Abstract
China’s economy is evolving and its population aging. Its social protection system needs to keep up. A reformed system would contribute to economic equality, dynamism, and rebalancing. Steps should be taken to expand social assistance and increase resident pension, medical, and unemployment insurance benefits along with the share of the population covered. Faster implementation of reforms to unify the system would support these objectives and help address financial stability concerns. A Third Pension Pillar would provide an avenue for “gig” workers to save for retirement.
Adequate Social Protection for All1
China’s economy is evolving and its population aging. Its social protection system needs to keep up. A reformed system would contribute to economic equality, dynamism, and rebalancing. Steps should be taken to expand social assistance and increase resident pension, medical, and unemployment insurance benefits along with the share of the population covered. Faster implementation of reforms to unify the system would support these objectives and help address financial stability concerns. A Third Pension Pillar would provide an avenue for “gig” workers to save for retirement.
A. Introduction
1. China has experienced remarkable economic growth. Rapid economic growth has lifted hundreds of millions out of poverty. Economic well-being and medical advances have translated into longer lives. The authorities aim of reaching high income status in the next decade appears to be within reach. A financially and socially sustainable social protection system that reduces economic uncertainty for workers and households and provides diversified savings opportunities can play an important role in achieving this goal, while protecting the vulnerable.
2. Growth has brought challenges. While worker and regional incomes have risen on average, some workers and provinces have prospered more than others. Also, the multigeneration family support system has shrunk with rapid urbanization and below replacement level birth rates. The latter is a major factor behind the current and projected rapid aging of the population.
3. The social protection system has scrambled to keep up. Social protection spending has doubled during the 2010s to 8 percent of GDP. In the last decade, rural and non-salaried residents have gained access to pension and medical insurance. China’s public pension insurance program is now the biggest in the world (Yang 2021). Despite this rapid evolution, the social protection system remains incomplete. To compensate, households save massively for “rainy days” and retirement, generating one of the highest household savings rates in the world (Zhang and others 2018).
4. Fragmentation undermines social protection coverage, adequacy, and service delivery. Local governments have primary responsibility for setting contribution and benefit amounts and the administration and provision of social protection benefits. Risk pooling is very limited. A mismatch between national policy objectives and local capacities and incentives hamper efforts to secure the adequate protection of workers (ILO November 2020). Moreover, slow implementation of the Social Insurance (Security) Law has contributed to underpayment of contributions and workers being denied social benefits (Wong and Yuan 2020: China Labour Bulletin 2019).
5. A more unified social protection system with broader coverage and greater benefit adequacy would provide households more economic security. Greater centralization would improve risk pooling and access to benefits. At the same time, the coverage of unemployment insurance and the adequacy of resident pension, medical, and unemployment insurance should be enhanced. A voluntary personal retirement account (Third Pillar) could relieve spending pressure on urban employee pension plan, provide a pension savings opportunity for non-traditional employees (’gig” economy workers) and allow individuals to diversify their retirement savings. Loosening household registration requirements further would allow greater access to and portability of social protection benefits, particularly for migrant workers. With more adequate and equitable social benefits, individuals and households may reduce precautionary savings, spurring economic activity.
B. Demographic Trends
6. China’s population has urbanized and aged considerably over the last 30 years. In 1990, the rural share of the population was greater than 70 percent Today, the urban population has grown to about 63 percent of the population. China’s population is also aging at an earlier stage in its development relative to other G20 countries (Figure). Falling birth rates and rising life expectancy drive the trend. Also, traditional multigenerational family support systems have been weakened. The average size of households has a third fewer people than in 1990.
China Is Aging Faster Than G-20 Peers
(Working age population as a percent of total population)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: UN Population Revisions 2019; IMF WEO; and IMF staff calculations.Notes: Black line represents China’s actual and projected working age population relative to total population. The other lines repesent the other G20 members. Year 0 is defined as the year when the per capita gross national income of China’s G20 peers is equivalent to China’s in 2019. Working age population for all countries defined as those individuals between 15–59 year of age.C. Social Protection System: Structure, Developments, and Challenges
7. Social protection encompasses the public social security (insurance) system and social assistance (Figure). Social insurance protects workers and residents from income (economic) insecurity caused by old-age, sickness, maternity, employment injury, unemployment, and other social risks (e.g., disability and survivorship). China’s social insurance system consists of four funds: Endowment (Pension) Insurance, Medical Insurance, Unemployment Insurance, and Worker Injury Insurance.2 The pension and medical insurance fund each have separate plans for urban employees and rural and non-salaried urban residents. The Social Insurance Law (2011) provides the legal framework for the social insurance system. Social assistance consists primarily of a minimum income guarantee program (dibao), which also has separate urban and rural resident components.
Text Figure. Social Protection System, December 2020
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: Authorities; IMF staff. Note: Part. = participants (millions); Exp. = Expenditure (Percent of GDP)1/ Expenditures includes expenses for maternity benefits.8. Social protection coverage expanded rapidly over the last two decades. Prior to 2009, most people living in rural areas, those in urban areas working in the informal sector, and many rural migrant workers remained outside the social protection mechanisms (Shen and others 2020). Since then, the authorities have aggressively extended coverage of basic pension and medical insurance rural and non-salaried urban residents. The number of participants in the urban employee pension program more than tripled over the last two decades. Coverage of basic medical insurance expanded from less than 3 percent of the population in 2000 to more than 96 percent in 2020. This growth far outweighs a decline in participants in social assistance programs over the same period. However, despite a doubling of expenditures, China’s social protection spending is low relative to G20 peers. In 2018, most other large emerging market economies (Brazil, Russia, Argentina, Turkey) spent more to protect their workers and most vulnerable citizens. (Figure).
