Strengthening Social Security System in China



Strengthening Social Security System in China

Introduction

Alongside with the significant economic performances in the last 15 years, major progress has been made in the development of social security system in China. In 2006, the Chinese government set the goal of achieving “universal social security coverage” in 2020. With the fast expansion of coverage in recent years, China already has the world’s largest social security system in terms of the covered population. At the same time, the modern social security system in China, with a history of only 30 35 years, is also faced with major challenges such as demographic change, fast urbanization, and increasing expectation of the people and most recently emergence of the “new normal” economic situation.

As a productive factor, social protection can promote productive employment and inclusive growth, improve productivity and aggregated demand, and stabilize labour market and the economy. This chapter will discuss the role of social security in the labour market, the progresses and the challenges. Given the limited space of the report, this chapter will review only the old-age pension, health care and unemployment insurance schemes. Based on an assessment of the progresses and challenges, suggestions will be put forward on the development of the social security system in the 13th five-year period and the time beyond.

1. Policy: Why does social protection matter to productive employment creation?

1.1 Interaction between social protection and labour market

As illustrated by the Universal Human Rights Declaration (article 22), 1948 and a number of relevant ILO standards, social security is one of fundamental rights for all member of a society. It provides for the protection and income security in case of events occurring along the life, e.g. maternity, unemployment, illness, working injury, old age and loss of the family breadwinner, invalidity, and family responsibilities such as childcare.

Social protection is not only a human rights’ component. It plays a major role in creating access to full and productive employment and decent work for all through cash transfers, active labour market measures, health insurance, and family support policies. Effects of these measures in encouraging labour market participation have been witnessed in low- and middle-income countries[1]. Income support and various kinds of social services could promote people’s ability to seek for jobs and get recovery from ill health or other losses, thus improving their employment statusemployability. The effects of enhancing better access to food and nutrition, education and health care contribute to fostering a more productive and more readily employable workforce, leading to higher labour market participation rates and higher productivity. It preserves and promotes human capital and hence enhances the functioning of the labour market. A well-developed social security system, with easily transferrable benefits, can contribute to the development of a fully integrated labour market.

Social protection, as a productive factor and an automatic stabilizer, also plays a key role in boosting domestic demand, stabilizing aggregate consumption, and driving the economic growth. The counter-cyclical function of social protection can help to smooth consumption in economic downturns. Social protection plays a supportive role to the structural transformation of national economies. This is because the increased consumption, as a result of the social protection measures, will boost growth and contribute to the economic restructuring, which will be eventually reflected in the adjustment of the employment structure and transfer of workers to the tertiary industry.

A better understanding of the interactions between labour market and social protection is crucial for the analysis of any social security system and the design of related public policies. Social security programmes are based on labour market conditions and interact with employment policies. Factors of labour market, such as the informality of employment, minimum wage, the job security regulation and flexibility of employment policies, could have major implications on the design of social security systems. To develop a social security system which shall contribute to reducing poverty and vulnerability, promoting decent work, and fostering inclusive and sustainable growth, it is important to fully integrate and combine the social security policies with the fiscal, wage, employment, and skills policies.

1.2 Challenges from the changing labour market

In the transition from planning economy to market economy in the last three decades, the labour market in China went through fundamental changes. The trajectory of the development of the social security system reflects the changes of the labour market in different periods. In fact, the establishment enactment of the social insurance schemes was intended to accompany major economic reform process, characterised by decreasing importance of SOEs and replacement of comprehensive employers’ liability towards workers and their families by collectively financed mechanisms. Social insurance was also expected to for the purpose of supporting the large number of workers that might be laid off by State Owned Enterprises (SOEs) in the early phase of market-oriented reforms in 1990s. As one of the measures to facilitate SOEs’ reform, the social insurance schemes introduced at that time were largely marked with “SOEs” features, covering mainly urban workers in SOEs and collectively-owned enterprises.

With the shift of urban employment from SOEs to private enterprises and self-employment since mid-1990s, the challenge of providing social protection for workers in private enterprises and self-employment became prominent in early 2000s. The government made major efforts to extend the social protection coverage. The adoption of the Labour Contract Law in 2008 and the Social Insurance Law in 2009 has expedited this process, as shown in the increasing proportion of the private sector workers in the covered population of the Pension Scheme for Urban Workers. In 2012, the proportion of employees of SMEs and the self-employed surpassed 50% of all the participants of the Pension Scheme for Urban Workers[2].

Figure 1: Structure of participants of the Pension Scheme for Urban Workers in 2012

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Source: Zheng Bingwen, China Pension Report (2011, 2012 and 2013), Economy & Management Publishing House.

2. Assessment of social security systems

2.1 A brief history of social security evolution in China

China began continued to develop its modern social security system after adoption of the “reform and opening up” policy in the early 1980s. Prior to 1990, the actual operation of social security programmes was principally the responsibility of the enterprise. In early 1990s, to support the jobless workers laid off by unprofitable SOEs, five kinds of social insurance schemes including pension, health care, unemployment, work injury and maternity were gradually set up. These five social insurances, combined with a dozen of social assistance programmes developed in rural and urban areas, constitute the social security framework in China. In 1990s, these programmes mainly covered urban workers in SOEs and the collectively-owned enterprises. In later years, the schemes were gradually extended to cover urban workers in the private economy, including those in informal sectors, flexible employment and self-employment.

