EU – CHINA SOCIAL PROTECTION REFORM PROJECT

Assessment Reports Series

Component 1

VOLUME ONE

 

PENSION SYSTEM

Into the Chinese XIIIth Five-year Plan

Combining Social pooling & Individual accounts

Designing a multi-tier pension system

Public sector pension reform

Integrating Urban and Rural social security protection

 

 

 

 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

This publication has been produced with the assistance of the European Union. Its contents are the sole responsibility of the EU-China Social protection project Component 1, and can in no way be taken as reflecting the views of the European Union.

 

 

 


 

Table of Contents

 

Introduction  6

FIRST BATCH OF TOPICS

Notes on the Panel discussion meeting  10

Topic 1.1.1.

Contributing to the elaboration of the XIIIth National Five Year Plan (2016-2020)] 20

Topic 1.3.2

Social pooling of the basic pension component (Evaluation of the combination of social pooling and individual accounts techniques in pension schemes for employees) 66

Topic 1.3.4.

Multi-tiered design of pension systems (public pension, enterprise annuity and individual pension) 114

SECOND BATCH OF TOPICS

Notes on the Panel discussion meeting  156

Topic 1.3.1.

Public pension sector reform   166

Topic 1.4.3.

Strategy of integrating social security system in urban and rural context also through the portability of social insurance  238

Consolidated Report on Relevant Best Practices in Europe  264

Supplement A

Reform of China’s Social Insurance Administration Service System   294


 


 


 

Introduction

 

The EU-China Social protection reform project document stipulates that project component 1 would conduct Situational Analysis aiming at “understanding the current Social Protection framework in China in order to point out elements and information useful to strength the institutional capacity for developing policies for Social Insurance and, generally, to achieve the expected results.” The Situational Analysis would focus on a set of topics for which stakeholders have expressed a particular interest.

The project document also indicates that (macro-activity 1.1) “The Component 1 EU Resident Expert in China will collect all the results of the Situational Analysis in an assessment report that will include, for each topic, the following aspects:

-        a general description of the current situation;

-        the most relevant statistical data;

-        an overview about on-going activities and plans aimed at improving the current situation, including current reform; efforts, proposals and possible pilot projects;

-        a list of open problems/issues.”

When adopting the 2015 Plan of activities for Component 1, the Project Advisory Committee, meeting on 22 April 2015, noted that five topics would be explored during the first year of the project, among which 3 would form a first batch, and two would start being addressed during the second half of the year.

Topics selected are as follows:

-        Batch 1:

Š               Topic 1.1.1          Social insurance administration systems reform [contributing to the elaboration of the XIIIth National Five Year Plan (2016-2020)]

Š               Topic 1.3.2          Evaluation of the combination of basic pension and Individual accounts

Š               Topic 1.3.4          Multi-tiered design of pension systems (public pension, enterprise annuity and individual pension)

-        Batch 2:

Š               Topic 1.3.1          Pension reform for public sector

Š               Topic 1.4.3          Strategy of integrating social security system in urban and rural context although through the portability of social insurance

Component 1 of the project has specifically to pursue 4 of its altogether 11 identified results - results R2 to R5 inclusive, namely:

- Improved interagency cooperation in social protection reform (R2); 

- Enhanced capacity in policy development, implementation and evaluation (R3);

- Strengthening the interface of the various pension schemes towards full coverage in old-age (R4); and,

- Reform efforts in response to urbanization trends, concerning notably basic protection and portability of rights (R5).

The five topics being explored during the year 2015 – see table below - directly contribute to the pursuance of results R2 – 1 topic, R4 – 3 topics and R5 – 1 topic.

For the first batch of topics, for which technical progress was considered most urgent in view of the deadlines attached to the preparation of draft contributions for China’s XIIIth Five-years Plan, NDRC and the Component 1 project team in Beijing agreed during the month of April 2015 on the terms of reference and the selection of high-level Chinese experts whose task would be to conduct the situation analysis for their respective topics, to submit their findings to peer review though a panel discussion, and to contribute to the identification of most relevant European experiences to support Chinese pension reform in the field, through a dialogue entertained with an ad hoc European Best practices experts selected by the project leadership according to established recruitment procedures for short terms experts.

The experts started working on their task in April 2015, the EU Best practice expert conducted his first mission to China within the framework of the project over the month of July 2915 and the panel discussion (macro-activity 1.3) could be held as scheduled by the end of July 2015 in Beijing, with participation from NDRC, the C1 project team.

The same pattern was used for the second batch of topics, for which experts were selected in July 2015. The consultation process with the C1 team was running throughout the period elapsed until the second panel discussion held on 13 November 2015, with the active involvement of the EU Best practices expert.

The following table summarizes the process for each of the topics under consideration.

 

Result

Topic #

Title

Chinese Expert

EU Best practices Experts

Date Panel discussion

R.2

1.1.1

Social insurance administration systems reform [contributing to the elaboration of the XIIIth National Five Year Plan (2016-2020)]

Mr. Tan Zhonghe

Mr. Koen Vleminckx

28 July 2015

R.4

1.3.1

Pension reform for public sector

Ms Zhang Yinghua

13 Nov. 2015

R.4

1.3.2

Evaluation of the combination of basic pension and Individual accounts

Mr. Song Xiaowu

28 July 2015

R.4

1.3.4

Multi-tiered design of pension systems (public pension, enterprise annuity and individual pension)

Mr. Dong Keyong

28 July 2015

R.5

1.4.3

Strategy of integrating social security system in urban and rural context although through the portability of social insurance

Mr. Wang Zeying

13 Nov. 2015

While Chinese experts reviewed their respective reports to take into account the comments and suggestions made during the panel discussion meeting, the first draft of the Best practices report was shared with interested Consortium members – Belgium, the Czech Republic, France, Italy and Spain – who all contributed comments and suggestions subsequently embodied in the finalized version of the Best practices report (macro-activity 1.4).

The process was concluded early in the month of December 2015 for the first batch of reports, and the consultation phase for the second batch with concerned EU project partners is under finalization at the time of submitting this first draft assessment report.

This volume therefore presents the results of technical works conducted to date under the auspices of project Component 1 for the five topics to be considered – namely the summary of the panel discussion meeting and the finalized Situation analysis reports - and the consolidated draft Best practices report. Although presented under the generic title of “Assessment report” as per the terminology adopted in the project document, the Report therefore includes elements related to the subsequent phase of collaboration between NDRC and the project team, i.e. (macro-activity 1.2) the “Identification and review of possible relevant EU experience”. This is justified by the fact that these documents will be submitted to the Workshop to be organized in January 2016 (macro-activity 1.6[1]) to review all five topics to be considered in 2015 under the project C1 component plan of activities to “debate the first draft of reform proposals “.

One additional report of relevance for the overall pension reform process is therefore appended as supplement to the main report, viz. an Analysis of the social insurance administration systems in China produced by Chinese expert Tan Zhonghe.

All documents and news from the project C1 component can be found on web site http://www.sprp-cn.eu

Jean-Victor Gruat,

Component 1 EU Resident Expert

December 2015

 

FIRST BATCH OF TOPICS

Notes on the Panel discussion meeting

       Jean-Victor Gruat and Wang Qingqing (Ms)

 

 

Mr. Jean-Victor Gruat is the EU Beijing-based Resident Expert for Component 1

Ms Wang Qingqing was the Assistant for Component 1 within the Beijing office of the EU-China Social Protection Reform project.

 


 

EU – China Social Protection reform project, Component 1

REPORT ON A PANEL DISCUSSION MEETING - TOPICS 1.1.1, 1.3.2, and 1.3.4

HELD ON TUESDAY, 28 JULY 2015 IN CHINA PALACE HOTEL, BEIJING

 

Some 25 participants attended the meeting – see list attached as Annex I – which was chaired by Ms. Ji Ning, Counsel, NDRC Department of Employment and Income Distribution, Project Leader for Component The programme of the meeting is attached as Annex II. The meeting started with welcome speeches by Ms. Ji Ning from NDRC and Mr. Lars Gronvald on behalf of the EU delegation.

Ms. Ji Ning noted that after 30 years of experimentation and implementation, China's social security system had made great progress. It has formed a pension system both for urban workers and for urban and rural residents. But operation of the system also encountered problems and contradictions. Which model was the best for the most populous country in the world? How to operate the system in a healthy way? What international experience is more adapted to China's national conditions? These were all the questions we needed to answer. We chose three topics for this first round of work, namely the preparation for the XIIIth Five-Years Plan, the combination between social pooling and individual accounts, the design of a multi-tier pension system with research entrusted respectively to Mr. Tan, Mr. Song and Mr. Dong. Ms. Ji Ning hoped NDRC would get inspiration and gain more knowledge from the papers, the European experience expressed during the meeting and discussions among participants.

Mr. Lars Gronvald hoped everyone would benefit from this panel discussion. This discussion would help us to understand the EU experience. With the development of China’s “new normal” economy the EU might make an even greater technical contribution to China. Our previous project was in 2011, but today's project was more complex and deeper. Mr. Gronvald stressed that today's discussion was very far reaching, which was a very good sign. Getting help by European experts will hopefully be very useful for the Chinese research. At the end of this year or early next year there would be a larger workshop to confirm future trends in reform. It is expected that the results achieved under the project framework by NDRC will be shared and discussed openly and thoroughly with all other interested partners. Mr. Gronvald expressed thanks to NDRC, the Chinese experts, the EU experts, and hoped to continue to participate in such meetings as part of the project future activities.

Mr. Tan Zhonghe presented his report about the development of China’s Old-age Insurance for the 13th Five Year Plan period. From the onset of the 12th Five Year Plan period, a social security system covering urban and rural residents has been tentatively established, with expanding coverage, growing participants, and enhanced the social security. Significant stride has been made in the undertaking of social security, which laid a solid foundation for the development of social security during the 13th Five Year Plan period. The 13th Five Year Plan period is a critical stage in reforming the Chinese social security system, and a key period in integrating social security systems for urban and rural residents. Old-age insurance scheme is one of the most important components of China’s social security system, and was among the earliest for reform among China’s social security programs during China’s transition from planned economy to socialist market economy. Although an old-age insurance scheme covering urban and rural areas has been basically established, there are still prominent problems, such as unsound policies and mechanisms, unbalanced development, and unsustainability. Mr. Tan’s report puts forward the development targets, reform tasks, measures and suggestions for the development of old-age insurance scheme, on the basis of the achievements of reform and development during the 12th Five Year Plan period, analysing the situation and major existing problems. Mr. Tan expressed the hope that his work could be used as a reference for the authorities’ efforts in formulating guidelines on social insurance development during 13th Five Year Plan period.

Mr. Song Xiaowu’s presented his report about improving the urban basic pension insurance. On the basis of Chinese basic pension insurance system evolution analysis and learning from international experience, the report holds the view that, to further improve the basic old-age insurance system, we should guarantee its solidarity, and therefore cannot expand the size of individual accounts to the detriment of the pooled part of the system. As to personal accounts, whether they should be “real” or “notional” is the second problem. The reporter believes that the solution to be preferred is to create conditions to gradually “make the accounts real”. But there may be some practical problems in the reality that may justify small NDC accounts. Mr. Song stressed that the basic old-age insurance social security system is an important project, which should match the stage of a country's economic and social development. After 30 years of reform and opening up, China's social and economic life has changed dramatically thanks to the miracle of rapid economic development but at the same time has gradually accumulated a lot of issues, notably the fact that the income distribution gap is too big. This is the founding layer of the pension system, and the introduction of personal accounts carries over the primary distribution into the secondary distribution, focusing on breaking the egalitarianism in a completely different environment. In the new stage of development however, China is facing a distribution gap that is too big, basic social protection programs should therefore enhance fairness and solidarity, so as to stabilize the gap once assigned.

