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Pre 1997 – Cradle to Grave care……
Housing
Health
Care
Education
State-Owned Enterprises
Agricultural Communes
and
Collectives
Subsistence
Pensions
Employment
Mid 1980s – Series of municipal social
security pilots began that eventually became
a ‘national’ system
From 1997 national frameworks for five
mandatory Social Security Schemes started to
be introduced:
•Old Age Insurance (1997)
•Basic Medical Insurance (1997)
•Unemployment Insurance (1999)
•Maternity Insurance (2001)
•Work Injury Insurance (2004)
All five schemes are contributory with contributions paid by the individual
and/or the employer
The five main benefits can be defined as:
Old Age Insurance – Basic scheme which is in two parts: A social pool funded on a
PAYG basis by employers which should pay out a pension equivalent to 30% of the
average income of the locality of the pooling area; and an individual account which pays
out a pension over 15 years based on an individuals own earnings related contribution
and accrual rate which is usually linked to interest rates available on term bank deposits.
Basic Medical Insurance – Also made up of a social pool and individual account. The
social pool funded on a PAYG basis provides partial reimbursement for the costs of inpatient care and some out patient care for certain chronic diseases. The individual
account funded by the employees contribution pays for outpatient expenses.
Unemployment Insurance – provides unemployment benefit for up to a maximum of
24 months for those who have suffered involuntary unemployment. The scheme is
restricted to paying benefits although a pilot introduced in 2006 widened the funds use
to employment promotion in certain designated areas. Benefit levels are set at less than
the minimum wage but more than the minimum living standard allowance. Contributions
to the fund are made by employers only.
Maternity Insurance – To provide support for designated hospital expenses for delivery
and ante/post natal care. Contributions to the fund are made by employers only
Work Injury Insurance – The regulations prescribe different levels of work injury and
for those over a certain category, work injury insurance will pay for medical related costs
of treatment and rehabilitation plus an income allowance to compensate in part for loss
of earnings and additional expenses incurred as a result of the injury. Contributions to
the fund are made by employers only
But there are complications to the system!
Complication #1: Primary Legislation
•Until October 2010 no primary law
•System defined mainly by different
scheme regulations
•New Law comes into effect July 1
•But requires many supporting
regulations to make it effective – not
yet in place with no real timetable
*The new Social Security law is expected to go before the National Peoples
Congress in October 2010.
Law : Good Points and Bad Points
• Good points
– Transferability of
contributions
– Unified Collection
– Better financial
transparency and
management
– Definition of fraud and
specification of penalties
– Inclusion of foreign
residents ?
• Bad points
• Codifies what is there
already – very short only
97 Articles
• Doesn’t resolve some key
scheme issues
• E.g whether individual
account should be funded
or not
• Doesn’t resolve a lot of
difficult organizational infighting
Which leads to… Complication #2:
Organisational Structures
National Level
Ministry of
Finance and National
Development Reform
Commission
Ministry of Human
Resources and Social Security
Information
Centre
Fund Supervision
Department
Social Insurance
Administration Centre
Provincial Level
This structure is replicated down to District and County Government with policy
being made in Bureaus of Human Resources and Social Security and operational
functions being carried out by executive agencies. There are 31 provinces, 4 city
provinces, 333 municipal and 2862 county level executive agencies.
There is no standard organisational model and no standard processes for the
administration or management of contribution collection, or payment of
benefits across China.
Complication #3: Inconsistencies in
administration
•Each province applies its own policies and procedures.
Therefore contribution rates and benefit entitlement differs
between areas
•E.g. For pensions in principle, national guideline rates for
employer contributions is 20%1 and individuals its 8%. Whilst
there is increasing standardization being applied at a provincial
level in some areas, differences still remain, with some
provinces levying 8 – 10% and others charging 22%.
•In addition benefit rates are linked to average salaries and
fiscal capabilities at county and district level. Salaries differ
depending on the area. For example in Xian the minimum wage
per month is 600RMB, in Shanghai it is 960RMB2.So your
benefit entitlement rate depends on where you retire.