With the arrival of the 21st century, the pace of social security development gained momentum. In order to build a nation-wide social security system, the central government launched a pilot reform for urban social insurance system, starting in Liaoning Province in 2001. In 2003，New Rural Cooperative Medical Insurance was created to cover rural residents. In 2006, the goal of “Universal coverage for urban and rural residents by 2020” was put forward by the central government, and reaffirmed at the 17th National Congress of the Communist Party of China (CPC) in 2007. Following that, major progress has been made with the extension of coverage of pension schemes. In 2009 and 2010, the new rural pension programme and urban resident pension scheme were launched, providing pensions for the non-wage earner residents. A social-insurance type pension programme for employees of public institutions was launched in five pilot provinces in 2009. The Social Insurance Law, coming into force in 2010, was a milestone of the development of the social security system in China. In 2012, the government announced the realization of the goal of “institutional universal coverage” (universal legal coverage). In 2014, the originally separated pension schemes for urban residents and rural residents were merged together. In January 2015, the State Council released the decision to establish the pension plan for civil servants and employees of public institutions.

2.2 Assessment on public pension systems

In 2009, less than 240 million people in China, including both the insured and the pensioners, had old age pension. At the end of 2013, 820 million people were covered by the old age pension scheme. This number has increased by 2.4 times in only four years. Currently, China’s public old-age pension system consists of the following three schemes:

The Pension Scheme for Urban Workers, as shown in its name, target the urban workerssalaried employees. The self-employed and flexibly employed are also encouraged to participate in this scheme. The contribution structure is composed of two parts: a PAYG-DB plan of 20% of the payroll (in most areas) financed by employers into the social pooling fund and a funded defined-contribution (FDC) plan of 8% of the wage contributed by employees to their individual accounts. Upon retirement, covered workers receive monthly benefits derived from both parts of this scheme. The average monthly pension for urban workers has increased from 700 yuan in 2005 to 1900 yuan in 2013 (as show in Figure 2). The Ministry of Human Resources and Social Security (MOHRSS) supervises the system, while local agencies in provinces are responsible for collection of contributions, benefit payments and fund administration. Figure 3 shows the trend of average replacement rate of the Pension Scheme for Urban Workers. The calculation is based on data of MOHRSS and NBS on the average monthly pension and the average wage of employed persons in urban units.

Figure 2: Growth of the average pension for Urban Workers

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Source: updated based on the data from Annual Report on Chinese Labour and Social Security Industry (2014) p.132

Figure 3: Average replacement rate of urban worker pension system from 2004-2013 (%)

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Source: Author’s calculation based on data from MOHRSS and NBS （2004-2013）

The Pension Scheme for Rural and Urban Residents covers residents who are outside of the Pension Scheme for Urban Workers. This scheme has two components: a basic pension financed by local and central government[3] and a personal account for contribution from enrolled individuals. A flat-rate basic pension of 70 Yuan per month is the minimum benefit. In terms of the annual contribution to the personal account, participating residents select one of 12 contribution levels ranging from 100-2000 Yuan. Local governments are required to subsidize no less than 30 yuan per year for the individual contribution. For the very poor groups including the disabled, local governments subsidize part or the whole of the bottom level of individual contribution. The average pension for urban and rural residents was 81 yuan/ month in 2013[4], which is about 11% of the per capita net income of rural households[5]. Currently, county social security agencies are responsible for setting up the personal accounts, managing the local pension funds, and paying the benefits to retirees.

In addition to these two major schemes, there is the pension scheme for civil servants and employees of public institutions. Traditionally, the pensions of civil servants and employees of public institutions are regarded as “final salary” after retirement, with generous benefit provisions financed entirely by public revenue. At the beginning of 2015, the State Council released the decision to establish the pension scheme for civil servants and employees of public institutions that are managed according to the Civil Servants Law. The contribution structure is the same as the Pension Scheme for Urban Workers: 20% from the payroll and 8% of the wage from employees. The method of benefits payment is also similar to the principles of the Pension Scheme for Urban Workers. The annuity fund for the civil servants and the employees of public institutions will be established as a supplementary pension scheme. The contribution plan is 8% from the payroll and 4% from individuals.

Apart from these social pension schemes, social assistance programmes play an important role in reducing poverty among the poor elderly. The Minimum Living Subsidy Scheme (Dibao), established in 1999, provides regular cash and/or in-kind support to poor households up to a locally defined poverty line which is based on a means test. The funding of urban Dibao is shared by both central and local government[6]. Wubao Programme is a social assistance programme introduced in 1950s for Wubao households, which mainly refer to the elderly, disabled and juveniles in rural areas who have no ability to work, no source of income, and no one to depend on. By the end of 2013, the Dibao programme covered 10.97 million households/20.64 million people in urban areas and 29.31 million households/53.88 million people in rural areas. In 2013, the average minimum living standard was 273 yuan/person/month in urban areas and 2434 yuan/person/year in rural areas, while the average monthly subsidy rate was 264 yuan/person in urban areas and 116 yuan/person in rural areas. In the same period, the Wubao Programmme covered 5.37 million people. The average annual subsidies under the Wubao Programme were 4685 yuan/person for the Wubao beneficiaries supported by the care centres and 3499 yuan/person for those supported by the village councils.[7]