Mr. Dong Keyong presented his report about the design of a multitier pension system. He stated that in its current features the Urban employees’ pension system had difficulties in coping notably with the challenge of China’s ageing crisis. Hence the reform proposals for the establishment of China's three-pillar pension model. In Mr. Dong’s view, on the basis of combination of social pooling and individual accounts, the separation of existing social pool and personal accounts are to be converted into first and second pillar. The first pillar basic pension would be based on an actuarial basis PAYG system related to the collection of contributions based on individual workers salary base with tax collection and national coordination, paying attention to the burden on enterprises. Benefits should in a way be linked to contributions but at the same time should avoid regressive redistribution mechanism and establish normal pension adjustment mechanisms in order to achieve the basic functions in the first pillar. To turn the personal account into the second pillar, the fact that individual workers currently pay 8% into the funds forms a solid basis for the establishment of this pillar, investment returns leading to improve pension income replacement rate. Mixed ownership economic reform provides the opportunity, through the reduction of state-owned assets, to replenish the currently empty personal accounts and to reduce the implicit pension debt. To accelerate the enterprise annuity system while achieving a fair system, organizations and institutions should be subject to mandatory occupational pension system, while annuity coverage rate is only about 7% currently. The introduction of preferential policies to accelerate the construction of enterprise annuity is therefore necessary. To achieve the implementation of voluntary private savings system, tax incentives should be developed to speed up the trial of voluntary private savings policies. The system should focus on solving the pension issues for those who are not covered by employer pension or occupational pension. Mr. Dong added that the considered mechanisms to improve pension operations represented an opportunity to promote the construction of China's capital market, to achieve pension collaborative development with the said markets.

After these three authors’ presentation, the EU experts gave their comments. The purpose of the EU-China protection project is for European experts to exchange information and experience with their Chinese counterparts. As the emphasis of component I lies on the preparation of an important pension reform in China within the framework of the XIIIth Five-year plan, Koen Vleminckx, a research director at the Belgian federal Ministry of Social Security and an initiator of pension reform in Belgium, was selected to provide the support requested. He prepared himself by collecting background information on social security in China and pension reform in particular. He provided information to the Chinese experts on their request or, in some cases where he thought it to be useful on his own initiative, but he respected their academic freedom. He also situated each expert within the context of the broader pension reform debate in China.

On the basis of the reports drafted by the Chinese experts, Mr. Vleminckx selected relevant issues for which he selected relevant ‘best practices’ in the EU member states. He also referred to EU level activities and networks where this was useful for China’s perceived needs. As the topics of the authors partially overlapped, particularly as far as the reform of the second tier individual accounts system was concerned, he put the emphasis on the issues that were particularly well developed and emphasized in the respective papers.

Mr. Vleminckx noted that in his report “China’s XIIIth Five-year Plan and the development of pension security, Professor Tan Zhonghe particularly stressed the need to enhance the governance of China’s social security system and its pension system in particular. He wants to improve China’s legal and regulatory framework of social security, its management and servicing system, communication and training of employers and employees, the contribution base and compliance, He also stressed the need to improve the actuarial system, modelling, and enhancing social security research, a point which was also stressed by Koen Vleminckx as this had been essential during his experience with the preparation of pension reform in his own country, Belgium. Koen Vleminckx provided best practices for each of these issues.

In his report ”Evaluation of the combination of social pooling and individual accounts techniques schemes for urban employees” Professor Song Xiaowu mainly addressed the reform of the second tier individual accounts for urban workers, believed to be one of the main issues of the XIIIth Five-year plan. He wants to maintain the current pension structure for urban workers, including the repartition of funding (20/8), but he wants to improve and modernize the individual accounts system. He identified two options for the modernization of the individual accounts: 1) reinforcing the funding of the individual accounts, or 2) replacing the funded individual accounts with notional individual accounts, in line with the NDC model. Professor Song prefers the first option and motivated his choice in his report. Koen Vleminckx provided European best practices for both options. Upon Prof. Song’s request he also provided best practices on pension calibration and indexation.

In his report “The Chinese pension system in transition: current challenges and reform path”, Professor Dong Keyong presented his viewpoint on the institutional restructuring of the Chinese pension system for urban workers. His main proposal is to merge the second tier individual accounts with the second pillar occupational pension plans that are currently underdeveloped in China. The second pillar would become mandatory and tax subsidized. The first pillar’s basic pension would be reserved for social pooling. This structure reminds us of the Dutch pension system. Professor Dong also suggests to further developing the third pillar as these are more individual and flexible and could thus provide a solution for covering freelance workers etc. that could not be covered by the second pillar. The development of the third pillar would be supported by tax incentives. Koen Vleminckx provided best cases on the regulation of investments by pension funds, on tax incentives for occupational pension plans, on the portability of occupational pension plans, and on tax incentives for individual pension plans.

During his last intervention Mr. Koen Vleminckx summarized his experience during his one-month mission in China. It had been a very busy, but very interesting period with very interesting exchanges with the Chinese authors and other Chinese experts and civil servants. He confirmed that he had selected 12 issues for which he provided one or more European best practice case. These will be presented in a report, which will be verified and further complemented by the consortium members. NDRC might also add issues that they belief to be relevant. These would then provide a basis for further technical cooperation within the framework of the EU-China project.

Following each of the authors’ presentations and comments by European experts, participants expressed their own views, comments and suggestions on the reports. This formed a very rich and lively debate, which the authors said would greatly help them when finalizing their papers.

Mr. Jean-Victor Gruat, EU Resident Expert for Component 1, then presented the main aspects of the Component plan of activities for the rest of the year 2015. After this very interesting and dynamic exchange between eminent Chinese scholars, European and NDRC experts, C1 component of the EU-China Social protection project has reached one of its critical targets. Future activities will of course build on this sequence. Two more topics will supplement the technical range of 2015 programme, namely the integration of urban and rural pension schemes – focussing on migrant workers’ rights vesting and portability – and the practical issues implied in the decision made at the end of 2014 to henceforth include public officials in the mainstream of the urban workers’ pension scheme in China. Also under this heading, a ten days study visit for high level responsible NDRC official is being planned to three European countries. Two other major events abroad of interest to component 1 were already held in 2015, namely a high level technical meeting in February in Brussels around the issue of reforming pensions for public officials, and a two-weeks high-level training course in June in France on multi-tier pension schemes. The second half of the current year will also be devoted, as far as the project is concerned, to the elaboration of proposals for activities to be launched in 2016. Mr. Gruat expressed his thanks to his colleagues from C1, to the French member of the consortium leading the project, to NDRC and to the EU delegation in China for their support.

On behalf of the EU Delegation in China, Ms. Yi Xiaolin expressed the view that this meeting was very successful, and represented the first milestone of the whole project. Also, she expressed her thanks to NDRC and to the famous Chinese experts who contributed their time and research to the project. She hoped in the project could continue to meet the real needs of China’s development. On behalf of NDRC, Ms. Tan Ling made a summary of the meeting. She hoped in the future the EU experts could give more examples of a broad range of the European countries.  Ms. Ji Ning concluding the meeting by saying that in her view the three topics of today’s discussion were mature. She drew a lot of inspiration from the discussion. She was looking forward to the next discussion and she expressed her thanks to everyone participating in the meeting.


 

The three authors at the Panel discussion meeting

 – from left to right, Mr. Dong Keyong, Mr. Tan Zhonghe, Mr. Song Xiaowu

 


ANNEX I - LIST OF PARTICIPANTS FOR PANEL DISCUSSION MEETING

Unit

Names

Title

Department of Employment and Income Distribution, NDRC

Ji Ning

Project leader, C1

Zhang Xinmei

Division Director

Tang Ling

Project coordinator C1

Zheng Jinhua

Official

Niu Ming

Official

Li Xiaoliang

Official

International Cooperation Centre, NDRC

Chang Hao

Project coordinator C1

Wang Yue

Project assistant C1

EU Delegation

Lars Gronvald

Counsellor

Yi Xiaolin

Project officer

Authors

Tan Zhonghe

CN Expert

Dong Keyong

CN Expert

Sun Bo

Assistant to DKY

Wang Gengyu

Assistant to DKY

Song Xiaowu

CN Expert

Zhang Luqin

Assistant to S XW

Xing Wei

Assistant to S XW

Guan Bo

Assistant to S XW

SPRP

JV Gruat

C1 Resident expert

Koen Vleminckx

EU Expert

Fang Lianquan

Main Expert (Research)

Wang Qingqing

Component assistant

Lin Guowang

Interpreter

Zhao Qing

Interpreter

 

 

 

ANNEX II – PROGRAMME OF THE PANEL DISCUSSION MEETING

Chairperson: MS. JI NING, COUNSEL,

DEPARTMENT OF EMPLOYMENT AND INCOME DISTRIBUTION, NDRC

 

09.00 – 09.15

Welcome speeches

-  Ms. Ji Ning, NDRC

-  Mr. Lars Gronvald, EU Delegation

First Session: Topic 1.1.1 - Social insurance administration systems reform [contributing to the elaboration of the XIIIth National Five Years Plan

(2016-2020)]

09.15 – 09.45

Draft Report presented by Mr. Tan Zhonghe, Short term expert

9.45 – 10.15

Comments submitted by European expert Mr. Koen Vleminckx and colleagues

10.15 – 10.45

Comments submitted by NDRC and general discussion

10.45 – 11.00

Coffee – Tea break

Second session: Topic 1.3.2 - Social pooling of the basic pension component (Evaluation of the combination of social pooling and individual accounts techniques in pension schemes for employees)

11.00 – 11.30

Draft report presented by Mr. Song Xiaowu

11.30 – 12.00

Comments submitted by European expert Mr. Koen Vleminckx and colleagues

12.00 – 12.30

Comments submitted by NDRC and general discussion

12.30 – 14.00

Lunch break

Third session: Topic 1.3.4 - Multi-tiered design of pension systems

(public pension, enterprise annuity and individual pension)

14.00 – 14.30

Draft report presented by Mr. Dong Keyong

14.30 – 15.00

Comments submitted by European expert Mr. Koen Vleminckx and colleagues

15.00 – 15.30

Comments submitted by NDRC and general discussion

15.30 – 15.45

Coffee – Tea break

Fourth session: Work ahead, and conclusions

15.45 – 16.30

- Tentative identification of most suitable European best practices by European Expert Mr. Koen Vleminckx

- Work plan and forthcoming activities by EU C1 Resident expert Mr. Jean-Victor Gruat

- Remarks by the representative from EU Delegation in China

- Recommendations by NDRC C1 Coordinator Ms. Tang Ling

- Conclusions

 


Topic 1.1.1.

