social security reform in china the case of old-age insurance

SOCIAL SECURITY REFORM IN CHINA THE CASE OF OLD-AGE INSURANCE

Written by Song,S. and Chu,G.(1977)Contemporary Economic Policy

Presenter95925012 Patrick ( 丁明豪 )95925015 James ( 袁凱遜 )95925017 Sharon ( 吳曉郁 )95925018 Colleen ( 許春梅 )

Social Security and Health Insurance System in China, IMCS, Spring,2008

Introduction

Presenter95925012 Patrick ( 丁明豪 )


The social security system in the people’s republic China is experiencing dramatic changes

This paperThe characteristics of

the pre-reform social security system

The old-age insurance

discuss propose recommendations

comment

Raising officialRetirement age

Changing funding system

Investing pension Funds to

appreciate their values

Introduction

The first labor regulation (Laodong Baoxian Tiaoli ) 勞工保險條例

State-sector employees

male 60

female 55?

Respective work unit

Danwei 單位

Cradle to grave benefit

Lifelong wage

housing

Determining eligibility

Paying benefits

Urban collective sector

Financial resources

Trade to trade

varied Locality to locality

Negligible private sector Social security program

Economic reform

Development in China

Under the old system

enterprises Soleresponsibility

Providing retirees with pension benefits

Welfare services

The differences between the old and the new enterprises:

The old had more retirees Damage worker’s morale

Highly decentralized administrations

Lack established mechanism eligibility

benefits

Discouraged workers from moving across enterprises, industries and or sectors.

Hindered development of collective and private enterprises.

Conflicted with the labor contract of the early 1980s

To improve labor Mobility and efficiency

Rapid growth of retiree population

The old social system

Time The number of retirees Number

(millions)

The ratio of retired people to employed

workers

1978 3.14 0.033

1993 27.80 0.185

Longer life expectancy 1949=35; 1990=60

One child policyOne-two-four family

The 710 institute of the Ministry of space and aeronautics (1990)

Time Retired/ worker ration

2000 0.195

2030 0.439

2060 0.559

Heavy financial burden

Chinese government focusing on its Social security system

Started in 1989Experiments on pension poling in

some countries and cities

The pension progressed rapidly

Time:1991

Cities and countries:2270

Established pension pooling at city or country level for state-sector enterprises

50 million permanent workers

12 million contractual workers

10 million retirees

1076 countries and cities had pension pool for collective enterprises

1994 80 million employed workers + 18.5 million retired people

PRC Labor Law ( January 1, 1995)

World bank = provided detailed report on pension pooling program before 1990

Recommend reforms of various programs in China’s security system

Old-aged insurance

unemployment insurance

This paper differs from other studies in two main areas

It reports the most recent efforts toward pension reform programs

It provides recommendations for the current reform of old-aged insurance

Characteristics of the Chinese pre-reform old-age insurance

Presenter95925018 Colleen ( 許春梅 )


Work units

• State-owned enterprises (SOEs)

• Collective sector

• Private sector

　－ No old-age insurance

Collective sector

• No standard provisions existed

• Benefits varied from trade to trade and from locality to locality, depending on financial resources

• Benefits lower than state sector

State-owned enterprises

• The first labor insurance regulations: retirement ages, eligibility and benefits

• Social security covered all employees

• Individual enterprises financed and administered pension. Employees didn’t contribute.

• 3% of total wages People’s Bank (the central bank)

• Kept 70% of contributions for benefit payments and submitted surpluses to municipal, provincial, or ministerial administration

• The central government subsidized shortfalls

The sum of base wage, position allowance and working-year allowance.

Amended in 1978

Allowed retirement 10 years sooner if poor health factor

－ promised to hire retired workers’ 　　　　unemployed offspring

－ offered middle- and upper-ranking party and technical cadres a special preferred pension benefit (lixiujin 離休金）

The full rate of pre-retirement pay +

all perquisites associated with their positions.

8.85 times

52.82times

Reforming for two reasons

1) Lacked benefit portability discouraged worker mobility across enterprises, industries, and sectors.

Lack of a market mechanism and the special privilege of benefits to state-sector employees worker had no incentive to seek employment outside the state sector, hindering the development of collective and private sectors

2) Enterprises bore sole responsibility for providing pension benefits and other welfare services for retirees.

Current Reform of Old-age Insurance

Presenter95925015 James ( 袁凱遜 )


Current Reform of Old-age Insurance

1. Introduction

2. Three-tiered Old-age Insurance System

3. Guidelines to the Old-age Insurance System

4. Pension Pooling in Practice

1. Introduction

• China’s reform of the old-age insurance system started in 1984, with pension pooling experiments in some cities and counties.

• In the reform’s early stage, city and county governments set uniform contribution rates and benefits within their respective jurisdictions.

• A key objective of this reform is to relieve individual enterprises of full direct responsibility for their workers’ retirement pensions by establishing funds that pool resources and share risks among enterprises. By doing so, old-age insurance reform would complement and support other economic reforms.

2. Three-Tiered Old-age Insurance System

1) The first tier provides a basic pension to all workers in urban sectors.

2) The second tier consists of enterprises’ additional contributions to the basic pension and depends on availability of enterprise bonus and welfare funds.

3) The third tier is mandatory individual pension accounts layered on top of the first two tiers.