Table 1 Three public pension programmes in China

|Plans |Pension Scheme for Urban Workers |Pension scheme for civil servants and|Pension Scheme for Rural and Urban |

| | |employees of public institutions |Residents |

|Mandatory/ |Mandatory |Mandatory |Voluntary |

|voluntary | | | |

|Covered population|Urban employees |Public employees |Urban & rural, non-wage |

|Administration |Local MOHRSS |MOHRSS, Ministry of Finance |County government |

|Finance |I – PAYG |II –Unfunded IA |I – PAYG |

On the basis of the major progress achieved, the following issues are to be addressed in the future:

To achieve effectual universal coverage. According to MOHRSS, the public pension schemes covered 819 million people (not including children under 16 and most of students do not need old-age pension insurance) at the end of 2013[15]. To realize the goal of universal coverage in 2020, it is estimated that around 200 million people are to be covered by the public pension system[16]. In extending the coverage, the main challenge is the low compliance in the private sectors. The low coverage population mainly includes the employees of SMEs, dispatched workers, people in temporary or seasonal employment, the self-employed, and the flexibly employed.

To reduce disparity and enhance adequacy. For urban and rural resident pensions, the basic benefit is 70 Yuan which is about 8.5% of the per capita annual income of rural households in rural areas in 2014[17], so there is a big gap to be filled if pension will gradually become the main means of providing old-age income security for the residents. There is also a gap between the average pension under Pension Scheme for Urban Workers and the pension of civil servants. The average monthly pension of urban employees, having increased from 700 yuan in 2005 to around 1900 yuan in 2013, is still below the pension level of civil servants.

To integrate the fragmented schemes. The three public pension schemes cover different populations. The future challenge shall be to gradually harmonize these separate schemes in terms of contribution rate, benefits level and quality of service. Except for the adjustment fund which is pooled at provincial level, the social pooling of the pension funds is mainly at city/county level. The fragmentation of the system not only makes benefits portability a major issue but also constrains risk-sharing among the provinces.

2.3 Assessment on health care systems

By the end of 2013, it is estimated that more than 95% of the Chinese population has been covered by the healthcare insurance schemes. Significant increases in the availability of health care coverage have been witnessed. Currently, China’s health care system mainly consists of the following three schemes:

Urban Employee Basic Medical Insurance Scheme (UEBMI). It is an employment-based basic health insurance scheme for urban employees. Funding for UEBMI is composed by an individual medical saving account and a social pooling fund. The 2% of the wage paid by employees goes into the individual medical savings accounts. The employers pay 6% of the payroll, of which 70% is paid into the social pooling fund and the rest 30% goes into the individual account. The social pooling fund is used to pay for the inpatient cost and serious diseases. The deductible in principle is around 10% of the local average wage, and the cap is around 4 to 6 times of the local average wage. The deductible part is paid either through the individual saving account or out-of-pocket. The part between the deductibles and the cap is covered by the social pooling fund according to certain reimbursement rate. The average actual reimbursement rate of UEBMI has increased from 58.91% in 2005 to 64.10% in 2011[18].

Urban Resident Basic Medical Insurance Scheme (URBMI). This scheme provides voluntary coverage for urban residents who are not covered by UEBMI, such as the elderly, students, retirees, the un-employed, disabled, and the poor people who receive social assistance. The URBMI mainly pays the cost of hospitalization, serious diseases and emergency treatment. The deductibles are different in the hospitals at different levels, which is lower in the primary-level hospitals and higher in the third-level hospitals.

New Rural Cooperative Medical Scheme (NRCM). The NRCM is a matching fund comprised of central government subsidies, county government contributions, and individual contributions. For poor rural residents, individual contributions are waived. This new scheme is operated at county level and there is considerable heterogeneity in the specific benefits packages across counties in terms of services covered, deductibles, expenditure caps, and co-payment rates[19]. According to the National Health and Family Planning Commission, the average actual compensation rate of hospitalization under NRCM reached 55% in 2012. The goal set in 2013 is to reach 75% for reimbursement and 60% for the actual compensation[20].

The URBMI and NRCM share a similar funding and reimbursement structure. The two schemes are mainly financed by the public revenue. In 2014, individuals pay flat premiums which isflat premiums which are around 90 yuan on average and government makes subsidies which are more than 320 Yuan per month in 2014. The cap is around 6 times of the average annual disposable income of the urban or rural residents and in principle no less than 60,000 yuan[21].

Apart from UEBMI, URBMI and NRCM, the Critical Illness Insurance (CII) and the Medical Financial Assistance Programme (MFA) provide support to poor residents to reduce medically induced poverty. The government made the decision to establish the Critical Illness Insurance for Urban and Rural Residents in 2012. CII covers the urban and rural residents who have participated in URBMI and NRCM. It is financed through the funds of URBMI and NRCM, causing no additional cost to individuals. No less than 50% of the out-of-pocket cost for catastrophic diseases, after the reimbursement from the URBMI or NRCM, shall be covered by CII. MFA was first launched in 2003 on pilot basis and have been gradually extended to the whole country afterwards. MFA covers the low-income households in urban and rural areas. It plays an important role in helping the poor residents to access basic health care insurance through funding the threshold payment (deductible part) and the part above the cap. The reimbursement level is heterogeneous in different localities and also related to the level of the hospital (primary, second or third level) and the financial status of the eligible households.