G20 Social Protection Expense, 2018
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: Government Financial Statistics (GFS); and IMF staff calculations.Notes: General Government, except Argentina and Brazil, which are central government including social security funds. 2. Health spending is excluded. 3. Data not available in GFS for India, Korea, Mexico, and Saudi Arabia.9. A defining feature of China’s social protection system is its operational decentralization. The central government establishes nationwide policies and regulations and provides guidelines and opinions on their implementation. Municipalities or counties are largely responsible for public service delivery and managing social security finances. They also set contribution rates and benefits based on local conditions. The fiscal condition of local governments is also crucial for handling caseloads and enforcing social insurance regulation (Qian 2017). No fiscal transfers from the central to local governments are earmarked social security administration costs, which local governments finance from their own budgets.
Financing Social Protection
10. Employer and employee contributions and government transfers (subsidies) are the main sources of funding for social insurance. Both employers and employees contribute to the pension, medical, and unemployment insurance funds. Employers also contribute to the work-related injury and maternity insurance. Since 2015, the central authorities have lowered the guidelines on employer contribution rates, which the government estimates has reduced contributions from enterprises by nearly 1 percent of GDP) (ILO 2021). However, compared to other emerging market countries, China’s contribution rate for the urban employee pension plan remains high (Figure).
China’s Statutory Contribution Rate for the Urban Employee Pensions Is Relatively High
(In percent)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: International Social Security Administration (ISSA); and IMF staff calculations.Notes: Contribution rates are as of July 2018 or 2019 except China. China’s employer rate of 16 percent is the target rate set by the central government.11. Weak compliance with contribution requirements has contributed to a funding gap. Many enterprises fail to fully pay social insurance premiums for employees. Also, employers and employees may mutually agree to make social insurance contributions on the basis of wages that are lower than those actually being paid (Cousins 2021; Zhou 2021). In many areas the real contribution rate (contributions as a percentage of earnings) has been much lower than the statutory rate (Zhao and Mi, 2019). Compliance issues have contributed to financing gaps in many provincial-level jurisdictions. To cover the gap and meet growing expenses, government subsidies for social insurance have grown to about 2 percent of GDP and cover ¼ of social insurance spending (Figure).
Subsidies as a Share of Revenue and Expenditure
(In percent)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: CEIC; and IMF staff calculations.Toward a National Social Protection System
12. The authorities seek to build a unified and sustainable social protection system. Greater visibility of overall social security system financial situation and the introduction of risk pooling are important reforms in this direction. The Social Security Fund Budget became part of the annual budget report to the National People’s Congress in 2013. Moreover, the authorities have introduced a pension risk pooling facility at the central government level (Box 1).
13. The authorities have also taken steps to make urban social insurance benefits available to migrants with rural hukou. In 2020, China had about 286 million migrant workers, of which 170 million worked outside their home county and 116 million worked locally. For the latter group, household registration restrictions on participating in the social insurance system within the province have been basically removed (ILO 2021).3 For the former group, the authorities launched a nationwide residency permit program. Migrants workers with a residency permit have access to basic (rather than all) urban public services. However, some megacities still require urban hukou to be insured (ILO 2021). Abolishing hukou will require urban governments to spend considerably more on basic public services, including social protection, for their migrant populations (Bikales, 2021).
Urban Employee Pension Risk Pooling1
The State Council established in 2018 the Central Adjustment Fund (CAF), which pools risk among the provincial level urban employee basic pension insurance pools. Provinces contribute to the fund by transferring money from their own pension reserves, based on the number of employees in the region and their average salaries. The MOHRSS and the Ministry of Finance then redistributes the money to provincial pension funds based on the number of retirees in their areas. In 2020, provinces transferred about 4 percent of the total income from local urban employee pension reserves to the CAF.2 The seven provinces were net contributors, while three others had net transfer balances of zero (Guizhou, Tibet, Yunnan,). The remaining 22 provinces in central and western regions were net recipients, with the CAF topping up the income of nine provinces by 5 percent or more (Figure).
Central Adjustment Fund Net Flows to/from Provinces, 2020
(LHS: Billions of RMB; RHS: in percent of 2020 income)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: Ministry of Finance; and IMF staff calculations.14. However, unification is generally proceeding haltingly. A first step toward national basic pension planning is the implementation of provincial-level overall planning, which the central government has sought since at least 2007. Thirteen years later, only seven out of 31 provincial-level governments have actually unified the urban employee basic pension plans within their jurisdictions. In March 2018, the Central government announced that the State Tax Administration (STA) should be the sole authority for collecting social insurance contributions,a target that has since been achieved. Provided local social insurance departments share payroll data with these offices, the transfer of the collections is expected to improve contribution compliance.4
15. Obstacles toward a unified social protection system remain significant. The highly decentralized framework, weak information systems, and differing local economic conditions create uneven delivery of benefits and large variations in the financial health of local social insurance systems. County and municipal insurance pools with surplus funds resist unification. When threatened with pooling their reserves in the past, local governments reduced collection efforts, down-sized surpluses, and created deficits (Wong and Yuan 2020). Getting different jurisdictions to share contribution and benefit information is fraught with bureaucratic and technical difficulties (China Labour Bulletin 2019). Also, some provinces that host many migrant workers, resist exporting portions of contributions paid by local employers to other provinces (ILO 2020).
