Chinarsquo;s Urban and Rural Old Age Security
System:Challenges and Options
Dewen Wang*
China amp; World Economy / 102 – 116, Vol. 14, No. 1, 2006
I. Introduction
In the process of economic transition, China has adopted an urban-priority reform approach in establishing its old age security system, which conforms to international development experiences. Chinarsquo;s rapid aging of people with low-incomes, however, is unprecedented compared with other developed or developing countries. The urban-priority reform ensures a relatively high coverage in urban areas, whereas it imposes a heavy burden of old age support on rural households. Current challenges caused by population aging and urbanization do not necessarily imply that the old age security system is headed for bankruptcy. If the issues of incentives and availability of pension financing can be solved through sound institutional design, it is possible for China to establish a universal basic old age security system to achieve the goal of caring for the growing number of elders.
The rest of this paper is organized as follows. Section II reviews the development of urban old age security system reform. Section III discusses the vulnerability of the current urban old age security system. Section IV introduces the development of rural old age security system reform. Section V investigates the challenges to rural family-based age security system and Section VI analyzes the strategic implications of the rural old age security system; the final section examines future challenges and puts forward some suggestions on how to build up a sustained old age security system.
II. Urban Old Age Security System Reform
Under the planned economic system, enterprises or working units were obligated to deliver pension funds to urban workers. Before 1978, the state took a unified approach to managing enterprisesrsquo; finances, including revenue and expenditures, profits and losses. Enterprises were responsible for both the delivery and administration of basic pensions to their own retirees according to the years of employment and the wage received before retirement. The state used a pay-as-you-go (PAYG) system to finance pensions and provided a cradle-to-grave service for urban workers through an enter prise-based security system, which actually met the requirement of the planned economy.
Since the market-oriented reform in the late 1970s the traditional old age security system was dismantled. The introduction of the enterprise responsibility system and the abolishment of the lifetime employment system in state-owned enterprises (SOE) in the mid-1980s not only changed the financial relationship between enterprises and the state, but also changed the relationship between enterprises and employees. After the implementation of a system of profit-sharing and paying income tax instead of turning profit over to the state, enterprises had to partially take the responsibility of accumulating and paying pensions. The Decision on the Reform of Enterprise Pension System promulgated in 1991 specified an over all framework for the establishment of an old age security system. It is called a mufti-pillared system, combining a social basic pillar with supplemental enterprise-sponsored pensions and individual savings. In this system, pension financing is shared by the Government,enterprises and individuals.
After setting up the framework for the old age security system, reform after the mid-1990s focused mainly on the construction of social basic security, the enlargement of pension pools and the expansion of insurance coverage. In 1993, the Third Plenary Session of the 14th Chinese Communist Party Central Committee promulgated a Decision on Issues of Establishing a Socialist Market Economy System, setting the principle of establishing the basic old age insurance system through a combination of pooling funds and individual accounts.
In 1997, the State Council promulgated a Decision on Establishing a Uniform Basic Old Age Insurance System for Enterprise Employees, detailing the establishment of an old age security system by implementing a social-pooling-plus-individual-accounts scheme. Individual pension accounts were set up at 11 percent of the employeersquo;s wage,in which individual contributions increased gradually from 4–8 percent, with the remainder coming from the enterprises. The ratio of enterprise contributions, set by the provincial Government, normally should not exceed 20 percent of the total payroll of the enterprise.This financing strategy is, in essence, a combination of the traditional PAYG system and the fully-individual contribution system and is best characterized as a partially-individual contribution system.
In August 1998, the State Council announced the Notification of Issues on Implementing a Provincial Pension Pooling Scheme of Uniform Basic Old Age Insurance System for Enterprise Employees and Switching Sect-oral Pension Pooling to Local Management, specifying measures such as consolidating the basic old age insurance system for enterprise employees across the nation, changing the pension pooling funds from city level to province level, shifting from partially to fully subsidizing pension funds and delivering basic pensions through social service institutions.
The Interim Measures for Collecting Social Basic Insurance Premium, promulgated by the State Council in January 1999, expanded the social pooling of basic pension funds to cover SOE, urban collective enterprises, foreign-invested enterprises and urban private enterprises. In addition, local governments can decide whether to add those who are self-employed in the social pooling of basic pension funds based on the local fiscal capabilities and self-employeesrsquo; willing.
The Pilot Program on Improving the Urban Social Security System, announced by the State Council in 2000, involved carryin
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