Figure 4: Actual reimbursement rate of the several medical insurance schemes since 2005

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Source of data: Auditing Report of Social Security funds in 2012, National Auditing Office

Table 2 Overview of the three main health insurance schemes in China

|Characteristic |New Rural Cooperative Medical Scheme|Urban Employee-Basic Medical |Urban Residents-Basic Medical |

| |(NRCM) |Insurance (UEBMI) |Insurance |

|Administration |County level |Municipal level |Municipal level |

|Mandatory/ |Voluntary at household |Mandatory for individuals |Voluntary at household |

|voluntary | | | |

|coverage |Rural residents |Urban employed |Children, students, elderly, |

| | | |disabled, other non-working urban |

| | | |residents |

|Current coverage |98.26% (2012)[22] |93% ( 2013) | 96%（2013） |

| | | |296 million (2013)[24] |

| |805 million (2012) |274million (2013) [23] | |

|Source of revenues |90 RMB from individual contribution,|8% of employee wages: 6% payroll tax |90 RMB from individual |

| |and 320 RMB from government |on employers and 2% employee |contribution, and 320 RMB from |

| |contribution (2014)[25] |contribution. |government contribution (2014)[26]|

Source: Health Insurance Systems in China: A briefing note, Sarah L Barber and Lan Yao, World Health Report (2010), Background Paper, 37

On the basis of the major progress achieved, the following issues are to be addressed in the future:

To improve the level of protection. The average actual reimbursement rate has been gradually increasing in recent years. The figures for UEBMI, URBMI and NRCM was 64.10% (2011), 52% (approximate for 2011) and 55% (2012), as shown in figure 4. Yet some poor households still have difficulty to access medical care due to the cost factor since in case of heavy treatment e.g. surgery costs can be extremely high compared to patients’ income. According to a WHO study, the inpatient reimbursement rate has to reach approximately 70 to 80% to prevent medical impoverishment, as shown in the experience of some countries[27]. With aging of the population, the expenditure will continuously increase in future decades, which will bring higher pressure on the central government to further increase public spending on health. Over prescription and utilization of technology due to the provider payment mechanism is also a factor driving up medical cost, as evidenced by higher charges for insurance patients[28].

To reduce disparities. There are large disparities in terms of levels of contribution, benefits and services among the three basic medical insurance schemes and across regions. The level of medical service and the quality of medical workers and facilities in the rural areas are to be further enhanced. Migrant workers and their children face particular challenge in accessing health care. According to the NBS survey[29], 17.6% of employers paid contribution to the medical insurance for migrant workers[30] in 2013. The high mobility of the workforce in the urbanization process will require easy transfer between NRCM and UEBMI and simple settlement procedures for reimbursement across provinces. These issues are may seem difficult to resolve due to the large regional gap in terms of level of social and economic development. but pragmatic solutions need to prevail. Of particular importance is the fact that migrant do not necessarily need treatment where they are insured, hence difficulties in going through the required administrative process from one level of care to the other. Family members all covered under one insurance do not also necessarily live together, which may also create administrative difficulties.

To reduce the overlap of participation. The UEBMI and URBMI are managed and supervised by MOHRSS, while NRCM is under the National Health and Family Planning Commission (NHFPC). Since the two schemes are manage separately, some people take part in both URBMI and NRCM. This has put additional burdens on the administrative and financial resources of both schemes. Managerial cooperation among schemes is definitely necessary.

2.4 Assessment on unemployment insurance system

Unemployment insurance (UI) was initiated in the mid 1980’s to provide basic benefits to workers laid off by in SOEs. After the introduction of “Regulations on Unemployment Insurance” in 1999, UI scheme has gradually covered all types of unban workers. UI is mandatory. The contribution used to be 2% of the payroll from employers and 1% from employees’ wage. In February 2015, the State Council announced the decision to reduce the total contribution rate to 2%, with the division of contribution rate between employers and employees to be decided by each provincial government. UI has a flat benefit level varying from the “Dibao” standard to local minimum wage, depending local regulations. The UI benefits could be provided for up to 24 months. To be eligible for UI benefits, an individual must meet the following requirements: (i) have contributed to UI for at least one year, (ii) employment was interrupted involuntarily, and (iii) have registered as unemployed and is willing to find a job.

At the end of 2013, there were 164 million participants in unemployment insurance scheme and nearly two million beneficiaries. In 2013, contribution to unemployment insurance reached 129 billion yuan and payment of benefits was 53 billion yuan, with an accumulated surplus fund of 369 billion Yuan[31].

On the basis of the major progress achieved, the following issues are to be addressed in the future:

To extend the coverage. From 1994-2014, the participation rate of urban employed population increased only marginally from 42.7% to 43.3%[32]. Currently, the UI mainly covers employees of the formal sectors, while the coverage of population in higher risk of unemployment such as the self-employed, migrant workers and college graduates is still low. For this reason, the number of people who claimed unemployment benefits dropped from 5.9 million in 2007 to 4.3 million in 2010 during the international financial crisis. As a countercyclical tool, the effect of UI is to be strengthened through extension of the coverage in the informal economy and SMEs, especially among the migrant workers and the flexibly employed.