Contributing to the elaboration of the XIIIth National Five Year Plan (2016-2020)]

Tan Zhonghe

 

 

 

 

 

Mr. Tan Zhonghe is Director of the Old-age Pensions department in the Social security institute of the Ministry of Human resources and Social security of the People’s Republic of China. He has a masters degree in Engeenering from the Beijing Post and Communication Univerisity. He is a Member of the China Social Insurance Council , of the National Standardization Technical Committee, of China Medical Insurance Research Counci. Mr. Tan is Standing Director of the Annuities Branch of China Social Insurance Council, member of the Acedemic Committee of China Academy of Labor And Social Security and Evaluation Expert of the National Social Science Fund Project

 


 

CONTENTS

 

I - Main achievements and experience for old-age insurance scheme during the 12th Five Year Plan period                                   22

(1). Evaluation Criteria and Methodology                                                                                            23

(2). General Judgment and Evaluation                                                                                                 24

(3) Basic Experience                                                                                                                         29

(4) Major Existing Problems                                                                                                              30

II - Main Situation Faced by Social Security Development during 13th Five Year Plan Period                                            32

(1) China is impacted by the Changes in Economic Pattern Transformation                                               32

(2) Reform Becomes More Difficult                                                                                                      32

(3) Challenges Facing New Type of Urbanization                                                                                  33

(4) Fast Aging Population                                                                                                                 33

(5) New expectations                                                                                                                         33

III - Development Targets and Guiding Principles of Social Security System                                                                 34

(1) Main Targets                                                                                                                              34

(2) Specific Targets                                                                                                                          34

(3) Steadily improve security level                                                                                                       35

(4) Guiding Principles                                                                                                                      36

IV - The main content and policy suggestions for social security system building during the 13th five-year plan period                    38

(1) Further improve retirement pension system                                                                                      38

(2) Main Measures                                                                                                                           52

V - Major project proposals for 13th five year plan                                                                                              57

(1) Grassroots employment and social security comprehensive service platform construction project               57

(2) Social security card project                                                                                                           57

(3) Social Security Standardization Project                                                                                           57

(4) Social security big data project                                                                                                      58

VI - Steps and main indicators of promoting the development of old-age insurance for 13th five year plan                         58

Annex 1: China's evaluation criteria system for old-age insurance development                           61

 


 

 

Research Report on the Development of China’s Old-age Insurance for the 13th Five Year Plan period

Tan Zhonghe 

From the onset of the 12th Five Year Plan period, a social security system covering urban and rural residents has been tentatively established, with expanding coverage, growing participants, and enhanced the social security. Significant stride has been made in the undertaking of social security, which laid a solid foundation for the development of social security during the 13th Five Year Plan period.

The 13th Five Year Plan period is a critical stage in reforming our social security system, and a key period in integrating social security systems for urban and rural residents. Old-age insurance scheme is one of the most important components of China’s social security system, and was among the earliest for reform among China’s social security programs during China’s transition from planned economy to socialist market economy. Although an old-age insurance scheme covering urban and rural areas has been basically established, there are still prominent problems, such as unsound policies and mechanisms, unbalanced development, and unsustainability. This report puts forward the development targets, reform tasks, measures and suggestions for the development of old-age insurance scheme, on the basis of summarizing the achievements of reform and development during the 12th Five Year Plan period, analysing the situation and major existing problems. It aims to serve as reference for the authority’s efforts in formulating guidelines on social insurance development during 13th Five Year Plan period. 

 

I - Main achievements and experience for old-age insurance scheme during the 12th Five Year Plan period

 

From the onset of the 12th Five Year Plan period, while deepening economic reform, China paid great attention to the building of old-age insurance scheme. A series of policies and measures have been formulated and issued, the development of old-age insurance scheme have been constantly promoted, the function and effects of old-age insurance have been given play, old-age insurance has played an important role in ensuring people’s basic life, promoting economic development and maintaining social stability.

 

(1). Evaluation Criteria and Methodology

China established a basic old-age insurance scheme for employees of urban enterprises in 1997, which covered employees of urban enterprises and freelancers; pilot programs for new rural social insurance experiment and urban social old age insurance have been launched in 2009 and 2011 respectively, in the year of 2012, the two schemes have covered all of the country’s population, in 2014, the two programs have been integrated as a unified basic old-age insurance scheme for urban and rural residents. In light of international experience and reality of China’s old-age insurance, this evaluation plans to further explore the indexes including coverage of old-age insurance scheme, suitability in fund raising, adequacy of insurance and fund sustainability.

1. Coverage 

Coverage criteria considers the coverage rate of old-age insurance for employees of urban enterprises, as well as urban and rural residents; the coverage rate of old-age insurance. See attached document one for implications and explanations of indexes concerned.

2. Suitability in Fund Raising 

Suitability reflects the burdens of fund raising imposed on the two schemes and the coordination of the two schemes. Choose 1) actual contribution rate, coefficient of contribution burdens on enterprises; 2) increase of per capita old age insurance contribution made by urban and rural residents, burdens on individuals.

 

3. Adequacy of Insurance

Choose replacement rate of pension as the measure of salary levels. The measure reflects the level of basic old-age insurance, which should not be too low or too high, and should be maintained within a proper range.

4. Sustainability of Funds

During the reform process of old-age insurance scheme for employees of urban enterprises, due to unspecified channel for cost payment, social pooling funds have used money from personal accounts, which is in reality still a pay-as-you-go system, only part of the provinces and cities had pilot programs in opening personal accounts. Therefore, accumulative surplus rate of basic old-age insurance fund for employees of urban enterprises, return on investment of personal accounts, return on investment of old-age insurance fund on personal accounts of urban and rural residents, the payment of financial subsidy have been chosen as sustainable measures.

 

 (2). General Judgment and Evaluation

Based on the measures mentioned above and analysis on the condition of regions investigated, the following judgments have been made on the development of reform on China’s old-age insurance scheme during the 12th Five Year Plan period:

1. An old-age insurance scheme covering urban and rural areas have been basically established and improved gradually

During the 12th Five Year Plan period, a series of supportive regulations and policies have been rolled out, which centred on the implementation of Social Insurance Law. The old-age insurance scheme that covers urban and rural areas has been further improved.

1) Launched urban social old age insurance pilot on top of the 2011 new rural social insurance experiment, the two schemes had covered all of China’s population in 2012, and had been integrated into a unified old-age insurance scheme for urban and rural residents in 2014, to that date, China had fully established an old-age insurance scheme covering urban and rural areas;    

2) Launched old-age insurance reform on government organizations and public institutions in 2015, bringing more than 40 million employees of government organizations and public institutions into the old-age insurance scheme enjoyed by employees of enterprises. The establishment of the two basic old-age insurance scheme platforms for urban and rural residents signifies the basic establishment of a framework for China’s old-age insurance scheme;

3) Further improved the social security policy for farmers whose land have been requisitioned, the work on social security of migrant workers and land requisitioned farmers has been progressing steadily. Freelancers, migrant workers, land-requisitioned farmers and foreigners who work in china should participate in social insurance according to law. Old-age insurance scheme has covered all of the population;

4) A multi-layered old-age insurance scheme is improving. Policies on individual income tax of enterprise and occupational annuity, encouragement for social organizations, foundations and privately-owned units to establish enterprise annuity have been further clarified. Encouraging capable social organizations, families and individuals to participate in commercial insurance and individual savings;

5) Meanwhile, made concerted efforts to carry out research on top-level design of old-age insurance scheme, studied major issues related to reform and development of old-age insurance, including improvement of individual accounts of old-age insurance for urban employees, national comprehensive arrangement of basic old-age insurance plan for urban employees, investment and operation of old-age insurance foundations, pension adjustment mechanism and postponing of retirement age in a gradual way, raising social security funds through various channels. Opinions from various parties have been solicited, relevant policies will be released soon.

 

2. Fast Expanding Coverage 

Coverage of old-age insurance scheme has been expanding from cities, towns to villages gradually, from state-owned enterprises to enterprises of various forms, from employees with stable jobs to jobless group, or group with unstable employment. By the end of December of 2014, 842.32 million people have participated in basic old-age insurance scheme, which was an increase of 134.3% or 482.45 million people. Basic old-age insurance for urban and rural residents, in particular, has seen 501.070 million people joined in just within 5 years since 2011, when the new rural social insurance experiment begun. See table 4 for the number of people participating in basic old-age insurance scheme between 2010 and 2014.

Table 1 - Participation in basic old-age insurance from 2011 to 2014 (Unit: .000 people)

 Year

Total number of people participating basic old-age

insurance

Including 

The number of urban employees

The number of urban and rural residents

2011

61573

28391

33182

2012

78797

30427

48370

2013

81968

32218

49750

2014

84231

34124

50107

 

In addition, a number of prominent problems left over by history have been resolved. Over 10 million people including land reclamation employees, retirees of enterprises who didn’t participate in old-age insurance scheme, urban residents who used to work at state-owned enterprises during 1960s to 1970s and had not participated in basic old-age insurance scheme, and their family members who worked at the same enterprises with them without signing labour contracts with employers.

In 2014, Ministry of Human Resources and Social Security issued Notice on Implementation of Registration Plan on Universal Coverage of Old-age Insurance Scheme, (issuance No.[2014]40), which decides to gradually implement Registration Plan on Universal Coverage of Old-age Insurance Scheme. The plan is based on laws and regulations including Social Insurance Law, and aims to the universal coverage of social security. The plan, through measures including information comparison, household survey, centralized data management and dynamic updating, records, reviews and exercises standardized management on participation of various groups in social security scheme, so as to promote the campaign in ensuring employees, urban and rural residents to be fully covered, and continue to participate in old-age insurance scheme.

 3. Level of Insurance steadily improved

During the 12th Five Year Plan period, old-age pension of enterprises’ retirees have been adjusted constantly, in 2014, per capita pension reached 2,500 yuan, which was an increase of 36.3% compared with the end of the 11th Five Year Plan period. Currently, per capita pension exceeds 100 yuan for urban and rural residents across the country. More and more people have been enjoying the basic old-age insurance. By the end of 2014, 85.92 million retirees, 143 million urban and rural residents have received old-age pension, institutional arrangement for the basic life of urban and rural elderly have been mapped out.

 4. Revenue and Expenditure of Funds is Expanding, Financial Strength Improved

In 2014, revenue of the fund for basic old-age insurance (including urban and rural residents) reached 2.76 trillion yuan, expenditure reached 2.33 trillion yuan, cumulative surplus was 3.56 trillion yuan, which increased by 99.09%, 116.87% and 125.77% respectively compared with the end of 2011. From 2011 to 2014, the revenue of basic old-age insurance for employees increased by 20% annually. A fund raising mechanism incorporating the state, employers and individuals have been tentatively established. The anti-risk capability has been greatly strengthened. 

    Governments at all levels continue to increase investment in old-age insurance, direct financial subsidy for social security has increased year by year. Governments provide urban and rural residents participating in basic old-age insurance with an annual subsidy that is no less than 30 yuan per person. Senior residents aged above 60 living in urban and rural areas are granted with basic pension no less than 55 yuan per person each month. Since 2015, the standard has been raised to 70 yuan per person. In addition, central government offers financial subsidy for basic old-age insurance of employees at central and western regions. Meanwhile, financial channels have been expanding, which serves as necessary capital reserve for challenges of aging population peak. By the end of 2014, fund assets managed by China’s National Social Security Fund reached 1.529 trillion yuan.