•An example of the variance in benefit standards in the rural
pension scheme: in Wuxi Municipality pension benefit levels
range from 55 – 180 RMB across 6 county areas whilst in
neighbouring Suhou Municipality, its from 135 RMB to 265 RMB3.
1%
of payroll 2 As at Jul 2008
3 1.00
GBP=10.36RMB
Variances in Minimum Monthly Wage 2010
Source China Daily 19/01/2010
Complication #4: Legacies from pre-1997
• Pre-1997 very few contributions (some limited contributions
towards pensions)… because there was no need to.
• So you now have people whose working life have straddled
the State Owned Enterprises (when they didn’t pay
contributions) and the post 1997 Social Security era.
• Local Governments are liable for the deficit of
contributions….but this creates its own problems…like the
local Pension pool not having the amount of funds to pay
out everyone’s pension. This is a particular problem in
areas with a large older population who previously worked
for a State Owned Enterprise
• The amount of Central Government subsidy to Social
Insurance Schemes has gone up from 44 billion RMB in
2003 to 179.2 billion RMB in 2010* (this is mainly to
subsidise old age pensions)
*1 RMB = 0.095 GBP (rates at 30/08/10)
Information: The One Child Policy
• If families have more than one child a fine is imposed. The fine for
an extra child is based on the official measure of average annual
income: 26,738 RMB (￡2527) for an urban Beijinger and 11,986
RMB (￡1130) for a rural resident. (Fines rise six to 10 times for a
second baby or six to 20 times for a third or more)
• This has led to people not registering babies – which mean these
babies will have no rights or entitlements. They are known as the
Floating Population. It is estimated that people not accounted for
in the last census is 1.81% of the total population: more than 23
million people
• If you are a civil servant and you have a second child you lose
your job
• There are exemptions to the one child policy; For example, two
single people that get married can have two children. In rural
areas if you have a daughter first you can try again (for a son!)
Complication #5: The Demographic
Challenges
• From 1949, under the Mao Regime people were encouraged and
incentivised to have large families. In the 1980s the one child
policy was introduced.
• The effect of these two policies is an increasingly older population
and therefore greater demand on pension funds – whilst at the
same time China is facing a reduction of the size of the younger
generation; meaning fewer workers will be paying social security
contributions.
• It will also mean increased in demand on care for the elderly as
many children move to different areas to their parents (e.g. when
they move away to study, get married etc).
• China relies heavily on family support to care for the elderly.
However, a 2006 MLSS Survey of around 17 million employees
estimates that 52% of households are ‘Empty Nests’ i.e. children
have moved to another part of China (or the world) to live
Complication #6: Management of
Contributions
• Contribution collection is extremely fragmented and
involves three related processes of assessment, collection
and enforcement.
• Fourteen provinces use social insurance agencies to collect
contributions, 17 use the State Administration of Taxes.
Only three provinces use SAT to administer the whole
process (i.e. collection and assessment).
• Timing of collection also differs from Province to Province,
for example in some poorer areas collection happens once a
year. Limited on-line self assessment is used is some areas.
• These variances coupled with the legacies from state owned
enterprises plus demographics means there are differences
to the way social security pools are funded.
• In addition, individual accounts are invested in local banks
which tend to offer a lower interest rates than the inflation
rate. Low risk investments is cited as the reason – however
a low return in investments is a risk in itself.
Complication #7: The Hukou
•The Hukou affects all rights of each individual citizen and
goes back to the days of the planned economy. The principle
was based on every location requiring a set number of people
to do a particular range of jobs and the guarantee that those
jobs were available in that area.
•All Civil and Legal rights are in your Hukou i.e. where you
were born and grew up. So you can only get free medical care,
education and get married (amongst other things) in your
Hukou.
•It is difficult to change your Hukou – although can be
changed if you have a University degree or you get married to
someone from a different Hukou.
•The Government has just announced that it won’t abolish the
Hukou (amid fears that migrants will bring their families into
the cities which will impact social pooling arrangements)
•The big complication! The Hukou has to fit into Social
Security arrangements.
Complication #8: The Hukou and Social
Security
• Your benefit entitlement belongs in your Hukou. However, if you
pay contributions in another area for more than 10 years you can
transfer your entitlement.