To improve the benefits level. As noted above, benefit levels are set by local authorities between the minimum living standard (Dibao) and the minimum wage. Although UI benefits exceed the minimum subsistence level, the scheme provides only a modest level of income protection, varying from 60% to 90% of minimum wage across provinces. At the national level, statistics indicate that UI benefits paid as a percentage of urban average wage have decreased since 2000, from 18.2% to 16% in 2010[33].

To strengthen the role of UI as an active labour market tool. Currently only a small part of UI funds has used for job introduction services and vocational training for UI beneficiaries. The role of UI for promoting employment can be further strengthened through its closer linkage with active labour market measures such as vocational training and employment guidance. Given the surplus of the unemployment fund, the percentage of spending on employment promotion can be further enlarged.

3. Trend in social security indicators and perspective on the

13th Five-year period

3.1 Trend of social security indicators

Coverage extension. The past 15 years have witnessed major progress in expanding social security coverage in China, both horizontally which corresponds to expansion among the population, and vertically which translates into higher level of benefits. The pension and medical insurance schemes for urban and rural residents established in recent years have played a major role in fast coverage expansion. Having achieved the universal legal/institutional coverage of pension and medical social insurance, the future focus will be increasing the effectual coverage, especially in SMEs and informal sector and among the rural migrant workers, the self-employed, the flexibly employed, etc. The coverage of unemployment insurance is still to be expanded to better cover the migrant workers and people in flexible employment.

Figure 5: Covered population under the social old-age pension, medical insurance and unemployment insurance from 2006-2012（unit: 10,000 people）

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Source of data: NBS, China Statistical Yearbook, 2006-12

With the major achievement in extending coverage in recent years, the future challenge will be related to improving the quality of the coverage in terms of benefits level and compliance. The benefits level can be further improved for the low-income population such as rural and urban nonwage residents and vulnerable groups in line with the fiscal space created by the future economic growth. Compliance in the private sector, especially the SMEs, needs to be improved, since some employers evade their obligations through underreporting the payroll, using so-called “self-employed” workers or other disguised means.

Financial status. As coverage of social insurance extends rapidly in recent years, the overall funding status has been improved. The aggregate accumulated surplus under urban pension, health insurance and unemployment insurance schemes have increased rapidly during 2010-2013 with a yearly growth ratio of 30.6%. By 2013, each of those schemes had a surplus which could be used for covering more than 12 months of the current level of expenditures. Figure X 6 illustrates the financial balance of urban social insurance system in recent 5 years.

Figure 6 Revenue and expenditure of five urban social insurance schemes (in billions)

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Source: MOHRSS (2010-2014), Annual Statistical Communiqué，.

Large surplus in some way represents a strong financial status of social insurance system, but it also brings about the challenge of the management and investment of the funds. In fact, one year cash flow is very little if the scheme is supposed to be funded. Even under a scaled premium approach – medium term required average contribution rate – this type of reserve would be too small. The fact that even at this reduced level there are difficulties in identifying profitable investment combining safety, yield and liquidity raises concerns is the schemes are to go towards deeper funding. Currently most of the funds only get low interests from banks and national bonds, resulting in the de facto devaluation. Another challenge is the lack of coordination among the funds of different provinces, leading to low efficiency in the use of the fund. Since the social security funds are administered by local governments – approximately more than 2,000 social security agencies (so-called “pooling units”) throughout the country, it is still not possible to relocate the surplus of some affluent provinces to support others that are in deficit.

Fiscal spaceearmarking. Chinese government has continually increased public expenditure on social security systems. Figure 7 shows that the social spending on social security systems has risen from 540 billion Yuan in 2007 to 1450 billion Yuan in 2013, with a yearly average growth rate of 15%. In the past 7 years, public spending on social security has remained quite stable at about 10% of the total fiscal expenditure. In 2013, the total social security expenditure (expenditure from social insurance funds + public revenue spent on social security programmes) was about 6.7% of GDP[34]. Although the expenditure on social security has been increasing steadily in recent years, it is still below the level of developed countries, in which the social security expenditures usually exceed 20% of GDP. To reduce the disparity of benefit levels between different population groups, public revenue will be the main means of improving the protection for the low-income population. With the projected slower economic growth and a fast aging population, it is important that appropriate level of fiscal space earmarking shall be created for the development of the social protection system. This is not necessarily compatible with the restrictions attached to the “new normal” economy.

Figure 7 Public social security expenditure

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Source: Ministry of Finance (2008-2014), Annual Finance Yearbook.

3.2 Perspective on 13th Five-Year period

With the prospect of a slower economic growth and a fast aging population in the next 20-30 years, the 13th Five-year period will be the strategic time for China to develop a universal, equitable, adequate and sustainable social security system. The following aspects will have major implications on the development of the social security system.

The challenge of demographic change. Figure 8 shows that the percentage of China’s older population will increase substantially in the four decades ahead. The percentage of those aged 65 and above will be 16.2% in 2030 and 23.9% in 2050[35]. The data on OADR[36] suggest serious age-related demographic pressures in China in the decades ahead. The so-called 1-2-4 family pattern[37] will result in declining family resources to support the elderly. While the percentage of those aged 65 rises, the supply of labour force (population aged 15-64) will decline. NBS data shows that the number of labour force declined by 3.5 million in 2012, reversing the trend of labour force growth in last 30 years. This situation is expected to continue in the next decade and pose major challenge for China’s social security system. It is important to build a sustainable social security system before the “population dividends” completely phase out. The problem will be much harder to solve when the population is very old and the economic environment is less favourable.