 5. Continue to Strengthen Supervision on Fund, and Ensure Fund Safety

According to Social Insurance Law and relevant laws and regulations, guidelines and regulatory documents have been formulated and implemented, including management rules on Fund Supervision and Inspection Permit, opinions on pilot program of public supervision, Management Rules on  Enterprise Annuity Fund, Disciplinary Rules on Staff of Social Security, local governments have been instructed to issue detailed rules on supervision, implementation, regulations on supervision, inspection and law enforcement. Special inspections have been carried out in old-age insurance fund for urban and rural residents and operation of financial subsidy. Fund safety has been prominently enhanced by investigating and handling major cases, and taking precautionary measure while punishing people held accountable. Networking and application of fund supervision software has been progressing steadily, networking and application have been launched in 28 cities of provincial level and 294 cities of prefecture level. The market of enterprise annuity has been gradually standardized, with strengthening market regulation. Relevant institutions have been organized to formulate and sign industry’s self-discipline convention, in a bid to promote orderly competition in the market. Professional teams have been built up and strengthened, there have been more than 2,000 fund supervision agencies, over 5,000 staff members are working for the country’s human resources and social security system, all of the supervisors at provincial level and two third of supervisors at prefecture or county level have received professional trainings, among which 2,702 have passed exams and have been granted with Fund Supervision and Inspection Permit. 

 6. Management and Service System Tentatively Established, Service Continue to Improve

Promote the social security management and service system and service networks, which have social security agencies at all levels as the backbone, banks and various kinds of designated service agencies as support, community labour security work platform as the basis, to gradually expand to villages and towns, administrative villages. Most of the country’s villages and towns have set up labour security service stations. By the end of 2013, there had been 8,363 social insurance management agencies of various kinds, which were above county level across the country, the number of staff reached 177-thousand, and there had been more than 300-thousand people engaging in comprehensive public service at grass root level including social security work. Promote the establishment of Golden Social Security Project, realize the integration of social security systems at central, provincial, and municipal level, the basic integration of application software and centralized management of data, a national unified technical supporting platform has been basically formed; carry out new modes of social security business, such as online management, self-service; by the end of 2014, 712 million social security cards have been issued, with applied functions enhanced. A series of national and industrial standards on social security have been formulated, including social security terms and visual identification system, application of standardization has been promoted. Strengthen regulation and management of files on social security business, strengthened internal control mechanism building, promote standardization of business. Strengthen the building of professional teams. Steadily carry out social management, promote the integration of enterprises’ retirees into community management, basic pension for enterprises’ retirees have been fully delivered by social service institutions. 

 7. Increasing law-based system

Social Security Law, which was issued in July 1st of 2011, ended the age when China had no basic law in social security sector, this signifies that China’s social security has become more law-based. On one hand, successful experience of pilot reforms in social security sector has been elevated to a legal height, on the other hand, the direction for the development of China’ social security system has been made even more clear, the implementation of basic old-age insurance scheme should be carried out by integrating social pooling and individual accounts, with the fees collected from governments, enterprises, and individuals, basic old-age insurance for urban and rural residents is mostly paid by governments, with individual payment as support.


 

 

 (3) Basic Experience

The experience of development of China’s old-age insurance during the 12th Five Year Plan period is as follows: 

1.     Great attention paid by governments

During the 12th Five Year Plan period, governments have stepped up establishment of social security system covering urban and rural residents, which was an important work in promoting scientific development, social harmony, and improving people’s life. The 17th National Congress of the Communist Party of China put forward the target of ensuring every citizen has access to social security, CPC’s 18th National Congress, 3rd and 4th Plenary session of the CPC Central Committee further clarified that an overall plan should be drafted for social security development of urban and rural areas, and targets for more fair, sustainable reform and development should be set. A series of important rules and policies have been issued, greatly boosting reform of social security scheme. Top-level design of old-age insurance has been carried out, which ensures scientific and sustainable development of social security work.

2. Continue to Increase Financial Input, Promote Universal Coverage of Social Security System

Social security issues left over by history, including urban residents who are not covered by old-age insurance, retirees of bankrupted and closed enterprises, retirees of collectively-owned enterprises who are not covered by social insurance scheme, people who suffered from work injuries before January 1st of 2014 when Work-related Injury Insurance Regulations took force, were resolved by universal coverage of social security system in an efficient way, including adjusting expenditure structure, increasing financial input, establishing old-age insurance system for urban residents, and improving relevant policies.  

3.     Continue to enhance fairness, adaptation to mobility, ensure sustainability

During urbanization process, some issues have been emerging, such as protection of social security rights during labour force mobility between urban and rural areas, between different management systems, and farmers’ transition into urban residents. The transition track of social security system has been opened among different regions, as well as between urban and rural areas, thanks to Rules on Inter-provincial transfer and continuation of Employees’ Basic Old-age Insurance issued in 2010, Rules on Inter-provincial transfer and Continuation of Employees, Urban and Rural Residents issued in 2014, the two documents ensured that labourers’ social security right could be accumulated instead of missed during mobile employment, which constantly promoted fairness in the development of social security, and free mobility of nation-wide human resources.

4. Strengthen Management and Service System Building of Social Security, Continue to Improve Management and Service Capability

Continuing the reform of improving old-age insurance policy and paying attention to implementation of all policies. Standardization, professionalism and computerization are centrepieces, with capacity-building of management and service continued to be improved. Formulating a series of management and service standards in social security sector, adopting various forms of training for staff from management agencies at all levels, realizing full computerization of social insurance by focusing on Golden Social Insurance Project. 

 

 (4) Major Existing Problems

China made great achievements in social security during 12th Five Year Plan period, but there are also some prominent issues, including:

1. Lack of Fairness

i. There are still “void” in coverage, especially a number of migrant workers and freelancers have not participated in social security, who lack protection from the system. According to requirement of universal coverage as the target, basic old-age insurance should cover all of the employees at urban and rural areas, as well as residents at proper ages, there have been 840 million people covered by social security, the target stands at whole population and 95% of participation rate, there have been nearly 200 million people who are not covered by social security, after ruling out groups including children and students, people uncovered by social security are mainly migrant workers, domestic helpers, self-employed people in cities and towns, disabled people, young rural residents, people engaged in cyber economy, part of poor population;

ii. The level of social security benefits for urban and rural residents are relatively low, currently, the basic pension for urban and rural residents are generally lower than subsistence allowance. The scheme is not attractive enough for residents. Social security issues for land-requisitioned farmers, which is a problem left over by history, is still widespread.

iii. Imbalanced development among regions. According to the share of employees’ basic old-age insurance rate, the lowest contribution by units in regions such as Guangdong and Zhejiang is 13%, while it is 20% in most areas of central and west China; According to the balance sheets of employees’ basic old-age insurance fund, imbalance among regions is serious. Currently, fund surpluses in Jiangsu, Zhejiang, Guangdong and Shandong exceed over 100 billion yuan respectively, while surplus in provinces and regions such as Hainan, Tibet Autonomous Region, and Xinjiang Corps are just around one billion yuan respectively. 

 

2. Inadequate adaptation to mobility

The level of integration is still low, with different policies implemented in different regions. Capability of management and service still calls for improvement, building of information systems progresses slower than anticipation, which led to many difficulties in ensuring cross-regional and cross-system mobility of participants. The coverage rate of mobile labour force is relatively low, suspension and overlapping in old age insurance coexist. 

3. Lack of sustainability

Against the backdrop of fast aging population, retirement age is relatively low, mechanisms on identification of contribution, benefits, and adjustment still need improving, risks of payment for old-age insurance and medical insurance funds in the future are growing. Stimulus mechanisms for participation and payment have not been given to full play. Investment channels are limited. Administrative power and financial power are not clearly defined between central and local governments, local governments receive a limited amount of financial subsidy. A multi-level social security system has not been effectively reformed, inadequate development has been seen in supplementary social insurance, which shows the trend of overdependence on governments, basic security systems face lots of pressure. Capability in management needs improving, which could not meet demands in the development of integrating social security systems in urban and rural areas.

Burden on employers and individuals are relatively heavy. Employers take relatively higher rate, social security burden for some enterprises, especially small and mini sized companies are heavy, refusal to payment, and payment evasion are widespread; relatively high contribution by freelancers, payment suspension are also serious.

4.     Relative backwardness in legal system building of social security

Particularly, there are difficulties in promoting law-based management, rules and mechanisms related to fund supervision and management, supervision and law enforcement need improving. Multi-department interaction mechanisms, mechanisms for coordination and cooperative investigation are not running smoothly, public oversight is not extensive, and the force of supervision on social security fund is relatively weak.

5.     Inadaptability of capability in social security management and service

Service resources of social security management and service are dispersed, problems such as overlapping management and overlapping of functions in government departments; management and service platforms of social security at grass-root level lack capabilities, which can’t meet the demand of fast development in social security; IT system of social security is progressing slowly, isolated information island existed, new technical methods such as big data, cloud computing are not playing a part in social security.

 

II - Main Situation faced by social security development during XIIIth Five Year Plan Period

 

The 13th Five Year Plan period is crucial in China’s efforts of building itself into a moderately prosperous society and deepening reform in a comprehensive way, governments pay more attention to people’s life, and social security; economy and society are developing fast, integration of urban and rural areas are accelerating, comprehensive national strength is strengthening, which lay down solid foundation and condition for deepening reform in social security sector.

(1) China is impacted by the Changes in Economic Pattern Transformation

China has entered into new normal period for its economic development. Economic growth rate is slowing down, profit-making capability of small and medium sized enterprises is worsening, unemployment of low-end labour force is increasing, which altogether lead to an increase of the population who suspend social security and contribution; upgrading of industrial structure, adjustment in employment structure, the increasing number of people engaging in service sector, the increasing flexible and diversified employment have all called for strengthening flexibility of social security policy; aging population and continuing increase in benefits, social security spending is increasing, and pressure in fund payment is growing.

(2) Reform Becomes More Difficult

China’s has entered into a deep water zone in its reform, with growing difficulties in social security reform and interest adjustment, balance needs to be made during the comparison of salaries and benefits among groups, unification in management system needs to be achieved by looking beyond sectional interests, level of overall planning should be enhanced by looking beyond regional interests, balance between fund raising and salaries should be ensured in economic new normal. Under the precondition of focusing on the present, and planning for the future, breakthroughs should be made in key issues and major difficulties.

(3)     Challenges Facing New Type of Urbanization

The 13th Five Year Plan period is crucial in China’s urbanization drive, during the acceleration of new type pf urbanization, more forms of employment will emerge, the change in people’s identities and frequency of mobility will speed up, the number of cross regional business in social security will increase, which call for an accelerated unification of social security policies, management and standards, increased level of integration, strengthened financial transfer, so as to remove systematic obstacles that hamper smooth mobility of labour forces.

   (4) Fast Aging Population

Over the past 5 years, net increase of population above the age of 60 reached 41 million, aging rate increased by 2.74 percentage points. During the 13th Five Year Plan period, the trend of aging will continue, according to forecasts, by 2020, the number of people aged above 60 will reach 254 million. The number of employees will decrease, dependency ratio will increase, pressure of ensuring long-term balance of old-age insurance fund will increase, and impact of aging population on social security will increase. At the same time, problems are becoming serious than before, for instance, investment channels for social security funds are limited, rate of return is low. How to tackle fast aging population, ensure sustainable development of social security system during peak time of aging population, is one of challenging issues faced with social security reform during the 13th Five Year Plan period.

(5) New expectations

Full coverage of social security and increasing demand of people for social security raise new and higher requirements for systematic building of social security and public service system building. With the awareness of rights protection in social security of the general public, people have more and higher demands for having access to more convenient and faster social security service. Comparison of benefits among different groups is growing, integration is becoming harder among different socials security programs (such as pension and subsistence allowance). The gap between growing demand in social security of urban and rural residents, and limited supply has been even more acute, it’s urgent to constantly improve social security system and policies, while paying more attention to the building of public service system, so people’s growing demand for social security can be met, and different groups can fully enjoy achievements made by economic growth.

