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Social Security

The Chinese pension reforms

In the last 20 years, China's pension system has undergone dramatic transformation.
The story, like so many in recent Chinese history, begins with chairman Mao. In the early 1950s, the country was recovering from decades of foreign invasion and civil conflict, but then became engaged in war with the United States in Korea.
When a labor insurance system for urban workers was proposed, many, including the leadership, questioned if it was the right time. Finally Mao decided that the revolution that had distributed land to peasant farmers, providing them with a basis for economic security, also needed to address the concerns of workers, particularly about livelihood, old age, sickness and disability.

This evolved into the “iron rice bowl,” an all-encompassing social security system for employees of state-owned enterprises (SOEs). Although the story begins at the birth of modern China, it is not yet the end of the tale, says Wang Jianlun, chairperson of the China Social Insurance Association, an industry representative body. As a former vice minister in the Ministry of Labor and Social Security (MOLSS, now MOHRSS), she played an important and passionate role in the pension insurance reforms that China has undergone in recent years.

“I believe social security will become more and more of a strategic matter in China ...”

Wang Hanlun

Modern Reform, she explains, originates in the dramatic economic changes started in the 1980s. Until then, pensions were provided directly by SOEs to retired employees. The transition from a centrally planned economy to a new socialist market economy required SOEs to rebuild their operational models.

“As the economic conditions of the country improved, the system changed and developed to meet China's evolving needs,” she explains. The resulting social insurance system may differ from international definitions, but she believes it meets the economic and structural realities of China today. Chairperson Wang describes it as social insurance with “Chinese characteristics.”

For chairperson Wang, three decisions were critical to recent pension developments. Since 1983, the relationship between the SOEs and employees had gradually changed to a contractual basis. This altered the cradle-to-grave provision offered by SOEs.

June 1991 became a milestone in pension reform when the State Council issued Document No. 33. This introduced a new social insurance pooling model in which the state, enterprises and individuals share responsibility. Another reform in 1996 allowed for individual pension accounts to complement the social insurance system.

Taken together these created the framework for the current system. “It is easy to view these steps as logical and progressive, but they were debated – intensely at times. Part of the issue is that we are trying to reform an existing system and there are many interests whose viewpoints need to be considered,” chairperson Wang states.

Unlike eastern Europe, where the social security system collapsed with the fall of communism leaving dependents without a claim on subsequent governments, China is undergoing “soft” reform. It is seeking to honor existing obligations, while moving to a comprehensive multi-pillar pension system and extending this system to cover more of its citizens – all simultaneously.

“That is a complex task, but in the last 30 years China has achieved significant progress in social security to parallel those made in the economic and societal development,” she says, with pride in the achievements of her country. “We have advanced the system, made strides to eliminate inequalities, and further extended it to encompass more people than, to my knowledge, any other system in the world has achieved.” 

Farmers’ dignity

In China, 700 million people live in the countryside, and the pension system is distinct from the urban one. In 2009, the People’s Congress made it mandatory for farmers over the age of 16 to contribute to an individual pension account. Until then, participation was voluntary and only 9% of the rural population was covered.

At the same time, the Congress earmarked 4 billion RMB ($587 million) to provide a pension of 55 RMB ($8) a month to retired farmers. “That may not sound a lot, but it is not so much a matter of survival as dignity,” says chairperson Wang. “Normally, the elderly can depend on sons to provide food and housing, but their voice within the family is diminished if they no longer contribute income.”

The cash flow ensures the standing of retirees within the family and maintains the harmony and stability of the family. The program will initially be piloted in 10% of the countryside, and gradually broadened to other places.

Chairperson Wang’s involvement in the reforms extends back to the1990s. She worked at MOLSS as vice minister in 1994. Her appointment coincided with the most tumultuous reform years. At that time SOEs still distributed pensions. As pensions were linked to profitability, SOEs were sometimes unable or unwilling to pay, so pensioners could not be assured of receiving payments in full or on time, and it was difficult for government to force timely payment.

Since 1998, pension distribution has been organized by MOLSS and distributed by banks to individuals with authorization by social insurance administrative agencies. Funds shortages are covered by central and local governments. Initially, some 38 million people were covered by this urban pension system and the changes assured them of a reliable, consistent payment. It was a change that, of course, won the approval of pensioners.

Chairperson Wang played a key role in implementing the changes, explaining them to those involved and supervising the system. Those who know her praise her as a key figure in researching China’s income discrepancies and as a strong advocate of the need to extend the rural pension system. When asked about the most significant obstacles she faced during her decade in charge, she laughs and candidly responds, “Human nature.”

“There were distinctly different interests involved, including governments at both the central and local levels. In particular, the enterprises wanted to contribute as little as possible and individual workers were reluctant to contribute at all because they believed they were simply relieving the burden from the SOEs and the government.

“Our challenge was to address the various interests, correct misconceptions and to explain the changes as a healthy development in our changing society and economy,” she said.

The chinese pension system will gradually be extended to cover the entire 1.3 billion Chinese population living in both urban and country areas. Future challenges include the need to extend pensions to the 240 million rural migrant workers living in urban areas, demographic changes that will see China age rapidly within 30 years and the development of a long-term mechanism to ensure the sustainability of the pension system.

Chairperson Wang is confident that the pension system is in a solid position to deal with them. “I am fortunate to have been involved in a period when the social security issues have gone from being simply a side issue to the economic reforms to being seen as integral to the stability and harmony of the entire country. In recent years, the notions of humanity, the life quality of ordinary people and, importantly, fairness have been emphasized in discussions on the social security system. For this reason – and I stress this is my personal view – I believe social security will become more and more of a strategic matter in the future in China and not simply addressed on an issue-by-issue basis.”

Published by PROJECT M in November 2009 in Leading Thoughts, Cover image by action press
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