Figure 8: Trends and projections: population aging and old-age dependency, 2011-2050

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Source: United Nations (2014), World Population Prospects: The 2012 Revision,

The importance of social protection for the transition to a consumption-led growth model. As economy is moving towards consumption-led model of growth, the development of the social security system will be essential for releasing the potential purchasing power. In the period from 1980 to 2012, the share of household consumption in GDP has declined from 50.8% to 36.2%[38]. China has a high domestic savings rate of 51% of GDP in 2013[39]. To shift the growth mode, the provision of adequate and reliable social security will help to boost consumption in the long term through a reduction of precautionary savings[40] which are particularly high in categories insufficiently protected such as migrant workers and families with non yet married and engaged into gainful employment child. Another factor affecting the transition to consumption-led growth model is the high contribution rate of social security. The contributions from employers and workers for the five types of social insurances total 42% of wage. The high cost can be a burden for many SMEs in private sector and also constrain spending by workers in the present time. Reduction in contribution rates would however mean ithereither a decrease in benefits or a tightening in eligibility which is difficult to envisage in terms of growing social needs, or an increase in Government share in financing, not necessarily compatible with the requirements of the “new normal” economy.

The need to redress income inequality. The World Bank estimated that the poverty rate in China fell from 60.2 per cent in 1990 to 6.3 per cent in 2011, using a poverty line of $1.25[41]. Almost in the same period, income inequality in China haveinequality in China has risen between the mid-1990s and the late 2000s, as shown by the Gini index (see Figure 4 of chapter 4 “Deepening reform of China’s labour market”). Although the GINI index remained stable within the range of 0.47-0.49 from 2003-2013[42], it is still at an alerting level. Social security programmes should play an important role in income (re)distribution and reducing inequalities. However, social security programmes have not yet been considered to have major contribution for reducing inequalities, since the level of protection for the most vulnerable groups is yet to be improved.

To facilitate high labour mobility in the urbanization process. Large scale labour migration is one of the most important features of the labour market changes in China in the last 20 years. The number of migrants (the so-called “floating population”) leapt from 18 million in 1989 to 245 million in 2013, representing 18 per cent of the national population and more than 33.5 per cent of urban residents. In the last 7 years, the proportion of migrant workers participating in urban pension systems increased steadily, as a result of a series of government measures aimed at extending social security coverage. Yet the participation rate of the rural migrant workers in the insurance schemes for urban employees remains low due to low compliance in SMEs and alleging of the high contribution rate. Some locations have established special schemes for migrant workers which is a pragmatic but questionable move. Many migrant workers are anyway reluctant to join the social insurance schemes due to frequent job changes and low income combined with lack of harmonization. It would be profitable to the attractivity of the scheme to put emphasis on the interest of benefits immediately derived from joining the fund in case for example of disability, death, sickness, maternity. But those branches also need significant improvements to really become attractive. The fast urbanization process and the mobility of a large proportion of the labour force would require easy transfer of benefits of large number of population among regions, sectors and schemes, which will make it difficult for the funds to keep actuarial balance.

Figure 9: Trends and ratios of rural to urban migration in China, 2000-2013[43]

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Source: National Bureau of Statistics (NBS 2014), 2013 Statistics Yearbook.

4. Suggestions on enhancing coverage and entitlements of

social security system

The Chinese government is committed to achieving universal social security coverage and building a well-off society before 2020. Social protection will be essential for achieving these goals. Some suggestions will be put forward in this section on the social security development in the next 5 years and the period beyond.

4.1 Achieving universal coverage in 13th Five-Year Period

The 13th Five-Year Period will be critically important for China to realize the goal of universal social security coverage. For the extension of coverage, we would propose to follow the two-dimensional strategy aiming at the rapid implementation of national social protection floors containing basic social security guarantees that ensure universal access to essential health care and income security at least at a nationally defined minimum level, in line with the Social Protection Floors Recommendation, 2012 (No. 202), and the progressive achievement of higher levels of protection (vertical dimension) within comprehensive social security systems according to the Social Security (Minimum Standards) Convention, 1952 (No. 102).

The extension strategy for national social protection could be based on multiple levels. At the bottom line, non-contributory programmes, such as the minimum living guarantee (“Dibao”) and the medical assistance programme, could articulate with other social security and active labour market programmes to encourage people graduating out of poverty and joining more productive, decent and sustainable employment. At the second level, it could be the compulsory employment-based social insurance schemes and the voluntary pension and health care schemes for the nonwage residents. This second level of protection should be the most important component in the whole social security system. At the third level, voluntary insurance plans, such as occupational pension sponsored by employers and individual pension plans, could provide complementary income and further protection for different social groups.

Having achieved institutional/legal universal coverage, the effectual effective coverage of the basic old-age pension and medical care schemes would need to be further improved. To better cover low-coverage groups such as rural migrant workers, self-employed and flexibly employed, practical issues such as portability, eligibility, and high cost need to be addressed. Based on solid actuarial assessment, an incentive mechanism linking social insurance contributions with benefit levels could be introduced to encourage workers to join the system. The development of the national social security data and information system will be important for monitoring the participation and extending coverage. To improve compliance, the role of labour inspection is very important and could be further strengthened.