D. Social Insurance: Reforms to Enhance Household Economic Security
16. Pension, medical, and unemployment insurance programs offer the most promise for increasing the coverage and adequacy of the social protection system. Reforms could also address the inequities in social insurance that exist between rural residents and urban workers and expenditure pressures in the pension system.
Creating Sustainable and Adequate Pension Programs
17. China has a multi-tiered (Pillar) pension system. Pillar I dominates the pension system, with three public plans, which provide near universal coverage of those 16 years of age and older. The second pillar is made of many very small occupational pensions.
18. Urban employee pension plan is the largest social insurance program. The Pillar I pension plan for urban employees and self-employed individuals (urban employee pension) has two components: a contributory basic pension and mandatory defined-contribution individual accounts. The basic pension operates on a Pay-as-You-Go basis. A participant in the urban employee pension plan receives a basic pension and an annuity payment from the balance in the individual account at retirement. The government covers the longevity risk. Through the two sources of income, the authorities aim to achieve a replacement rate for an individual with 35 years of contributions of 50 -60 percent. In 2019, the benefit ratio (pensions in payment/ average wage) was 53 percent5
19. The voluntary rural and non-salaried urban residents pension program is popular. The program was created out of the merger in 2014 of separate plans for rural residents and non-salaried urban residents.6 The program makes social pensions available to the non-employed and the labor force outside the formal sector (e.g., rural famers and migrant workers not covered under the urban employee scheme). It is a residual scheme in that eligibility is restricted to those not covered under the urban employee pension or civil service pension plans. The program includes a non-contributory basic social pension funded by the central government for the central and western provinces and jointly with local governments for the eastern provinces. The government aims for a target replacement rate of 15–30 percent (Wong and Yuan 2020).
20. The separate civil service plan is being merged with the urban employee pension scheme. The plan is available to civil servants and employees in public institutions such as teachers and public health care workers. The plan is relatively generous. Based on 2015 data, Shen and others calculated that 62 percent of the Chinese pensioner population (rural residents) gets the same share of all pension benefits paid as civil servants, who compose 2 percent of pensioners.
(i) Reinforce Sustainability of Urban Employee Pension Plan
21. A package of policy measures could build greater confidence in the sustainability of the urban employee pension plan. Absent reform, urban employee pension expense would almost triple over the next three decades from 5 percent of GDP in 2019 to 14 percent of GDP in 2050.7 While refinements to retirement age or the benefit calculation are the most direct way to address pension spending pressures, the pension system does not exist in a vacuum. It is important to consider reform complementarities. For example, improved contribution collections would boost social insurance revenue to pay for some of the anticipated higher spending. Long-term savings options through a “Third Pillar” could make parametric changes more palatable to future retirees.
22. The urban employee pension retirement age dates back to the 1950s. The regular retirement age is 60 for men and professional women. The retirement age of 50 for non-professional women is particularly low by international standards (Figure). Based-on UN population projections, the life expectancy for a 60-year-old male will be more than double in 2050 than it was in 1955. A similar story holds for females, who in 2050, under current retirement rules will be able to draw a full pension for more than a third of their lives.
Increase and unify gradually the retirement age at 65 and link future adjustments to changes in life expectancy.8 China would not be alone if it did so. Several of China’s peers have raised or announced specific plans to raise the statutory retirement age. Others have implemented an automatic link between changes in life expectancy and changes in the statutory retirement age. Critically, an automatic link removes the difficult political decision to make needed ad hoc changes in the statutory retirement age over time as the population ages.
Publish the benefit indexation formula. The current system is roughly indexed to a mix of wages and prices. To allow for better financial planning for retirement, the indexing methodology should be published. Also, the purchasing power of pensioners that have received the average pension has increased by 60 percent over the last seven years. A formula that indexes benefits to changes in consumer prices and a portion of the change in real wages, say 2/3, would still allow for increases in purchasing power, but would also yield considerable pension expense savings.
Prohibit the “buy in” option.9 A person who has not made 15 years of pension contributions – the minimum vesting period required– to the urban employee pension is allowed to “buy in” to the plan by paying a lump sum fee to earn the right to a full pension. This creates immediate revenue for the local pension administrator and a long-term liability that can be substantially larger (Wong and Yuan 2020). It also opens the door to abuse. For example, in richer counties, the “buy-in” is a way to move non-working residents out of the resident pension system and into the urban employee pension system and absorb surplus balances that are at risk of be transferred elsewhere through provincial or national pooling schemes (Wong and Yuan 2020).