III - Development Targets and Guiding Principles of Social Security System

(1)  Main Targets

The main target for China’s social security reform during the 13th Five Year Plan period is, centring on the target of building China’s into a moderately prosperous society, efforts should be made to follow the policy of making coverage universal, ensure basic living needs met, offer multilevel and sustainable social security, focus should be put on strengthening fairness, adaptation of mobility and ensuring sustainability, so a more fair, sustainable social security system featured with basic systematic framework, improved mechanisms and systems, basically completed welfare items, increasing benefits, strengthened fund security, smooth and orderly coordination of systems, effective and convenient management and service, and universal coverage will be built.

 

(2) Specific Targets

1. Improved systems, sound operation mechanisms

A multi-level old-age insurance scheme with Chinese characteristics has basically taken shape, which includes three levels in its structure: “basic needs layer” is to solve issues for low-income and impoverished groups in urban and rural areas by providing them with social assistance and welfare (such as people receiving subsistence allowance and households enjoying “the five guarantees”); “support layer” has social security as the centrepiece, on the basis of five social insurance categories, to consolidate basic old-age insurance for employees and basic old-age scheme for urban and rural residents; “supplementary layer” focuses on the development of enterprise and occupational annuity, further improvement of policies such as supplementary medical insurance, medical aid system for serious disease, and fast development of commercial insurance. Efforts should be made to ensure basic insurance coordinates effectively with policies of subsistence allowance, social welfare, social assistance and commercial insurance.

Chart 1 shows structure of framework of China’s multi-level social security system  

 

2. Realize universal coverage of old-age insurance basically

On the basis of consolidating existing number of participants, focuses will be put on bringing freelancers, migrant workers and low-income rural residents into coverage, coverage rate of basic old-age insurance increases from current 85% to around 95%, which is around 1.05 billion people.

(3) Steadily improve security level

Steadily improve employees and urban residents’ basic old-age pension, meanwhile, make overall planning on adjustment of benefits of old-age insurance for urban and rural residents, so that all of the elderly aged above 60 could be lifted out of poverty, consumption could be expanded, consumption outlook would be stable, the strategy of boosting domestic demands should continue to be promoted.

4. Establish and improve regular adjustment mechanism of old-age benefits, economic growth, price levels, fund strength should factor in pension adjustment

 Adjustment in old-age benefits of governments, public institutions, enterprises, urban and rural residents should be considered in a comprehensive way. It is needed to ensure elderly in urban and rural areas could enjoy achievements of social and economic development, with basic living guaranteed.

5. Further enhance the level of overall planning, promote proper personnel mobility

 Implement overall planning of basic old-age insurance of enterprises’ employees, properly define responsibilities of the central government and local governments in basic old-age insurance, further improve policies related to the coordination of old-age insurance among different regions for migrant population.

6.  Improve the long-tern mechanism for tackling risks brought about by the peak of aging population, and realize long-term balance of funds

Further strengthen stimulus measures featured with coordination of benefits with payment, keep actual contribution rate at a high level; properly increase the minimum terms required for payment, gradually postpone retirement age, improve dependency ratio; establish regulated social security budget, increase share of social insurance expenditure of governments at all levels in financial expenditure; carry out investment and operation of pension funds for maintenance and appreciation of values; open up new channels for fund raising, expand scale of national social security fund, increase strategic preservation, which could be put into use during peak time of aging population.

7. Establish a management and service mechanism of social security featured with clearly defined responsibilities, scientific arrangement of institutions, well-regulated personnel management

Integrate management and service resources of the society, promote one-stop management and service for different insurances, actively study ways of service in government purchase, outsourcing of social security serve; basically complete the building of a public service network that covers the whole society for social security. The number of card holders reaches 1.2 billion; ensure all-in-one-card service of social security, which can be commonly used across the country. Comprehensively promote standardization, computerization and professionalization of social security management and service, offer effective, convenient and secure social security service for the people, realize the target of “recording, securing, servicing life” for participants.

 

 (4) Guiding Principles

The following rules should be observed in order to achieve the target set for social security system building during the 13th Five Year Plan period:

1. Ensure balance between rights and responsibilities, integration of fairness and effectiveness

As a major way in redistribution of national income, fairness should be highlighted. Design of social security system should include arrangements featured with universal benefits, governments should take the responsibility of ensuring basic living standard of impoverished groups; a mechanism of defining benefits of social insurance for different groups and regular adjustment mechanism should be set up, so that interests of all parties could be properly adjusted for social harmony. Meanwhile, contributory social insurance should act as the core scheme in social security, with functions of mutual support between social pooling account and individual account and risk diversification. Put emphasis on the balance of rights and obligations, namely benefits and payment, promote honest and hard work, and avoid repeating setbacks which some countries have taken before, whose welfare systems unable to sustain due to excessive welfare.

2. Ensure basic systems taking shape and becoming stable

China’s basic old-age insurance and basic medical insurance system featured with integration of social pooling and individual accounts are right choice made in light of basic national situation, and successful stories of other countries. The systems have been operating for many years, and gained acknowledgement from every walks of life. The basic system should be consolidated during deepening reform, and continue to make improvements, instead of rejecting the system and making repeated mistakes.

    3. Unifying and standardizing basic policies

China’s social insurance reform is promoted gradually on the basis of local pilot programs; it is inevitable that there are contradictions such as different policy standards, division of management rights in some regions during the development of the system. The basic direction of deepening social security system reform is unify basic policies, fund management, management and service process across the country, establish national integrated social security information protection system, so as to ensure the overall interests of people across the country. It is an inherent requirement of improving socialist market economy, and a key factor in ensuring market plays a decisive role in allocation of human resources.

4. Making overall considerations, progressing in a coordinated way

Realize balanced development by strengthening top-level design, coordinating economic and social policies, urban and rural development, relations between social security reforms and other reforms, considering relations among five social security reforms, in a bid to realize balanced development; enhance the level of the rule of law, and law-based capability in management and service in a coordinated way, promote building of a multi-level security system, so as to realize comprehensive development;  coordinate development at present and in the future, properly define responsibilities taken by the nation, units and individuals in old-age insurance, activate enthusiasm of all parties, realize sustainable development.

5. Adhere to universal coverage, ensure every one enjoy social security

Universal coverage is the basis of ensuring every one enjoy social security. Universal coverage should be realized by focusing on resolving systematic loopholes, efforts in promoting the universal coverage. On the basis of consolidating the number of urban employees participating in social security, the coverage should be expanded continually, efforts should also be made in reforming and improving existing security systems, polices, and social security management service, so as to ensure small and medium sized enterprises, jobless urban residents, flexible employees and farmers all covered.

6. Adhere to the principle of moderate insurance, with the priority target of ensuring people’s basic living needs

The level of China’s productivity is generally low, development gap between urban and rural areas is relatively large, social security system should not transcend objective conditions of economic development, its level should not be excessively increased, instead, it should match with the level of economic and social development, the progress and efforts should be properly made in reform process.

IV - The main content and policy suggestions for social security system building during the 13th five-year plan period

 

According to the development target and basic principles for social security during the 13th five-year period, the main contents of social security reform are as follows:

(1) Further improve retirement pension system

1. Promote urban and rural old-age insurance in a coordinated way to achieve a full coverage

Coverage rate is one of the basic measures to evaluate the effectiveness of the old-age insurance system. It is also the important task for China. Now the coverage rate for the developed nations in Europe and the US is around 90%. By 2020, China’s total population will reach 1.434 billion. The basic old-age pension system should cover 1.05 billion. Targeting the 95% coverage rate, it should reach 1 billion people (workers basic endowment insurance 440 million people and residents’ old-age insurance 560 million people). Among them, people entitled for basic old-age insurance should be 286 million (workers basic old-age insurance 126 million and residents’ old-age insurance 160 million). Now the basic old-age insurance has covered 840 million people. To achieve a full coverage, it should cover another 160 million people in the future 5 years. Among them, workers basic old-age insurance should at least add 110 million. Considering 40 million staff at governmental and public organizations incorporated into workers basic pension system, at least 10 million should be added each year. Urban and rural old-age insurance system should add 50 million in total, and 10 million each year.

 Regarding the difficulties for a full coverage, in towns, it falls on the migrant workers, internet economy employees, housekeeping personnel, self-employed people and the handicapped. Most of them work in non-public sector and micro businesses. Due to its small economic scale, flexible operational model and instable employment and low income, they lack the ability to pay for the premium. In rural areas, it mainly falls on young people who don’t have the willingness to pay and some poor people who don’t have the ability to pay. Targeting the conditions above, we should gradually incorporate qualified people into the system by combing law enforcement and interest’s orientation, and policy improvement and promotion.

2.     Improve insurance policy for residents and self-employed people 

  We should further improve incentive mechanism of paying premium more and getting insured more, to mobilize the individually employed businesspeople, flexibly employed people and urban and rural residents to get insured. For residents who choose high-end premium and for a longer-period premium, we could appropriately increase government subsidy and give additional basic pension, guide by interests and step up insurance management to encourage consistent and longer premium. For the people living on minimum subsistence allowances and the handicapped, we should improve the policy of government supported payment. Targeting the prominent issue of suspending premium by the low-income group and flexibly employed people, we should improve the statistical methods of social average salary, by including that of the private companies into calculation. Thus it could lower the payment base and increase the premium elastic range, by expanding the base from 60% to 300% of social salary, thus keeping consistent with enterprises workers premium range and facilitating them to choose how much to pay according to their own conditions.

3.     Improve connection method of endowment insurance

    At present, the policy of interprovincial transfer of workers basic pension and connection of workers basic old-age insurance and rural and urban residents social endowment has been carried out steadily. It solve the problem for transregional transfer of workers insurance (including migrant workers) and the connection between workers and residents insurance. But in actual condition, they still face difficulties in transfer and connection and the high cost for the move and some of them even cannot transfer their insurance. We should speed up unifying operation process for transfer and connection and improve the nationwide unified information system of social security to curb enjoying repeated insurance and standardize and computerize transfer and connection to provide convenient service for insured people.

 

4.     Improve individual account system of basic old-age insurance for urban workers

   At the beginning of the century, the state council of China, while creating social security strategic reserve fund, was determined to carry out pilot of consolidating workers basic old-age insurance individual account to accumulate partial fund for future. Evaluating on the more than 10-year operation, these measures are of important strategic significance for coping with ageing of population and alleviate fund payment pressure under future accounting on the cash basis. But consolidating pilot program also faced with prominent problems. Some regions faced great pressure in ensuring current cashing. Companies were heavily burdened. Effective investment channels were lacked to preserve and increase value for consolidating fund. Various regions lack initiative to do it and to continue to expand the fund was faced with severe challenges. We need to adjust policy and make a directional choice. The main purpose of creating individual account was to clarify the old-age insurance responsibility between government and individuals. Only this function was played out, consolidating or not consolidating all can be a choice. It will not affect the basic model of accounting on cash and partial accumulation in general. On the condition that the strategic reserve fund has been created and continued to expand, we can choose not to deposit another sum of money to consolidate it. There have been different views on individual accounts in the international community. The International Labour Organization, and the International Social Security Association consistently oppose the accumulation system of personal savings without the function of mutual aid. The World Bank, previously advocated strongly consolidating individual accounts, but recently it proposed that China could implement individual nominal accounts. Seeing from the different countries’ practice worldwide, there are those who took individual accounts, while others nominal accounts. On comprehensive analysis and considering that China can hardly meet the condition to consolidate individual accounts in a long period of time (huge cost in payment system transition and difficulty in achieving good investment return for doing it), China could consider not to continue to consolidate the individual accounts of workers basic old-age insurance, rather it could take individual accounts as an incentive treatment. Suggestions: First, adhere to solid account accumulation for urban and rural residents’ old-age insurance individual account. This fund is from individual payment and has not burden of historical debt. It cannot be used for basic pension and must be invested standardized, and keep account according to actual investment earnings. Second, standardize workers’ pension individual account interest rate. Due to long-term capital nature of the premium, to maintain the replacement rate of the individual account endowment, the accounting interest rate should be set on comprehensively considering the growth of workers’ salaries and the factor of rising of commodities prices. It should be released by the nation annually. All these are to encourage people’s incentives to get insured. Third, appropriately cut companies’ premium rate and promote supplementary old-age insurance. Workers personal premium will be fully pooled into coordinated funds to ensure people get insured timely and to alleviate payment pressure for that purpose. Meanwhile, Companies’ premium should be cut down appropriately and they are encouraged to use some of the money to build a supplementary pension so as to promote the building of a multi-level security system and reduce the future capital pressure. 