To extend the coverage of unemployment insurance, it is important to increase the coverage of rural migrant workers and the flexibly employed. In 2013, the participation rate of rural migrant workers who work away from home counties in the unemployment insurance is 28.5%[44].

4.2 Enhancing the equity and adequacy of the social security system

To enhance the solidarity and risk-sharing function of social security system, the current separate programmes for different social groups need to be further integrated. The government is committed to providing equal social services for residents both in urban and rural areas. This would require the integration of social security and social assistance programmes for urban and rural residents. More rural migrant workers shall be able to have equal access to the social services and social welfare programmes in the urban areaswhichareas which is at least partly dependent on the reform of the hukou system and the budget allocation process to local governments by the central government.

For the covered population, the level of the social protection depends on the adequacy of the benefits. To provide effective protection, the system should provide sufficient income support for the basic needs under contingencies of old-age, illness, unemployment, etc.

The level of pension for over 30 years’ contribution recommended by ILO is a replacement of no less than 40% of previous income, in line with the Social Security (Minimum Standards) Convention, 1952 (No. 102), or 45%, in line with the Invalidity, Old-Age and Survivors' Benefits Convention, 1967 (No. 128). A clear definition of the income to be replaced should be accepted – with or without premium and benefits, benefits in kind, including or not taxation, etc. An indexation mechanism for the adjustment of old-age pensions, based on a sound actuarial assessment, is necessary for providing better income support security, gradually reducing wealth gaps, and achieving long-term fund balance. The redistributive effect combined with equity considerations of social security provisions should be reviewed and goals needs to ebbe established. A minimum level of pension could be established to guarantee the income of retirees whose pension is below the minimum level due to low wage. Such a minimum pension, guaranteed by the state, could be combined with the other social assistance programmes as well as employment and wage policies to prevent poverty of the elderly. Based on a sound actuarial assessment and taking into consideration of the viable fiscal space, the basic pension for urban and rural residents could be gradually increased, since the present level is still too low as income guarantee if it is the main source of income.

In the area of health care, the out of pocket medical expenditure, especially for the poor rural and urban residents, can be gradually reduced within the possible fiscal space. According to the study of WHO, the inpatient reimbursement rate would have to increase to approximately 70 to 80% to prevent impoverishment due to health care costs, as shown in the experience of some countries[45]. The government could consider to establishestablishing a defined minimum benefits package to ensure a higher level of risk protection, particularly for the rural and urban residents’ programs[46].The reform of the payment mechanism will also help to lower the medical cost through reducing the overutilization of services and medicines. The level of medical service and facilities in rural areas, including the quality of health care workers, could be gradually improved.

The level of income protection recommended by ILO for the unemployment benefits is at least 45% of the reference wage, in line with C.102, or 50%, in line with the Employment Promotion and Protection against Unemployment Convention, 1988 (No. 168). Gradually enhancing the protection level of the unemployment insurance will be the long-term goal, while extending coverage, especially among the rural migrant workers and the flexibly employed, is the more pressing task, which will also help to increase financial resources for the fund.

4.3 Strengthening the sustainability of social security system

As mentioned above, since the coverage of major social security schemes are expanding rapidly in the last 15 years, most of them have witnessed large amount of fund surplus. However, it is predicted that this situation will be changed in next 10 years as the speed of coverage extension slows down and the population dividends gradually diminish. Besides, factors in the design of the current system, such as low level of social pooling, a lack of investment policy on social security funds, and weak incentives on contributions, will have implications on the long-term sustainability.

Regular actuarial testing and analysis is indispensable for the long-term financial equilibrium. Therefore, an actuarial system could be built and fully utilized for pension and medical care first and for the other types of social insurances later. Such an actuarial mechanism would play an essential role in setting and adjusting contribution rate and benefit level. It could also serve as the basic reference for making any social security policies.

The early formulation of rules and regulations on the investment of social security funds is required to maintain and increase the value of the funds, especially the pension funds. The fund efficiency and investment can be improved through gradually lifting the social pooling to the national level.

Based on solid actuarial assessment, a closer link between social insurance contributions and benefit levels could be established to encourage participation and more contribution. The retirement age could be postponed through gradual harmonization of the retirement age between women and men, for example in a time span of 20 years, and incentive policies on late retirement.

4.4 Coordinating labour market and social security policies

The foreseeable trend of labour market development requires that the social security system adapts to the changing labour market. The social security policies need to be combined and integrated with social, fiscal, employment and wage policies to better fulfil the following labour market functions:

Facilitating mobility. With the continuous urbanization process and the industrial grading, the social protection system will need to adapt to the highly mobile workforce, better facilitate job transitions among regions and sectors, and provide support for job transitions. Social security system should contribute to developing a more open, responsive, inclusive and integrated labour markets, overcoming segmentation and reducing urban/rural and regional wage gaps. Easy portability between different regions and insurance schemes will be a prerequisite for such labour mobility.

Encouraging employment. It is important to promote the linkage between social assistance, social insurance and active labour market policies. The role of unemployment insurance as an active labour market tool could be strengthened to assist the return to employment, by further linking unemployment insurance with programmes that support entry or re-entry into employment, skills upgrading and other active labour market policies. The social protection provisions such as unemployment benefits, healthcare and pensions as a whole can be designed to making it easier people to enter, remain in or return to the labour market.

