fund, is not officially part of China’s social insurance system: It is administered by the Ministry of Housing and Urban-Rural Development rather than the Ministry of Human Resources and Social Security. However, it is often grouped together with the five official social insurance programs since it functions in a similar manner, with benefits funded through contributions paid by employers and their employees.
The fund was first established in 1999, a time when tens of millions of workers were being laid off from state-owned enterprises (SOEs) across China. The government could no longer rely on SOEs to meet the housing needs of workers so the Housing Fund was promoted as a means by which employees could pay for and maintain their own home. Contributors to the housing fund can apply for preferential rate mortgages, cover housing repair and maintenance costs and get rent subsidies. If unused, the fund can be redeemed upon retirement, and as such it actually functions more as a secondary pension. In addition, recent local amendments have allowed housing funds to be used for non-housing related expenses such urgent or serious medical treatment costs.
The Regulations on the Administration of Housing Funds (住房公积金管理条例) state that employee and employer contribution rates are to be determined by the local government but should not be lower than five percent of the average wage at the enterprise. In Beijing, for example, employers have to contribute 12 percent of the average wage during the previous year and employees contribute 12 percent of their monthly salary. In Shanghai, employers contribute seven percent of the average wage during the previous year and employees contribute seven percent of their average monthly salary in the previous year. In all cases, contributions are made on a monthly basis and are tax-deductible.
Unlike the five social insurance schemes, which have seen regular and substantial increases in coverage over the last decade, the number of workers contributing to the housing fund seems to have fluctuated around the 100 million mark for the last decade. In 2008, there were reportedly 110 million workers in the scheme. The number of participating workers reportedly went down to 91 million in 2011 but was back up to 107 million by the end of August 2014. The total accumulated fund, as of August 2014, was just over seven trillion yuan, according to figures from the Ministry of Housing and Urban-Rural Development. Most of the participants in the scheme are government workers, public servants and professionals in the private sector. Given soaring property prices in China, the housing fund has been seen by the vast majority of low paid workers as irrelevant. Most factory workers for example live in cheap and cramped rented accommodation close to their place of employment, see photograph of factory worker housing in Shenzhen above, and the prospect of owning their own home in the city is a pipedream. That said, some workers, particularly older employees, are now demanding the payment of housing fund contributions in arrears, as well as their social insurance contributions when they are laid off during factory closures etc. This is not necessarily because they want to buy a house but more likely because they want to maximise every benefit possible before retirement.
Social insurance and migrant workers
Article 95 of the Social Insurance Law states that “Rural migrant workers in urban areas are to be covered by social insurance in accordance with the provisions of this law” (城务工的农村居民依照本法规定参加社会保险). However, the social insurance system was clearly not designed with migrant workers in mind. It is a highly localised system that assumes employees remain in the same place throughout their working life and retirement. Although more and more migrant workers are now getting social insurance, actual coverage rates are still only about half the national average. The annual survey of migrant workers by the National Bureau of Statistics found that in 2013, only 15.7 percent of the 166 million rural migrant workers employed outside of their home area (外出农民工) had a pension and 17.6 percent had medical insurance. See chart below. The coverage for work-related injury insurance is higher but this is largely because the employer contributions are comparatively low and many migrant workers are employed in dangerous occupations such as mining and construction where it benefits the employer to pay for work-related injury insurance.
Employers have routinely claimed in the past that they have not paid social insurance contributions for migrant workers because the workers themselves are not interested in a pension. They cite the high contribution rates and the lack of transferability of pension accounts as the main reason why migrant workers do not find the system attractive. However, such obfuscation completely ignores the obvious fact that employers have a legal obligation to provide every employee with social insurance. Moreover, the underlying reason migrant workers are unhappy about making pension contributions is not because the rates are too high but rather because their basic salaries are too low and any deductions will have a major impact on their day-to-day living standards.
A key point to note is that the majority of migrant workers have now been employed for two decades or more; they are middle-aged and already planning for their retirement. The 2013 survey of migrant workers mentioned above showed that 144 million of the total 269 million rural migrant workers in China were born before 1980. Over the last few years, many of these older workers have been at the forefront of workers’ demands for payment of social insurance. As the migrant workforce continues to age, those demands will only get louder.
After China embarked on its much vaunted economic reform and development program, the government gradually abdicated its authority in labour relations to business interests. As the private sector expanded, employers could unilaterally and arbitrarily determine the pay and working conditions of their employees, keeping wages low and benefits largely non-existent. The national government sought to protect the interests of workers by implementing legislation, such as the 1994 Labour Law and 2008 Labour Contract Law, however local governments either could not or would not enforce the law in the workplace.
Under these circumstances, creating a system where employers are primarily responsible for their employees’ social security was doomed to failure. Employers could often simply ignore their legal obligations and continue with business as usual, often with official connivance. As Reuters reported in February 2015, after the 2008 financial crisis, the central government allowed struggling companies to delay social insurance contributions for up to six months. The policy was never formally rescinded. It was only when the workers themselves started to demand payment of social security (most notably in the 2014 Yue Yuen strike) that employers were forced to comply.
The failure of the Chinese government to enforce the law and create a social security system that covers everyone has not only disadvantaged China’s workers, it has severely hampered the government’s own ability to push ahead with and accomplish other important policy goals.
One of the key policies regularly enunciated by the government over the last few years has been to boost domestic consumption as a means of ensuring more stable and balanced economic growth in the future. Much of China’s consumption power however remains in the hands of the wealthiest one percent and that has led to huge capital outflows rather than increased domestic spending. The majority of workers are still reluctant to spend because, lacking a pension or medical insurance, they tend to set aside what they can in bank savings and other riskier investments in order to try and secure their future and shield themselves from adversity.
The fact that only a fraction of the social insurance contributions that should have been made over the last two decades or so have actually been made, means that the various social insurance funds are under much more pressure than they should be. With China’s rapidly aging population, this is a particular problem for the pension funds and medical insurance funds. As noted above, the government will eventually be forced to increase the retirement age and reassess the contribution rates for employers and employees if there are to be sufficient funds are to cover all expected pension and medical expenses in the future.
For any social security reform to be successful however, the Chinese government will have to accept the reality of labour relations today and no longer pretend that problems can be solved merely by changes in legislation. Although employers still have the upper hand, the collective bargaining power of workers is increasing steadily and the government needs to find a way to accommodate the competing interests of labour and capital in creating a realistic and stable social security system; one that looks after workers during poor health and old age but also helps to create a content and well-paid workforce that in turn can help develop the domestic economy through greater innovation, productivity and consumption of goods and services.