 

5.     Accelerate achieving a nationwide planning of workers old-age insurance on the basis of summarizing province-level planning experience

   Internationally, for the countries practicing a basic old-age insurance system, they all take uniformed system and policy nationwide and uniformed operation of funds. And rarely is there a phenomenon of different regions taking their own policies and managing their own funds. China took a path on which some regions engaged in pilot program at first, and then the country summarized the experience and gradually made it a standardized national policy. It played a positive role for exploring ways, improve policy and ensure people get insured timely at the initial stage. But there were problems such as not uniformed policy, regional segmentation and ambiguity of power and responsibility between central and local governments. At present, half of the balance of funds for workers old-age insurance are concentrated in very few eastern provinces. Different regions have different dependency ratio and premium for the companies, from 13% to 21%. In recent years, as the provincial planning system was put in practice, policy was uniformed and funds can be transferred for use within the province. And stimulus and constraint mechanism for localities by the provinces was also built. All these laid a foundation for nationwide planning. According to the requirement of law of large numbers of social insurance, the objectives of the nationwide planning are to carry out unified system and policy and management process and information system across the country by stepping up central government’s decision-making mechanism. The objectives also coordinate the use and management of the funds, balance regional burdens, strengthen the anti-risk capability of the funds and facilitate flow of the people got insured to promote the formation of a unified labour market and fair competitive market environment. The core is to clarify the financing and payment responsibility of the central and local governments on basic old-age insurance fund, clarify power and responsibility and mobilize the incentives of both central and local governments by combining the conditions of present finance management system and regional imbalanced economic development. The planning could consider starting from workers basic old-age insurance and followed by the one of the government and public organizations’ staff.  The urban and rural residents’ old insurance could not meet the condition to incorporate into national planning, because its system is different from the workers’ basic old-age insurance, and their financing channels and treatment setting mechanism are also different. 

   It is not suitable to practice unified collection and allocation of funds by the state for the nationwide planning. We could consider taking partial planning for current funds collection and payment to create central planning funds. Through the adjustment by this fund can we effectively balance burdens between regions and alleviate the problem that in some places they have too much reserves while others lack money for payment so as to promote unified premium rates and leave rooms for reducing employers’ rates. 

 6. Setting a criterion for financing and social security that commensurate with economic development to avoid insufficient security or excessive security   

Financing and treatment level concerns not only the healthy operation of the old-age insurance but also the economic burden of the employers and the individuals and the basic living condition of the people got insured. Thereby it affects the social and economic development. Therefore, we should set a criterion for financing and social security that commensurate with economic development.

 

i.               Adjust properly the premium rates for the organizations in a timely manner

According to the ranking of 164 countries listed in Global Social Security, the sum of premium rate by both the organization and individual reached 28%, ranking the 13th. The rate is relatively high. It is mainly because the companies’ old-age insurance premium shoulders the system transition cost and state-owned enterprises reform cost. Because before the system transition, the old people have no individual account accumulation, the middle-aged people have no fund indemnity during the period regarded as payment one and nearly 10 million people retired in advance during the SOEs reform period from 1998 to 2006, current payment mainly relied on payment from companies and individuals. Meanwhile, the low overall planning and imbalanced fund balance reduced the fund use efficiency. The huge gap between premium basis and salary statistics also caused the virtual-high of the premium rate (premium rate which is 20% in 2012, if calculated on the social average salary that included private companies, would be 16%). The relatively high premium rate made the financial burden for companies heavier and constrained the improvement for competitiveness. At the same time, it exacerbated the payment evasion and resulted into a vicious circle. Our studies show that the system transition has not ended yet, the payment for the period regarded as payment one will continue for about 20 years, and as the peak for ageing is coming, the total premium rate has no room for a big down adjustment. Considering such factors as the government will continue to increase subsidy, more people will be get insured, premium salary base will be standardized, structural problem for fund will be solved by national planning and the capital use efficiency will be improved, we could properly adjust the employers’ premium rate for old-age insurance. The rate for individuals will not be changed, as 8% is relatively suitable. 

ii.              Properly setting the replacement rate of the basic old-age pension   

The Social Security (Minimum Standards) Convention No. 102by International Labour Organization, which took effect in 1952, stipulates that the minimum old-age allowance for the people got insured for 30 years, should be no less than 40% of their average salary. The new standard in No. 128 Convention in 1967 was 45%. Among the over 160 countries that have old-age insurance system, about 78% of them have a comprehensive replacement rate (basic + supplement) over 60%. The rate for developed countries like France, Germany, Japan, and UK was 62%, 52%, 49% and 47% respectively. Based on the above conditions, we believe that the average replacement rate for the primary treatment is better to keep between 45% and 70% due to the small share of the supplementary insurance in China. The target replacement rate for the urban and rural residents’ pension should be set as 50% of the net income of farmers during last year, with basic pension and individual account taking half and half.

 

                  iii.        Setting a normal adjustment mechanism for basic old-age pension    

Setting a normal adjustment mechanism for basic old-age pension is an important measure to guarantee the basic living standards for the retirees and also an important manifestation for them to enjoy the fruits of economic and social development. International experience told us that the countries with the system all had a growth mechanism for the pension standard in relation with the change of prices and salary growth. China has for several times, adjusted the basic old age pension for the retirees since it had the system. But a scientific and standardized mechanism has not been built yet. 

   The basic thinking for setting a sound mechanism is to improve the old-age pension adjustment mechanism for company employees, and based on that, to gradually build a sound one covering government, public organization, and company employees. The adjustment of basic old-age pension should be based on price fluctuation and growth of workers’ salaries and the adjustment range should consider the salary growth rate and price index and the basic old-age insurance fund and the capacity of the fiscal support. To curb the situation that people stop to pay premium after a full 15 years, and try every possible way to retire in advance, we should continue the principle of paying more, getting insured more, and while adjusting basic pension, we should emphasize on premium duration and level. We should also reduce the range of quota for universal adjustment and increase the treatment for those who retired later. And in principle, we will not lean our policy on the group with special identity. Meanwhile, the country should also adjust the minimum standard of the basic pension for rural and urban residents according to the economic development and price fluctuation.   

   7. Postponing retirement age in a gradual manner

   Retirement age is an important factor affecting the old-age insurance system. The present practice that the male workers retired at 60, female leaders 55 and female workers 50, started since the 1950s. On the one hand, the retirement age is low and there are also some policies for retirement in advance. The actual age for getting pension was only 54, while the life expectancy for urban population already reached 78 and is becoming longer. On the other hand, the different retirement age for female workers and leaders resulted in conflicts in reality. At present, the threshold age for urban and rural residents to get pension has been the same, which is from 60. That for the individually insured was 55. As the economy and society develops and the average life span extends and people are receiving longer education, it is an inevitable trend to postpone retirement age. We should do it properly on considering the factors such as demand and supply of labour, education level, and life expectancy and fund balance. It could be done in two steps by starting from extending the retirement age for woman first and then for man. Firstly, we could adjust the retirement age for female workers from 50 to 55. Secondly, extending that for male and female workers simultaneously, from 55 to 60 and from 60 to 65 respectively. It is advised to release the plan during the 13th five-year plan period to solicit people’s voice. And after amending and improvement, the plan is to put into practice during the 14th five-year plan period. We should give people an about 3-years preparatory period to arrange their career and life after retirement. Meanwhile, we should study and improve some supported policies on the retirement for those who did heavy manual work. We should cancel the policy on advanced retirement because of illness. For those who lost their working ability, we could give them allowance according to related regulations and let them retire when they meet the age requirement. For those individually insured people, we should also adjust their retirement age in a timely manner and improve the policy to promote their employment and encourage employers to create posts suitable for old-aged people and guide them to work or start their own businesses.    

8. Promote fund investment to preserve and increase its value

As the social insurance develops, the balance of old-age insurance fund increases rapidly. With the acceleration of urbanization, more and more will take part in the old-age insurance program in the future, so the fund will also increase and it is expected to reach an accumulation of nearly a trillion Yuan in the coming 10 years. Months ago, the Ministry of Human Resources and Social Security and the Ministry of Finance sought people’s advice on the Regulation on Investment and Management of the Basic Old-age Insurance Fund. That means the balance fund will go to market for investment. The regulation stipulates the channels for fund investment and its capital quota. It should be put into practice as soon as possible after soliciting opinions. The old-age insurance fund in the world, whether it is full accumulation system or pay-as-you-go system, all take a strategy of diversified investment to preserve or increase its value. Some conservative investors, such as Singapore’s central public reserve fund, began to gradually change their style. The fund account was only allowed to buy special state bonds before, but now it could go for market investment. Meanwhile, those fund, which was only used for market investment previously, such as the individual account of Chile, the DB, DC fund of the US, Canada’s pension planning, and California’s government employee retirement fund, all expand the quota of equity asset and are trying other investment channels. The fund from some countries also tried going global for investment. All these show that against the backdrop of ageing society, slowdown of economic development in many developed countries and the economic globalization, all countries actively use the force of market and seek more returns by diversified investment to reserve and increase the value of their old-age insurance fund, relieve budget burden and improve its replacement level. However, practice proves that the marketed and diversified investment for the old-age insurance fund is not accomplished at one stroke. It all started by investing on fixed income products, and then as the capital market developed and improved, and the managing organization improved their ability to steer the capital market, they began to increase the quota of equity assets. The regulation on investment of China’s old age insurance fund, told us it takes time for related policies and management to improve, for the coordination and cooperation among decision-making, executing and supervising bodies, for the shaping and improvement of multilayer capital market and for the investment organizations to improve their ability to cope with changing financial market. So all these determine that the marketed and diversified investment should be done in a gradual way. In light of the special nature of old-age insurance fund, safety and appropriate mobility are more important than its profits. At present, China’s capital market indeed has the drawback like lack of financial products, unstandardized operation of listed companies and lack of a multi-layer and multi-structural market. Therefore, we advise to combine fund investment with regional economic development. Only the fund promotes social and economic development, can it be share the fruits of economic development and accumulate real and tangible purchasing power. On this, the international practice has given us rich experience. Singapore’s central public reserved fund was invested in infrastructure building, the huge house leasing program in particular to let everyone has a house to leave. The country’s employees’ reserved fund, after privatization, was used to support private economy. It promoted the infrastructure building such as power station, airport, highways and port by buying non-public bonds and direct loans, stimulating economic development as a result. The California’s government retirement fund also put local investment a priority, and is always an important part of local economic system. All these show that the purpose of old-age insurance fund is not only for the increase on the accounting, but also for promoting the regional economic development. The latter is the root for preserving and increasing the value for the fund. China’s capital market needs further improvement and standardization. This condition determines that the present investment focus for China’s old-age insurance fund is to support real economy. On the one hand, it could be used to support infrastructure building through loans, purchasing state bonds or bonds issued by local government. It could be in particular used to support affordable house building program. On the other hand, we could increase its investment in private equity to help the development of small and medium companies with huge potential (like high-tech and bio-tech companies) to achieve a high return. 