• For example, you pay contributions in Beijing where rates for both
contributions and benefits are high. You want to retire in Xian,
where benefit rates (and therefore pension rates) are lower.
• Theoretically you can transfer your benefit entitlement from
Beijing to Xian
• BUT – In practice, transfer of benefits is incredibly difficult and
complicated…. due to the lack of protocols and processes around
transfer of contributions….
• …which means there are even bigger problems for the people that
move around and work in different areas for periods of less than
ten years.
Complication #9: The Hukou and Social
Security – Migrant Workers*
• In 2007 a law was passed making it mandatory to pay
contributions if an Employment Contract was in place.
However!
– Many people don’t have an employment contract
– The law isn’t always enforced.
• Many employers are reluctant to pay contributions for
migrants because they consider it to be a waste of funds.
• In addition, conflicting guidance has been issued; whilst
employees are supposed to pay towards three of the main
benefits, migrants have been told they only need to pay
Medical and Work injury Insurance.
• And a further complication is that local schemes for
migrants have also been set up – but these have absolutely
no universal application
•
*Many professional occupations are undertaken by migrant workers.
Complication #10: Long & Medium Term
Fiscal Planning
• China’s fiscal planning arrangements are not transparent.
• There is no systematic reporting routine – there are some
limited local government budgets but these are not
published.
• Plus
– there is no clear planning, budgeting or reporting
framework,
– the institutional financial framework in which to
integrate long term planning is weak
– there is a lack of understanding at a senior level on the
implications of the accumulation of large liabilities of
insurance schemes and
– There is a lack of actuarial training across government
Complication #11: Long & Medium Term
Fiscal Planning
•There has been limited work on the impact of the aging
population on health care – but not on how it will impact the
medical insurance system
•An unemployment simulation model has been piloted in three
cities, but there appears to be a lack of resources and
ownership to make wider use of it. This may well be because
the unemployment pot is well funded – those that pay into the
fund probably won’t use it and those that need it aren’t
eligible to claim the benefits.
•There has been work done on the actuarial implications on
the Pension system. But compared to the UK it is very
underdeveloped; there is no agreed model, no reporting
routine (and no requirement for one) and extremely
complicated.
•It has been likened to developing and Actuarial Model for the
27 member states of the EU.
Complication #12: Annual Budget Planning
and execution and internal controls
• Budget planning is at a early stage of development - The
budget was classed as a State Secret until 1989.
• No high level oversight – and its not taken particularly
seriously (apart from old age insurance where subsidy is
required)
• There is an over concentration on the revenue side
• Absence of a proper cost accounting framework integrated
into the Financial ledger. So there is very little financial data
on which to develop forecasting information.
• However, from 2010 there is a State Council Regulation
under which each locality must produce a budget for the
five main insurances. The plan is that by 2012 they will be
able to aggregate these local budgets and present an
overall budget to the Peoples National Congress*.
(*That is the plan – however, there are 2000 pooling areas!)
Complication #13: Internal Controls and
benefit fraud
•
•
•
•
•
There is no legal definition of social security fraud and no
national anti-fraud regulations
Weak or non-existent controls have led to incidents of
fund misappropriation and evidence of fund misuse
In the administration of benefits, particularly
Unemployment Insurance, staff sometimes turn a ‘blind
eye’ or simply do not care to investigate possible fraud
Employers often ‘misrepresent’ the numbers on their
payroll to avoid paying insurance contributions
The problems of fraud is a growing concern - companies
have even been set that specialise in fraudulent activity.
In Summary….
• China has made rapid advances in building its urban
enterprise social insurance and started to tackle the social
security deficit by expanding coverage urban and rural
citizens
• Some areas have made in roads in establishing consistent
business processes and use of some self service tools (e.g.
checking individual contribution accounts).
• However, going forward:
– It is unlikely that the current funding system will be
sufficient to maintain financial sustainability
– Current financial and administrative processes, systems
and frameworks are insufficient to manage growth
– Systems and processes need to be effectively joined up
in terms of accrual and entitlement