Statutory Retirement Ages
(Age)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: ISSA; and IMF staff calculations.(ii) Improve Adequacy and Fairness of the Resident Pension Plan
23. A higher resident social pension would reduce poverty and inequality. A UN and ILO report (2021) notes the basic resident pension plan is not playing a substantially effective role in protecting the rural older residents. Others have noted the unusually low benefit levels under the residents’ pension (Shen and others 2020; Jain-Chandra et al., 2018). In 2020, the monthly average pension benefit payment was 170 yuan. This is below the absolute rural poverty line of RMB 192 per month set by the central government. Many pensioners in rural areas receive less than the average, while those in urban areas can receive substantially more – a source of inequality in the social insurance system. For example, the average monthly benefits for pensioners in Shanghai was 7.4 times as high as the national average in 2018 (Yuan 2020).
24. Some of the savings from reform of the basic urban pension could easily finance an increase in the basic resident pension. The fiscal cost of raising the monthly social pension to the poverty line would be low. If the average resident monthly social pension had been set at the poverty line in 2020, it would have cost an extra RMB 45 billion (0.05 percent of GDP). From a budget standpoint, this is small but could represent an almost 14 percent increase in the social pension income of the average resident pensioner. Moreover, if increase were distributed to pensioners with pensions below the poverty line rather than all resident pensioners, it would put a small dent in the social pension inequality present between urban and rural residents.
Boost Medical Insurance Benefits
25. China’s health spending is broadly commensurate with its level of development. China spent about 6.7 percent of GDP on healthcare in 2019, slightly more than the median health spending of G-20 emerging market members (Figure). Also of note is that over the last two decades the burden of paying for healthcare has shifted away from individuals. The share out-of-pocket payments by individuals, in aggregate, has been halved from 60 percent of health costs to about 30 percent.
26. Basic medical insurance has the most participants and the second largest financial footprint within China’s social insurance system. The government has almost tripled the subsidy per person to RMB 580 in 2021 from RMB 200 in 2011. In 2019, government subsidies (RMB 0.6 trillion) were about a third of total government health expenditures.10 The medical insurance system’s structure is similar to that of basic pension insurance. A contributory plan for urban employees consists of social medical insurance and mandatory individual accounts for employees. Most provinces also allow voluntary participation for self-employed persons. A separate rural and urban residents medical plan provides basic medical insurance coverage to rural and non-salaried urban residents not covered by basic medical insurance for employees.11 For both plans there is no minimum qualifying period for benefit eligibility.12
G20 Health Spending
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: World Development Indicators (WDI); and China National Statistics Bureau (NBS).Notes: Data is from WDI for 2018, except for China. China data is from NBS for 2019.27. Recent reforms aim to lower drug costs for households and enhance the flexibility of personal medical insurance accounts. The central government has reduced the average price of drugs for participants in basic medical insurance by more than 50 percent through bulk purchases.13 The use of individual accounts will be widened to cover basic medical expenses of other household family members in addition to the insured individual.14 The authorities also have announced plans to explore use of individual accounts for paying for family members’ contributions to basic medical insurance for rural and urban non-working residents.
28. More generous medical insurance plans would foster greater household economic security. Basic medical insurance benefits are capped at 600 percent local average wages. State insurance plans mainly cover services in public hospitals and common diseases rather than provide universal coverage of all healthcare costs. Also, basic medical insurance leaves workers and residents exposed to medical costs that exceed covered services and costs from uncovered emergency healthcare or chronic illnesses. The uncertainty is exacerbated for those that live in poorer provinces, which have limited resources to finance health spending. The authorities should consider establishing a national supplementary medical insurance plan that allows individuals to purchase coverage for uncovered medical expenses at reasonable rates. This would lead to a more efficient distribution of medical risks rather than having individuals bear their own idiosyncratic medical risks.
Overhaul Coverage and Benefit Adequacy of Unemployment Insurance
29. Unemployment insurance is a weak link the social insurance system. 15 The coverage and adequacy of and participation in the unemployment insurance system is low. Coverage is restricted to workers in urban firms and urban public institutes.16 Several hundred million farm workers and nonagricultural workers living in rural areas are not covered. Less than half of urban employees participate. While most cities have relaxed rules so migrant workers are now treated the same as urban-hukou workers, only a fifth of migrant workers are part of the system. Moreover, unemployment benefits only reached [20] percent of the registered unemployed urban population.17
30. Many employees lack an economic incentive to participate. Benefits are tied to local minimum or subsistence wages rather than the typically much higher local average wage on which employee (and employer) contributions are based. This leads to low unemployment benefit adequacy both relative to benefits in other emerging market countries and in absolute terms, reducing incentives to participate (Figure). Also, although the Social Insurance Law of 2011 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. Many rural areas do not have adequate systems for disbursing urban unemployment benefits.
Unemployment Benefit Adequacy
(In percent of average wage, latest available)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: OECD; CEIC; and IMF staff calculations.Notes: for China, bar is gross replacement rate; all others are net replacement rates.31. Unemployment insurance system parameters that can influence participation rates are:
Contributions: Employers and employees contribute to unemployment insurance. The base is the average local salary subject to a floor (60 percent) and ceiling (300 percent).18
Eligibility: The minimum contribution period for unemployment benefits is 12 months. Depending on the length of the contributions, individuals can receive benefits from 12 months to 24 months. In addition, to receive benefits, the participant must be involuntarily unemployed; not be receiving old-age benefits; be registered at, and regularly reporting to, a local employment-service agency; and be actively seeking employment.19
Benefit rate and base. The benefit rate is based on the length of the contribution period. Generally, the benefit base is between the minimum living allowance (see social assistance section below) and the local minimum wage.20 The unemployment insurance fund pays medical insurance contributions for the insured during the benefit period.