   Risk accompanies investment. Therefore, we need a series of supporting measures and policies. One is to set up a system and mechanism to guard against risks. One of the important measures is to set up a system on investment evaluation and grading, information releasing and a mechanism on exit and access. On evaluation and grading system, emphasis should be put on evaluating and grading different investment products and the operation organizations. We advise to put the old-age insurance fund operation on the agenda of each year’s Two-Sessions (National People’s Congress and Chinese People’s Political Consultative Conference) and release related information to the public. It is money for people’s future use, so people’s right to participate, to know and to supervise should be given a full play. Second is to improve legal system for pension fund investment and management. The State Council should step a management system for old-age pension fund to clarify related contents, regulate on related departments and behaviour of the investment organizations. Third is to set up a supervision system for fund investment. We advise the Ministry of Human Resources and Social Security to set up an Investment and Supervision Bureau for Old-age Pension Fund. Their task is to supervise the investment of pension fund, enterprise annuity, occupational annuity and national social security fund. The role of social supervision and supervision by other departments should be played out. Fourth is to clarify pension fund collection and distribution of investment returns. Fifth is to improve investment risk prevention and control mechanism. We should strictly limit investment scope and ratio. The fund should not be managed together with other types of capital. The investment organization should draw some money out of their management fee to compensate possible losses. Related organizations should set up system for internal control to earnestly step up risk management. 

 

9. Fully implement the old-age insurance reform of government organizations and public institutions

   The specific policies on reforming old-age insurance of the public and government organizations have been clarified and will be put into practice in 2015. The difficulties are as follows: First, how to guarantee a smooth transition for the middle-people (who work before reform and will retire after reform) in these organizations under current policy while ensuring their treatment not affected. Second, how to ensure the pension for those people who worked at public organizations but were not on their official payroll. Most of them are to retire soon. They cannot take part in old-age insurance scheme for public organizations and have not been in workers’ insurance scheme. Third, some public institutions are not fully reformed. They may face difficulties to pay premium, as the premium rate for them is 20% and individual, 8% and a further compulsory occupational annuity. We suggest related departments to carry out specific measures to solve these difficulties.

 10. Set up a system of treatment for family members of the deceased and allowance for the sick and disabled

   We should set up a system for treatment for family members of the deceased who got insured and allowance for the sick and disabled because of illness, to form an integrated security network.

i.               Standardize the treatment policy for family members of the deceased

At present, the treatment for the family members of the deceased in government, public institutions and companies is with a huge gap and through different channel of payment. The basic thinking: First is to clarify the function of the system to alleviate the economic burden of the family of the deceased to arrange funeral and give certain but not too high material support for the family. Second is to clarify the items and payment ways for the treatment for family of the deceased, which should include funeral assistance and pension for the family and be paid one-off. Third is to standardize the payment channel. The treatment should be paid by the basic old-age insurance fund.   

ii.              Set allowance system for the sick and disabled

According to present policies and regulations, workers could enjoy retirement treatment when they lost working ability because of sickness or disability. The social insurance law regulates that we should set up a unified and standardized system which links with old-age insurance system. The basic thinking: First is to aim at establish a separate and integrated illness and disability allowance and combine the policy of retiring from post and retiring because of illness into it. Second is to abide by the principle of enjoying allowance on the condition that they paid premium. We also should avoid the moral risk of getting insured after illness and differ the system from social relief and aid. Third is to reasonably set standard for treatment. On the one hand, we should consider the national condition and bearing capability of the fund to ensure people’s basic living. On the other, we should connect the new system with the old and ensure they could enjoy regular pension after reaching their retirement age.     

11. Extending minimum duration for premium 

Judging from one person’s life cycle, the period before age 24 is generally education stage and working stage between 25 and 60 and old-age life stage between 60 and 80. People should keep paying premium during the average 35 years of working period to accumulate rights and interest for old-age insurance after retirement. Considering factors that people may suspend work, the minimum duration for premium should be no less than 25 years. However, in 2012, the average duration was only 24 years (among it, average actual premium duration was 10 years and duration regarded as paying premium was 14 years). The advanced retirement ratio was 9% and suspending premium ratio was 15%. All these severely affected the balance of the fund and resulted in low pension for some of the retirees (especially the females). We advise to extend the minimum duration to 25 years. To keep a continuity of the policy, for the people who reach retirement age, but not pay premium for less than 25 years, we should extend their premium to full 25 years. We should consider adjusting the duration while amending social insurance law. 

 

12.  Vigorously develop company’s occupational annuity to improve the multilayer system

Chinese workers’ multi-layered old-age insurance system is composed of basic old-age insurance, enterprise annuity or occupational annuity and old-age insurance with personal savings nature. At present, the enterprise annuity develops slowly and covers less people, as there is only 6% of people take part in the program. Individual savings old-age insurance has not built yet and most of retirees rely on basic pension. The way for social security is simple and the government bears a heavy burden. The main problem affecting the development of supplementary old-age insurance is lack of policy support and guidance and it needs to be improved. One is to accelerate expanding coverage of enterprise (occupational) annuity. We could properly lower the premium rates for companies and institutions by reforming and improving basic old-age insurance system to leave room for developing enterprise annuity. Second is to practice EET model for tax policy. In reference of international practice, we could further adjust the tax policy on enterprise and occupational annuity. Meanwhile, should study policies on tax support for individual savings old-age insurance. Third is to develop enterprise annuity pooling plan. Big enterprises, due to large number of employees and huge amount of capital, can design their own investment plan. But for SMEs and social organizations, it is difficult to do so because of small scale of money and high operation cost. Therefore, we should encourage them to pool their annuity together to reduce management cost and improve operational efficiency. Fourth is to integrate insurance system between different levels. We should do a good job in integrate basic old-age insurance with rural and urban subsistence allowances and related social welfare and relief and aid policies. We should continue to play the role of land security and family security. At present, the personal savings of Chinese residents have reached over 40 trillion Yuan and commercial life insurance also developed to a level. People with high income are encouraged to take part in commercial insurance to improve the life quality after retirement. 

13. Improve social security fund supervision and management  

            i.    Improve laws and regulations on social security fund supervision

We should promulgate an integrated regulation on fund supervision law enforcement and fraud handling. Meanwhile, we should enforce it strictly to hold those who violates responsible. 

             ii.  Build a professional team for supervision organizations

The central, provincial and municipal government should exercise the rights of supervision and the top level should set sub-organizations to lower level to form a separate supervision system.

            iii.   Create a system for prevention, investigation punishment, and evaluation  

We should standardize decision-making, management process and improve internal control to prevent and control risks from the root. We should improve fund supervision information system to step up real-time supervision on fund collection, payment and management. We should step up law enforcement on fund supervision to punish those who violate laws and regulations such as embezzlement, fraud. We should implement the criminal law explanation by the CPC standing committee and step up coordination between police, and judicial departments to improve efficiency of punishing violations. We should also build fund safety evaluation and analysis system and achieve a quantitative analysis on fund risk to improve the accuracy of supervision. We should also release the punishment cases to the public to expand the right to know of the public and serve as warning education.

 

iv. Improve the all-round supervision system combing administrative organs, CPC and society

We should actively play the role of the labour union, various organizations, public, media and social organs in supervision. We should ensure general public to exercise their right of supervision by improving decision-making rule and process, information releasing, public reporting and awarding system. We should improve mechanism on reporting and handling of the problems and integrate administrative and social supervision. All these is for the setting up of an all-round supervision system to secure the fund and improve people’s livelihood.

14. Improving management and service system 

                i. Further integrate management and service resources 

We should make it clear that the power to the management organization is to practice these functions well like executing policy, managing fund, and providing service. We should set up social security management and service bureau under Ministry of Human Resources and Social Security and the similar organs at provincial and municipal level and branch at country level. We should integrate the organizations handling workers basic old-age insurance, government and public institution employees’ old-age insurance and new rural insurance (urban and rural residents insurance) to improve operation and service network and grassroots public service platform.

               ii. Optimize operation model and service means

We should promote online operation of social insurance, expand public service channel and explore outsourcing services. We should accelerate computerization of social security to foster E-social security by relying on information technology and network coverage, implement accurate management by pooling and effective use of data, and achieve all be done on one integrated social security card. 

             iii.   Improve grassroots public service platform

We should integrate all network and service resources of the grassroots service organizations and social service organizations to build a employment and social security service platform at all sub-district and township levels and set up employment and social security station at all community and villages. We should set up a coordinator system at all villages. All is to improve service network for grassroots social security business with city (county) as core, sub district (township) and community (villages) as basis. 

             iv.   Improve computerizing social security services 

One is to fully use social security card. We should build a basic information data for social security cardholder, as the people will reach 1.2 million at the end of 13th five-year plan and cover 90% of population. And we should reach the goal that the card can be used with multi-functions and across the country. Second is to pool social security information together and promote data sharing and business coordination. We should accelerate integration of management system with achieves system and improve digitalization and visualization of achieves to pave the way for achieves resource sharing across the country. We should build a unified information exchange and business coordination platform by improving cross-regional business handling. We should promote cross business, cross-region, cross-level and cross-department information sharing and business coordination to form a unified platform. Third is to use big data and cloud computing technology in social insurance area. And we should explore supervision, information analysis and decision-making based on big data. We should continue to expand network monitoring. We should improve network supervision system, data collection, trimming and cleaning mechanism to improve data quality and analysis. We should improve business-monitoring model, fund supervision system and medical behaviour monitoring system to explore computerized monitoring, gradually expand business application scope and improve decision-making support. Based on data storage technology, we should further improve decision-making support system, carry out theme analysis, data demonstration and warning and prediction and explore building of analysis model, to build an information-based statistics and surveying platform. 

 

2Main Measures

  1. Strengthen legal system of social insurance

 Study and formulate basic old-age insurance regulations, social insurance handling management regulations, revise and improve social insurance premium collection and payment provisional regulations, in order to formulate a legal system of laws, regulations and departmental rules supplementing and supporting each other. 

  2. Strengthen coverage, collection and payment in accordance with the law

According to Social Insurance Act, it is a legal obligation for employers and employees to participate in basic old-age insurance. Registration management needs to be strengthened, especially for non-public economic organizations and small businesses. Reporting and implementation of payment must be strengthened as well. At the same time, reporting and approval system must be standardized. Law enforcement need to be further strengthened. The audit of the number of employees and social insurance contribution base need to be strengthened the in accordance, in order to prevent evading social insurance coverage and payment of social insurance fee. Make sure to cover everyone that is legally eligible and collect all due fees. Improve the old-age insurance policy for farmers whose lands are expropriated. Include them in either basic pension insurance for enterprise employees or urban and rural old-age insurance, based on their own circumstances. Money collection comes after they are being covered in social insurance system.    