Formalizing the informal sector. This requires the development of a comprehensive social protection package to support the transitions to regular work. The benefits, contributions and operations need to be adapted to the characteristics of informal economy workers[47]. This entails effective measures to improve employer compliance in terms of signing labour contract and paying contribution, make the individual cost more affordable, and enhance portability of the benefits. Extending the coverage of unemployment insurance among the people in irregular employment will be particularly important for integrating these people into the formal sectors. The formalization of the informal sectors will in return increase financial resources to improve the sustainability of the social security system.

To help people access the existing social protection schemes and active labour market programs in a coordinated manner, the concept of single window services at the local level, through the existing network of employment service centres or decentralized administration, could be considered. This can be better achieved through closely coordinating the provision of social services, social protection benefits and employment services with community-based organizations, especially for rural migrant workers who work in the informal economy[48].

4.5 Social dialogue

National tripartite dialogue, with government, employers and workers as well as academics, civil society and others, is fundamental for the adoption of optimal public policies. The international experience shows that close coordination among line-ministries and full consultation with social partners and other key stakeholders will help to develop a more equitable, sustainable and holistic social protection system. This is because social dialogue and the participation of the other stakeholders in itself is a process of balancing the interests. The social protection policies should express a consensus among all stakeholders, including all line-ministries and social partners.

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[1] World Social Protection Report 2014/15

[2] Zheng Bingwen, China Pension Report (2011, 2012 and 2013), Economy & Management Publishing House.

[3] For western provinces, the central government will pay the total cost of the basic pension component; for eastern provinces, the central government will pay 50 per cent and local governments will cover the remaining 50 per cent.

[4]

[5] Source of data: NBS. The per capita net income of rural households is 8895.9 yuan in 2013.

[6] On-line resources of ILO:

[7] 2013 Communique on Statistics of Social Service Development, Ministry of Civil Affairs,

[8] For the self-employed, the contribution ratio is 20%; in the case of migrant workers, the level of contribution from employer and employee are sometimes set by some local government.

[9] (Regional average wage for previous year at time of retirement + average wage over period of contributions/2) x years of contributions x 1%

[10] Balance of principal and interest in individual account/ (average no. of annuity payments after retirement)

[11] Balance of principal and interest in individual account/ (average no. of annuity payments after retirement)

[12] Currently a minimum of 55 yuan / month throughout China, with the option of a larger amount in some areas

[13] Balance of principal and interest in individual account/139 (average no. of annuity payments after 60)

[14] For people above the age of 60 when the Rural and urban resident pension scheme was launched, they can receive flat-rate monthly pension without previous contributions.

[15] : MOHRSS (2014), 2013 Statistical Communiqué

ÿ

[16]

[17] NBS (National Bureau of Statistics). (2014). National Statistics data. Retrieved from

[18] Auditing Report of Social Security funds in 2012, National Auditing Office

[19] Douglas Besharov, ‎Karen Baehler, Chinese Social Policy in a Time of Transition, Oxford University Press, 1 edition (June 14, 2013).

[20]

[21] News release of the State Council on September 17, 2012，

[22] China Health Statistics Yearbook, National Health and ….

[23] MOHRSS (2014), 2013 Statistical Communiqué，

[24] MOHRSS (2014), 2013 Statistical Communiqué，

[25]

[26]

[27] WHO Regional Financing Strategy 2010.

[28] Sarah L. Barber and Lan Yao, Heath Insurance Systems in China: A Briefing Note, World Health Report (2010)

[29] National Bureau of Statistics of China, China Monitoring Report on Migrant Workers (2013)

[30] The migrant workers here refer to those who work outside their home counties.

[31] MOHRSS (2014), Annual Statistical Communiqué，

[32] Source of data: NBS: China statistical Yearbook 2014; MOHRSS (2014), Annual Statistical Communiqué

[33] MOHRSS (2010), Annual Statistical Communiqué，; NBS(2010), 2010 Statistics Yearbook,

[34] Ministry of Finance (2008-2014), Annual Finance Yearbook.

[35] United Nations(2014), World Population Prospects: The 2012 Revision,

[36] The old-age dependency ratio (OADR), that is the population aged 65 and over divided by the working age (15-64) population.

[37] “1-2-4 family pattern” refers to the structure of a family with one child, two parents and four grandparents.

[38] NBS, China Statistics Yearbook, various issues.

[39] NBS (2014), 2013 Statistics Yearbook.

[40] Katja Hujo(2014), Reforming Pensions in Developing and Transition Countries, United Nations Research Institute for Social Development (UNRISD).

[41] World Bank (2012),

[42] NBS(2014),

[43] Out-migrant workers refer to those who work away from their home counties.

[44] Source of data: NBS: 2013 Monitoring Report on Rural Migrant Workers

[45] WHO Regional Financing Strategy 2010.

[46] Health insurance systems in China: A briefing note, Sarah L Barber and Lan Yao, World Health Report (2010), Background Paper, 37

[47] Extension of social protection, 2013, ILO.

[48] Unemployment insurance, income security measures andactive labour market policies in ASEAN, Proceedings of the ASEAN tripartite seminar Ho Chi Minh City, Viet Nam 20–22 March 2012, ILO

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