Reserves. Provincial governments maintain their own fund balances (no national pooling).
32. Unemployment benefits can be well below average wages and differ between urban and migrant workers. Differences between local minimum wages21 and local average wages result in unemployment benefits well below a typical worker’s pay. For example, in Beijing the benefit rate ranges from 70 to 90 percent of the minimum wage for those that contributed for less than 5 years or more than 20 years, respectively.22 The rate is applied to Beijing’s minimum wage of RMB 2,200/month. Assuming the benefit rate is 70 percent, the typical benefits will be RMB 1,540/month or a fifth the average private wage. Migrant workers receive an even lower lump sum benefit.
33. Reforms are headed in the right direction. In line with the 2011 Social Insurance Law, the authorities plan to achieve greater coordination between the central and provincial authorities, promote the transfer of unemployment insurance between urban and rural localities, and simplify benefit application procedures. In 2020, the Ministry of Human Resources and Social Security (MoHRSS) opened a national platform for applying for unemployment insurance benefits, which serves as a hub for subnational platforms. Benefit application procedures have been streamlined. Applicants can apply in person, online, or via mobile phone and only have to present personal identification. Review of eligibility is based on local government internal data (e.g., work and benefit payment history).
34. More accelerated reforms, greater coverage, and higher benefits would enhance worker economic security. The long delay in integrating local unemployment insurance funds and developing adequate information sharing systems limits insurance and benefit portability. To improve portability, the authorities could move contribution collection to STA (as with basic pension contributions) and mandate requisite information sharing to improve compliance, develop a centralized risk pooling system from which benefits could be paid, and provide subsidies to poorer provinces to improve their information technology. Also, extending coverage, for example to contractors and other self-employed individuals, may induce greater risk taking on the part of individuals to create new enterprises. Above all, align the bases for calculation of contributions and benefits. The resulting increase in benefits could incentivize many urban employees and migrants, who are technically eligible to participate in the unemployment insurance system, to do so.
E. Social Assistance: Offering Better Support to Vulnerable Households
35. China’s social assistance programs generally have good coverage, but adequacy could be better. Social assistance programs cover almost all households in the lowest quintile of the income distribution. The broad coverage, however, combined with spending of less than 1 percent of GDP, translates into questionable adequacy. Total transfers to households in the lowest quintile amount to less than 30 percent of their pre-transfer income. This is less than the average “adequacy” found in emerging market countries (Figure). What is missing is a program to provide direct support to households with children. As with other social protection spending, local governments determine benefits, subject to central government guidance, and are responsible for service delivery.
Social Assistance Remains Inadequate
(LHS: in percent; RHS: in percent of GDP)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: World Bank ASPIRE; PovcalNet databases; and IMF staff estimates.Notes: Adequacy of benefits is the total transfers received by beneficiaries as a share of the pre-transfer total income in the lowest income quintile of individuals. Coverage is the share of the lowest quintile individuals that receive a social protection benefits. EME: Emerging market economies.36. The minimum income program (dibao) is the largest social assistance program. The Ministry of Civil Affairs establishes general guidelines for the dibao program, which is implemented primarily by county level governments. It serves as a gateway to eligibility for other smaller assistance programs (Bikales 2021). The program pays a monthly allowance to families whose per capita income of family members living together is below the local minimum living guarantee standard and meets the local minimum living guarantee family property status. Each local government sets local living standards according to local conditions. The calculation method differs across cities and counties. The most common method calculates the basic living standard as the product of a locally determined percentage rate and the local consumption expenditure per capita in past 12 months. The monthly allowance paid to a household is the difference between the household’s income and calculated basic living standard. For example, if the local living standard is RMB 1,200 per person per month, a three-person household with a monthly household income of RMB 3,000, would receive a monthly allowance of RMB 600 (RMB 1200*3 – 3000 = 600).23
37. Other social assistance programs to tend to be small and targeted. These programs include emergency, housing, education, unemployment, and medical assistance and price subsidies. Price subsidies are available to those receiving unemployment insurance benefits or assistance. There is no national unified standard for price subsidies. The subsidy amount is determined according to the local urban and rural subsistence allowance standard and the basic cost of living price index (SCPI) for low-income urban residents.
38. The adequacy and coverage of social assistance programs could be improved. The local living standard, on which dibao is based, could be better aligned with local consumption expenditure per capita by adjusting the local percentage rate upwards. Given the relatively small and declining number of participants in the program (44 million) the increased assistance payments would likely have a limited impact on the budget, but provide significant additional support to those participating in the program. In addition, consideration could be given to extending unemployment assistance to “gig’ workers who are laid off at least until a more permanent solution is found to provide these workers greater economic security.
39. Rules-based automatic transfers could also reduce economic uncertainty of poorer households. A rules-based fiscal stimulus explicitly links the automatic activation of spending and tax measures to the state of the economy through a macroeconomic trigger, such as a rise in the unemployment rate. Such a rule would help shape household and business expectations by promising a robust countercyclical response and act as a form of income insurance to the targeted population. The April 2020 WEO illustrated that a one-half percentage point rise in the unemployment rate above its natural rate generates fiscal transfers targeted to liquidity-constrained households equivalent to about 0.7 percent of GDP (IMF 2020b).
