Top up China's pension fund for stronger social safety net

Hu Shuli says any social security revamp must begin with the state taking responsibility for an ageing society by honouring its commitments

PUBLISHED : Thursday, 06 December, 2012, 12:00am
UPDATED : Thursday, 06 December, 2012, 3:47am

A proposal to fix China's pension scheme is bringing hopes of a stronger safety net. The government has launched a public consultation on a plan that will allow people to switch between three existing types of pension insurance. If approved, the flexibility will go some way to addressing long-standing criticism of the current system.

China needs a social security system that is commensurate with its development. A good system ensures social changes keep pace with changes in the economy. It safeguards stability, and is a necessary feature in any prosperous society.

The government's efforts over the past decade to improve social security have been commendable. Most recently, at the 18th party congress, it said that all urban and rural residents should be covered by a social security system that is sustainable, fair and mobile. Given the current shortfalls, this is an ambitious goal.

The protections being offered now are far from adequate. Not only is the pension scheme weighed down by inherited debts, it is also fragmented with different non-transferable plans catering to different groups. The difficulty of switching plans deters people from changing jobs and hinders labour mobility.

Any solution must start with the government clearing the pension debts. Then, where possible, it should lower the fees for the basic plan so more people can be covered, and diversify its plans to meet different needs. In addition, personal accounts should also be managed according to market principles for better wealth protection and asset appreciation.

Migrant workers will be the biggest beneficiaries of the new plan, if it is approved. But it won't be enough. For a start, not all migrant workers would be covered by the urban social insurance scheme because it would be too expensive. Employees are expected to contribute up to 45 per cent of their monthly salary to the fund, a burden they would find hard to bear. Some companies do not hire permanent workers; some opt out of the scheme altogether.

On the whole, migrant workers are in no position to press claims when injured, enjoy no unemployment benefit when they lose their job, are hit with high medical bills when they fall ill, and have no pension to fall back on when they grow old. Those who are most in need of social security are excluded from it; this mismatch of resources and need is seriously impairing the fairness and accessibility of the welfare system.

The system is also not sustainable, because too few are contributing to it. Scholars have long agreed that fees should be cut so more people can join. Yet, no attempt has been made to do so because China's pension insurance system is already facing tremendous payout pressure.

The government is to blame for this. Under a centrally planned economy, employees of state-owned enterprises were given low wages but enjoyed generous welfare packages. But with the introduction of a national pension scheme, the National Social Security Fund now has the responsibility to meet those obligations, but without the necessary injection of funds. The state-owned enterprises and the government, as the ultimate employer of these workers, must take responsibility to top up the depleted funds.

The result is that younger workers and their employers are today paying more than 28 per cent of their wages to support the elderly, and few businesses and individuals can afford private insurance. There is no diversification of risk to speak of: the government alone shoulders the entire burden for providing pension and social insurance for an ageing population.

Something must be done. The government must start by tackling the legacy debt, which should be handled separately from the current pension obligation.

Funds should be raised to settle the legacy debt. Researchers at home and abroad have proposed using financial tools such as government bonds or the National Social Security Fund to raise money, instead of just relying on income from the existing pension insurance system. China Securities Regulatory Commission chairman Guo Shuqing has suggested injecting 30 to 50 per cent of state-owned assets into the social security fund, while some scholars have suggested using dividends of state-owned enterprises to make up for the shortfall of lowered fees. All these measures are worth considering.

With China now enjoying the last of its demographic dividend, there's no time to lose. The priority is to clear the legacy debt.

The moves now to promote urbanisation and speed up labour mobility are only an attempt to remedy the defects of the system, rather than a fundamental overhaul. In the long run, it must address the problem of unfair access, and simplify the fragmented, complicated system.

Building an effective social security system is a challenge for governments around the world, and none could claim that their own system is perfect. While European countries struggle with their perhaps overly generous welfare systems, Asian economies in general are lacking in social welfare.

While an economy like China's, in transition, would need to beware of the welfare trap, it must for now accelerate the pace of social security reform - in an affordable and sustainable way - so it can honour the commitments made to the people.