3. Guidelines to the 0ld-age Insurance System

1. Old-age insurance should have three components: basic insurance, enterprise supplementary insurance, and individual pension savings.

2. Contributions to pension pools are primarily on a pay-as-you-go basis, with a small surplus.

3. Workers contribute 3% of their standard wages to individual supplementary pension fund.

4. Basic retirement payment is adjusted according to the overall price index of urban resident consumption and the growth rate of active workers’ wages.

4. Pension Pooling in Practice

• Methods of pension pooling vary from place to place, as permitted by the central government.

• Pension pooling has led to significant developments: By 1991, 2,270 cities and counties had established pension pools at city or county levels for state-sector enterprises, covering more than 50 million permanent workers, 12 million contractual workers, and 10 million retirees. In addition, 1,076 cities and counties had pension pools for collective.

• By 1994, more than 80 million employed workers (about 53% of the total workers) and 18.5 million retired people (about 60%) joined pension pooling programs.

• All these developments followed a general trend of spreading risk among enterprises and shifting administration from individual enterprises to local governments and then to provincial governments.

Recommendations

Presenter95925017 Sharon ( 吳曉郁 )


Recommendations

Change the retirement

age

Change the Funding system

Invest pension

funds

Reform Old-age insurance

Change the retirement age

• Retirement ages in China should be increased to 65 for men and 60 for women – Reason: the national life expectancy has increased

• In 1951,national life expectancy was about 40 • In 1990,national life expectancy was over 70

– Benefit• Improve the workforce• Curb future pension growth

Change the

Funding system

Invest pension funds


Change the

retirement age

Issue of Changing the retirement age

• Reduce work opportunities for young people • How to solve the issue

– Retired people has provided some relief to the shortage of skilled workers in some industries

– Change of working hours from 48 hours (six eight-hour days) to 40 hours (five eight-hour days)

– The service sector in China was developing rapidly

Change the

Funding system



Change the

retirement age

The strategy of raising the retirement age

• Raise the retirement age by 3 months every year(On 2015, the retirement age will reach the objective)–Advantages: The transition is smooth–Disadvantages: The administrative progress is tedious

• One-time adjustment (At this moment, the retirement age will reach the objective)–Advantages: Pension expenses decline efficiently –Disadvantages: The policy is abrupt

Change the

Funding system



Change the

retirement age

•Combine the two strategies– Raise the retirement age by 1 year for every 3 or 5 years– Two steps: 2 years for the first step (by2005) 3 years for the second step (by2010)


• PAYG (pay-as-you-go ) system – The pension fund to the retirees is contributed by

the workers on the job – Intergenerational Transfer

• The reason to change PAYG (pay-as-you-go ) system – PAYG (pay-as-you-go ) system suits for the

country with large number of young people – China is an aging country

Change the

Funding system



Change the

retirement age

PAYG formula

• PAYG (pay-as-you-go ) formula:

Change the

Funding system



Change the

retirement age

t = (B/W) * (N t = (B/W) * (N b b / N / N ww) = r*d) = r*d

B : average social security benefitW : average taxable wages r = income replace r = income replace

raterated = dependency ratiod = dependency ratio

N b : the number of beneficiaryN w: the number of active workers

t : contribution rate

Time dependency ratio replace rate

2000 0.19 0.162030 0.44 0.352060 0.56 0.45

The strategy of Changing the Funding system (1)

• Privatize and create a fully-funded social security system – Workers have their personal social security accounts

(PSSA)– Social security bureaus or private investment

companies hold these PSSAs– Workers have choices over how they are invested

and used in the retirement

• Criticisms– The risk sharing and fund pooling are absent– Transition Problem

Change the

Funding system



Change the

retirement age

The strategy of Changing the Funding system (2)

• Establish a partially-funded system with a higher contribution rate in early years so that a surplus accrues relative to the PAYG scheme – contribution inflows would be larger than benefit

outflows in early years

• Partially-funded system involves mandatory PSSAs layered on top of the PAYG scheme– workers contribute on a PAYG basis, but in

addition, individual workers must have PSSAs

Change the

Funding system



Change the

retirement age


• Develop the strength in financial /portfolio management

• China should explore various channels for investing the funds– Purchasing government bonds that have relatively

higher returns than most savings accounts in banks– Invest in stocks – Invest directly in projects

• real estate, energy, transportation, communication, and large scale construction projects


Invest pension

funds


Change the

retirement age

Conclusion

Presenter95925012 Patrick ( 丁明豪 )


• This paper examined the characteristics of the pre-reform Chinese old-age insurance system in light of the overall industrial reforms in the early 1980s that compelled social security reforms.

• The old-age insurance (1984) reform in China established a pool system for the retirement pension

• More than 50% of the total of the employed workers and retired people had taken part in the pension pooling programs.

Conclusion

recommendation

Raising the retirement age

Changing the Funding system from a PAYG system to a partially-funded system

60 for women

65 for men

Investing pension funds to appreciate their real values

Possible Venues for investment

• Purchasing government bonds

• Investing in stocks in both international and domestic market

• Investing in projects such as real estate and communication projects

China needs to develop its strength in financial/ portfolio management in order to meet the retirement needs of a large and aging population

social security reform in china the case of old-age insurance

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