40. A child assistance (allowance) program would complement the three-child policy. Government transfers to households with children would ease the financial strain of having more children and reduce the number of children in poverty.24 Many countries have child benefit programs. Almost 110 countries have a periodic child or family allowance anchored in national legislation (ODI/UNICEF 2020). The child benefit packages vary along several dimensions including type, eligibility requirements, population coverage, nature of benefit indexation, and administrative rules. Spending on child benefit packages averages about 0.4 percent of GDP in low- and middle-income countries, compared with 1.7 percent of GDP for high-income countries (ODI/UNICEF 2020).
41. Social assistance transfers could also be made more efficient by expanding the scope of a pilot program that utilizes e-CNY and related technology to reach the less well off. Central government transfers to low-income individuals pass through three layers of government before reaching beneficiaries bank accounts (if they have one). The central authorities have begun to streamline the transfer channel by bypassing provincial-level governments and progressively allocating more central transfer payments directly to lower-tier governments. With e-CNY digital wallets, these local governments could distribute assistance directly to low-income people’s “hard” digital wallets (i.e., a hard wallet is akin to a credit card, meaning that the participant does not have to have a mobile phone). A pilot study in Shenzhen suggests this is feasible (SIP 5).
F. Savings, Social Protection, and a Third Pension Pillar
42. Social protection reforms can boost private consumption. Lack of adequate coverage and uncertainty about the viability of local social protection systems and the ability to access system benefits likely induces households to self-insure by accumulating precautionary savings against loss of income, health emergencies, chronic health problems, and risks associated with aging (SIP 2). Within the Asia region, microdata suggest that the decline in aggregate household savings in Japan and Korea was driven by lower savings rates across all income deciles, although the drop was much more pronounced for low-income households, reflecting the improvement in social safety nets (Zhang 2018). In China’s case, empirical studies have found a positive impact of pension payments to rural residents on their consumption expenditure (Zhao and Li 2018; Zheng and Zhong 2016).
43. A Third Pillar pension program would complement social protection reforms and possibly reduce aggregate savings. The purpose would be to generate retirement savings to complement, not replace, social security pensions25 and support domestic capital market development. China’s funded pension assets are low relative to most other G20 members (Figure). Voluntary, individual, pension investment accounts (Third Pillar), which are typically fully funded, could ease spending pressure on the public system by providing another stream of income for retirees. A number of emerging markets have also established (Brazil, Chile, Poland, Turkey) or planning to establish such schemes (Russia) (Heinz 2019). A Third Pillar also could induce a lower household savings rate as an individual’s savings portfolio would be more diversified. Moreover, a Third pillar could prove attractive to “gig” economy workers who lack long-term labor contracts with employers that underpin access to urban employee pension benefits.
G20 Funded Pension Plan Assets, 2019
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 022; 10.5089/9798400201486.002.A001
Sources: OECD; and IMF staff calculations.Notes: Excludes Argentina and Saudi Arabia due to data unvailability.44. The authorities have launched multiple third pension pillar initiatives Past efforts include a pilot in 2018 of a tax-deferred pension product. The 2018 pilot results were less than expected. Several new approaches have been announced or are planned: (i) In June 2021, the China Banking and Insurance Regulatory Commission (CBIRC) introduced a one-year pilot of a voluntary individual account pension program (CBIRC 2021); (ii) the MoHRSS plans to promote the establishment of the personal pension system (the third pillar pension system); and (iii) the authorities are establishing a national pension company to manage qualified commercial investment products under a Third Pillar pension system.
45. Development of a Third Pillar is a long and complicated process.26 An over arching structure will have to be selected. For example, the Third Pillar could be run by on a special government agency (similar to the existing provident housing fund), regulated commercial firms (as in several advanced economies) or incorporated into the existing second pillar (Hong Kong SAR). With all structures, coordination and sequencing of reforms across government ministries, financial regulators, and financial firms will be critical to develop proper infrastructure, incentive policies, distribution channels, product innovation, investment policies, risk management, and provide extensive public education. Derivatives markets to hedge risk (e.g., interest rate and longevity risk) of firms offering third pillar investment products will also have to be developed.
46. An exclusive account system, financial incentives, and a wide range of qualified investment products tend to be important features of a Third Pillar. Heinz (2019) stresses the importance of sound public policies supporting the scheme, both in the design as well as in the default options being offered. An exclusive account system could be created with individual accounts to receive, invest, and manage retirement savings. The account would track use of incentive policies. It would also allow the allocation of pension funds in different financial products. To induce individual retirement savings, several countries offer deferral of income taxes on earned income invested (United Kingdom; United States) or tax-free earnings on invested amounts (United States) or subsidies (Germany). Given most low-income earners do not pay income taxes, a matching subsidy from the government that is capped may be more effective. The government should develop a list of “Qualified” 3rd pillar investment products and standards, including duration, purpose, and early redemption penalties. A robust educational campaign is also necessary.
G. Conclusions
47. A unified, rules-based social protection system can support quality growth. Besides shielding vulnerable households and workers from economic shocks (including from COVID-19), social protection can generate public support for growth-enhancing structural reforms such as optimization of state-owned enterprises. Social protection is also a crucial fiscal tool to foster more inclusive growth, support greater labor mobility, and reduce incentives for household precautionary savings. A system with good coverage, adequate benefits, and automatic benefit provision would help rebalance the economy. More economically secure households are likely to spend more on consumer goods and services allowing China to reduce its dependence on carbon-intensive manufacturing, while preserving economic growth.
48. Resident pension and unemployment insurance reforms along with greater unification, including risk pooling, should be the priorities. For rural and non-salaried urban residents, pension coverage is good, but benefit adequacy is wanting. Unemployment insurance coverage and benefit adequacy should be improved for all workers. Accelerated implementation of longstanding efforts to bring more uniformity to system administration and reforms to align system benefits with changing demographics are critical. Other important reforms include: higher medical insurance benefits and provision of low-cost opportunities to insure against uncovered medical costs; introduction of a child allowance program; and reforms to put the urban employee pension program on a more sustainable footing. Reform complementarities such as the creation of well-structured and integrated third pension pillar can ease pressures on basic pensions, while also supporting capital market development
49. To be effective, the social protection system must be sustainably financed. Fortunately, reforms that lead to more adequate, reliable, and equitable social benefits will foster trust in the system and a greater willingness by participants to finance it through contributions. General tax revenues from a more progressive taxes and base broadening as well as expenditure reprioritization will also be important financing sources (See staff report for more detailed tax measures). Reprioritization can also come from within the social protection system. For example, savings from reforms of the urban employee pension program could be applied to cover higher costs elsewhere in the system. More broadly, sound fiscal finances in general can add to greater household security.
Annex I. Recommended Reforms
| Social insurance system: Create a unified system to improve coverage, adequacy, and service | |
| 1 | Accelerate implementation of 2011 Social Insurance Law that envisages a unified system. |
| 1a | Pool all local insurance reserves by type of insurance (pension, medical, unemployment, injury) at the provincial level then the national level. |
| 1b | Develop necessary information technology to improve information sharing capabilities and provide subsidies to poorer regions to support IT development. |
| 1c | Improve contribution compliance by moving all contribution collection responsibility to local tax authorities and ensure they have the required information to assess compliance. |
| 2 | Remove obstacles to obtaining residency permits in location of employment for migrant workers or further downplay household registration system (Hukou) strictures. |
| 3 | Consider measures to bring ‘gig’ economy (flexible) workers into social insurance system (e.g., change employment status). |
| Urban employee pension: Reinforce sustainability | |
| 1 | Raise and unify retirement ages and link future increases to changes in life expectancy at the retirement age. |
| 2 | Publish formula used to calculate annual changes in pension benefits. |
| 3 | Consider adjusting benefits indexation to moderate increases but preserve purchasing power. |
| 4 | Strictly enforce abolishment of buy-in option. |
| Resident pension: Improve adequacy and fairness | |
| 1 | Raise pensions to at least the absolute poverty line in localities where the pension is below it. |
| Third pension pillar: Provide long-term savings opportunity for retirement | |
| 1 | Develop comprehensive and integrated approach to create private voluntary pension plan regulated by the government and managed by private firms (Third Pillar). |
| 1a | Consider establishing exclusive account system, financial incentives, and a wide range of qualified investment products. |
| 1b | Include an education campaign to ensure that all individuals receive a fair deal, in terms of low fees, adequate investments, and proper service. |
| Medical insurance: Boost benefit adequacy | |
| 1 | Consider raising cap on reimbursed medical costs. |
| 2 | Establish a national supplementary medical insurance plan for individuals to purchase coverage for uncovered medical expenses at reasonable rates. Subsidize purchase for poorer individuals. |
| 3 | Allow use of individual medical account savings to pay for family member contributions to basic medical insurance under residents program. |
| Unemployment insurance: Overhaul coverage and benefit adequacy | |
| 1 | Align the bases for calculation of contributions and benefits. |
| 2 | Equate migrant worker benefits with urban employee benefits. |
| 3 | Consider permanently waiving or shortening minimum contribution period. |
| Social assistance: Expand coverage and improve adequacy and delivery of benefits | |
| 1 | Develop a targeted child benefit (allowance) program, drawing on experience of other countries. |
| 2 | Increase minimum income guarantee program benefits (dibao) perhaps by aligning benefit more closely with local consumption expenditure per capita. |
| 3 | Link activation of transfers to households to an economic trigger (e.g. the unemployment rate). |
| 4 | Expand use of digital technology to improve assistance delivery, building off successful pilot of e-CNY digital wallets in Shenzhen. |
| Social insurance system: Create a unified system to improve coverage, adequacy, and service | |
| 1 | Accelerate implementation of 2011 Social Insurance Law that envisages a unified system. |
| 1a | Pool all local insurance reserves by type of insurance (pension, medical, unemployment, injury) at the provincial level then the national level. |
| 1b | Develop necessary information technology to improve information sharing capabilities and provide subsidies to poorer regions to support IT development. |
| 1c | Improve contribution compliance by moving all contribution collection responsibility to local tax authorities and ensure they have the required information to assess compliance. |
| 2 | Remove obstacles to obtaining residency permits in location of employment for migrant workers or further downplay household registration system (Hukou) strictures. |
| 3 | Consider measures to bring ‘gig’ economy (flexible) workers into social insurance system (e.g., change employment status). |
| Urban employee pension: Reinforce sustainability | |
| 1 | Raise and unify retirement ages and link future increases to changes in life expectancy at the retirement age. |
| 2 | Publish formula used to calculate annual changes in pension benefits. |
| 3 | Consider adjusting benefits indexation to moderate increases but preserve purchasing power. |
| 4 | Strictly enforce abolishment of buy-in option. |
| Resident pension: Improve adequacy and fairness | |
| 1 | Raise pensions to at least the absolute poverty line in localities where the pension is below it. |
| Third pension pillar: Provide long-term savings opportunity for retirement | |
| 1 | Develop comprehensive and integrated approach to create private voluntary pension plan regulated by the government and managed by private firms (Third Pillar). |
| 1a | Consider establishing exclusive account system, financial incentives, and a wide range of qualified investment products. |
| 1b | Include an education campaign to ensure that all individuals receive a fair deal, in terms of low fees, adequate investments, and proper service. |
| Medical insurance: Boost benefit adequacy | |
| 1 | Consider raising cap on reimbursed medical costs. |
| 2 | Establish a national supplementary medical insurance plan for individuals to purchase coverage for uncovered medical expenses at reasonable rates. Subsidize purchase for poorer individuals. |
| 3 | Allow use of individual medical account savings to pay for family member contributions to basic medical insurance under residents program. |
| Unemployment insurance: Overhaul coverage and benefit adequacy | |
| 1 | Align the bases for calculation of contributions and benefits. |
| 2 | Equate migrant worker benefits with urban employee benefits. |
| 3 | Consider permanently waiving or shortening minimum contribution period. |
| Social assistance: Expand coverage and improve adequacy and delivery of benefits | |
| 1 | Develop a targeted child benefit (allowance) program, drawing on experience of other countries. |
| 2 | Increase minimum income guarantee program benefits (dibao) perhaps by aligning benefit more closely with local consumption expenditure per capita. |
| 3 | Link activation of transfers to households to an economic trigger (e.g. the unemployment rate). |
| 4 | Expand use of digital technology to improve assistance delivery, building off successful pilot of e-CNY digital wallets in Shenzhen. |
References
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China Banking and Insurance Regulatory Commission (CBIRC). 2021. Notice on launching exclusive commercial pension insurance pilot. China Banking Regulatory Affairs Office (2021) No. 57.
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Prepared by John Ralyea (FAD)
Maternity insurance merged with medical insurance in 2020. At end-2020, 236 million woman with maternity insurance.
China relaxed the household registration system for cities with fewer than three million residents in April 2019, and for cities with three to five million residents in December 2019.
Some countries improved their levels of compliance and efficiency in the collection of social security contributions by merging the services in charge of social security collection with tax administration (Bakirtzi 2011).
The ILO has suggested that an “adequate” replacement rate should be at least 40 percent (Heinz 2019).
Shen and others (2018) view the merger as a positive reform as it will help to realize the gradual equalization of rural and urban benefits.
Earlier studies also projected significant increases in pension spending (CASS 2019; Soto and Gupta 2017)
The factor for calculating the annuity payment from individual pension savings accounts would also have to increase to reflect expectations of longer lives.
If the central government’s policy were strictly followed by local governments, the buy-in option should have been a one-off phenomenon in 2010 (Yuan 2020).
Government subsidies to basic medical insurance for urban employees are immaterial.
In 2016, the government unified the basic health insurance system for both rural and non-salaried urban residents.
In 2020, the reimbursement rate for hospital expenses under the urban employee medical insurance and the rural and non-salaried urban residents medical insurance was about 70 percent and more than 85 percent, respectively.
Beginning in 2018, the NHSA has carried out four batches of centralized drug procurement covering 533 selected products. Centralized procurement drugs are all generic drugs.
The 1999 Unemployment Insurance Regulations (No. 2410) regulates matters related to unemployment benefits, administration of funds, and sanctions in cases of fraud.
Non-contributory unemployment assistance is discussed briefly with other the social assistance programs in the next section.
Perhaps reflecting the difficulty in obtaining benefits, “surplus” unemployment reserves are used to finance vocational training.
For migrant workers, only their employers contribute, not the worker.
Several of the eligibility criteria were waived during Covid. The waivers were extended to end-2021.
The 1999 Regulations state that unemployment benefits must be lower than the local minimum wage.
Local minimum wages are set annually with reference to per capita expenditures for food, Engel coefficient, consumer price index, local average wage and other factors.
From the 13-month of receiving benefits onwards, the benefit ratio reverts to 70 percent for all eligible recipients.
The dibao program implicitly provides child support payments. When a new child enters the family the per capita income of the family will fall generating a greater monthly dibao payment to the family.
On a smaller scale, China recently included 253,000 unsupported children – children with parents who are unable to care for them – in a designated social security system, which will also help reduce child poverty. A monthly subsistence allowance of 1,140 yuan ($176) is provided per child, the same amount provided to orphans (ILO 2021).
Funded systems are no panacea as increases in longevity or lower than expected investment returns could cause funding to fall short of providing adequate pension benefits at retirement.
This and the following paragraph draws on “Research Report on the Third Pillar of Pension Funds in China” issued by the Insurance Association of China in conjunction with McKinsey in November 2020. A synopsis of the report is available publicly here.