   3. Increase financial investment for basic old-age insurance

In China, money for basic old-age insurance is raised from national treasury, companies and individuals. China supports companies by preferential tax policies, it also takes financial responsibility for state-owned enterprises and government employees when they did not participate in basic old-age insurance but their years serving were identified as valid in terms of verifying how many years of insurance they have paid. The government has to subsidies, especially when basic old-age insurance fund does not have enough money. Although all levels of financial departments have continuously increase their spending on social insurance, the speed of increase in spending is still low than the increase of revenue income. The Third Plenary Session of the CPC Central Committee explicitly proposed to improve financial investment system for social insurance, and improve social security budget. It also proposed to improve state capital budget operation system, and increase the ratio of state capital revenues turning into public finance. That ratio will be increased to 30% by 2020, to ensure more spending on improving livelihood. As basic old-age insurance almost covers all, governments at all levels should further adjust the structure of fiscal expenditure, increase capital investment, implement national co-ordination, improve social insurance budget, in order to achieve standardization and institutionalization of fiscal investment into basic old-age insurance fund.   

  4. Strengthen policy publicity and guidance

Firstly, strengthen publicity of social insurance law and regulation for owners of small and medium sized businesses who have low social insurance coverage, as well as owners of catering, construction businesses who have high labour mobility. Holding forum and regular training for private business owners to enhance their awareness of participating in social insurance and pay for relevant fees. Familiarize employers with relevant laws and the punishment regulated by law for not participating in social insurance and violation of employees’ social rights. Guiding employers to positively participate in social insurance and pay relevant spending. Secondly, provide targeted guidance and training for employees and urban and rural residents. Persuade and educate those who are not willing to participate in social security, in order to stop short-sighted behaviour and increase their awareness of risks. And handle the relationship between current interests and long-term benefits correctly. Make participants aware the relationship between paying for social security and get pension, encourage them to do payment in the long-term and pay more. Provide participants a foreseeable future, and enhance their enthusiasm to pay. Explain to migrant workers and other flexible employees the transfer of social security; make them confident to participate in social security. Try to achieve active inquiry and participation of service object from passive participation.

  5. Strengthen the management of labour and employment norms, regulate insurance participation and payment 

Link the following two things with insurance participation and payment. They are training for small and micro business operators and certification audit for operators and person in charge of high-risk industries. Rigorous exam the qualification of labour dispatch companies, in order to prevent them from not participating in social security in the name of dispatched employment; urge labour dispatch companies to get their dispatched labour covered, especially those domestic companies who dispatch their labour to foreign counties. For those who failed to do so, resolutely cancel their qualification to dispatch labour as a company. Meanwhile, inspection is needed to prevent the following from happening, companies turn employee into dispatched labour in order to avoid paying for employee’ social security fee, as well as other actions that harm the legal rights of employees. 

6.     Continue to expand the National Social Security Fund 

In 2000, China founded Council of National Social Security Fund, and set up a national social security strategic reserve fund. The money was raised from financial allocation, transfer of state-owned shares and lottery income as well as many other ways. The fund adds value through market operations. Given that the National Social Security Fund is set up to cope with aging population, expanding the fund could be considered, in order to better cope with the financial risk of payment while aging population reached peak time. According to the spirit of the Third Plenary Session of the 18th CPC Central Committee, the work of transferring state-owned shares should get started a soon as possible. Invest some of the important national resources capital revenue into the fund, to enhance the reserve capacity of social security fund. As the population of middle-income class, especially high-income class is getting bigger; the levy of inheritance tax is becoming an important means to enhance future re-distribution of recourses. Inheritance tax can improve intergenerational adjustment and social equity, and its revenue can be used to replenish the reserve fund.   

7. Improve income verification system and statistical system of average income for employees

  Implementation of standardized income verification system is the basis for the establishment of credit system. It is also a fundamental project to improve social security system. In developed countries, improving income verification system effectively prevented tax loopholes, it also enables the low-income group conveniently get social welfare. So far, China’s income distribution system is not standardized yet, the level of income is neither real nor transparent. That resulted to false social contribution base. Management should further improved in terms of regulating total wages of enterprises and employees, fully implement real-name system for wages, and reduce cash payment, while monitor company behaviours in real time via inter-bank network. 

  So far, insured individuals have accounted for about 30% of all the insured population, and are continuing to increase. According to the current policy, the contribution base for self-employed labourer and flexible employment mainly refers to the average income for employees. The statistical data for that average income is mainly collected from above-scale enterprises and government organizations and institutions, the date from a large number of small and medium sized companies and individual businesses are not included. As a result, the data of average income is relatively higher than the real data. Many are saying their income is “artificially raised”. That add to the burden for self-employed, thus huge number of them are unable to afford payment, and quit participation of social security system. Statistical methods of calculating average wage should be further improved in order to make sure the authenticity of the data get.  

  8. Establish actuarial system for pension 

Currently, actuary is already widely used in most countries who have mature social insurance businesses, and has become an important sign to reflect the fund's management standardization and specialization. With the population aging and accelerated development of urbanization, there are many uncertainties for fund income and expenses; operational risk of institution is increasing. In order to maintain the sustainable development of the pension system, actuarial system for pension must be introduced, establish an actuarial reporting system, strengthen early warning forecast for the payment ability of the fund, and the monitoring operational risks, support policy making and funding arrangements in advance to ensure that basic pensions are fully released on time. 

Periodic actuarial and analysis is important tool and mean to ensure the long-term balance of the pension fund. Since subsidy constitutes an important source of finance for China's pension system, it is necessary to analyst the financial ability of fiscal income in order to further judge the financial sustainability of the pension system. It is recommended that during China’s 13th five-year plan, the determination of all the parameters regarding old-age insurance should be based on actuarial analysis. Otherwise, any determination or adjustment of the parameters regarding old-age social security is blind. That will be dangerous, and could affect the long-term balance and system sustainability of old-age social security.

  9. Strengthen social dialogue, listen to various opinions and recommendations  

Old-age insurance reform and adjustment affects interests of all sides, including employees, retirees, businesses, governments and other urban and rural residents, and therefore very sensitive. International experience shows that full and active social dialogue contributes to the formation of a more reasonable, equitable and sustainable old-age insurance reform plan. It also helped to get the understanding and support from all sectors of society as well as the smooth implementation of the reform program. Various stakeholders’ participation and dialogue itself is a potential balancing mechanism. In 2012, the International Labour made a special research on the role of social dialogue in old-age insurance reform during economic crisis. They observed a general phenomenon: old-age insurance reform plans were implemented smoothly with sustainability when full communication, consultation was carried out between government and social partners, other stakeholders, and all aspects of requirements were considered and balanced to reach a political consensus. In addition to listening to a wide range of opinions and suggestions from government, employees, businesses, foreign experts and scholars, social dialogue need to be expanded when old-age insurance reform involves others. That is to ensure the demands of other groups; especially the vulnerable group is fully reflected and took into consideration during old-age insurance reform. The participation of various forces can make old-age insurance reform plan more comprehensive, reasonable, fair and balanced. 

  10. Strengthen research and propaganda on social security 

Enhance the social security research with focus on fairness and sustainability, in order to form a social security theory and policy system with Chinese characteristics. The research can also provide theoretical guidance and technical support to building a more equitable and sustainable social security system. Strengthen social security management system, technical standards and research on standardizing businesses. Innovative research methods and means, use cloud computing and big data processing technology to carry out deep collection and analysis of social security business data, social security policy assessment, analysis, forecasting and early warning; to deepen research on macro decision support systems, service monitoring system, fund monitoring system. Carry out actuarial studies; establish actuarial system to promote balanced analysis of the social insurance system. Promote scientific research applications. Raise fund via multiple channels to increase research funding. Strengthen social security policy advocacy and guidance of public opinions.

11. Strengthen international exchanges and cooperation of Social Security  

 

Strengthen bilateral and multilateral cooperation in the field of social insurance and promoting work on social security agreements, timely ratify the International Social Security Conventions that fit to the need of our country, and actively participate in the standard-setting of International Labour Organization conventions and Recommendations as well as other international standards. Use the opportunity of participation in the International Labour Organization (ILO), the International Social Security Association (ISSA) and other international organizations to strengthen international exchange of social security, to draw on the experience of the International Social Security reform and management services. Strengthen external propagation for social security, introduce China's experience and effective practices on social security, and promote the development of international social security. 

 


 

 

V - Major project proposals for 13th five year plan 

 

 (1) Grassroots employment and social security comprehensive service platform construction project 

  Continue to implement the grass root employment and social security comprehensive service platform construction project. Strengthen service facility construction at county and township levels; strive to provide service on social insurance registration, payment, checking and distribution of social security, transfer of social insurance as well as other services at grass-roots level facility. By 2020, employment and social security services platform should cover all counties, townships and administrative villages. The government will properly subsidize basic infrastructure construction. 

(2) Social security card project 

  Take "a card has multi-purpose and can be used nationwide" as the overarching goal, cover services like card issuing, application, management and others, plan to build a comprehensive social security card service system as a whole which collaborate nationwide efforts, share resources, coordinate services, and is safe and efficient. That could make card use for the public to be easy and convenient, and achieve precise and standardized management, personalized service for human resources and social security services targets.

(3)    Social Security Standardization Project

  Based on the "Human Resources and Social Security Standardization Plan (2011-2015)", further improve the social insurance standards, develop and revise a number of social insurance national standards and industry standards. Implement work regarding the national "social management and public services standardization pilot" and national standardization pilot in key areas in the social insurance field, in order to fully implement social security standards.

(4)   Transfer of social security and financial clearing platform project

Build a unified national platform to cover social insurance transfer, optimize information flow and capital flow for transfer of social security, and change from local agency transfer to national centralized clearing and convergence. Provide more convenient services for social security card holders, and enable them to inquiry, tracking their status. 

  Build a national fund settlement platform, serving national co-coordinating pension insurance, getting treatment from hospitals in another province or city that is different from permanent residency, and transfer of social security. Establish a central financial settlement centre in order to achieve national coordinating pension fund management for revenue and expenditure plan and final accounts; use the platform to allocate and collect regional basic pension and inter-regional treatment working fund. 

(5)   Social security big data project

  Integrate existing basic data of social insurance scattered in different departments, including basic information of employers, basic personal information, income, participation and payment of insurance, policy parameter and many other information, in order to form a unified social security Big Data platform. Horizontally, realize data sharing and real-time exchange between various departments, including Ministry of Human Resources and Social Security, National Development and Reform Commission, Ministry of Finance, Ministry of Public Security, Ministry of Civil Affairs, National Health and Family Planning, National Bureau of Statistics, Administration for Industry and Commerce. Vertically, connect all platforms from grass-root level to county level, prefecture-level city, provincial to central level. Gather all the data to central social security data centre, and establish sub-centres at provincial level. Use big data and cloud computing technology to develop social insurance-based big data applications. Solve the problem of information silos. Monitor behaviours of not participating in social security, participating social security at two different locations at the same time, receive double or multiple pension, and fraud of the Fund. Make sure data is consistent and accurate, get rid of obstacles to transfer social security across regions, achieve a mode of one centre with several terminals. At the same time, try to provide service at Internet terminals, social security kiosks, mobile phones, WeChat and SMS. Try to achieve the goal of handling 80% of social security businesses via Internet by the end of the 13th five year plan; Establish a social insurance decision support and monitoring system based on big data to monitor the operation of social security. Compare information of participating companies to find false and inaccurate information, as well as adverse participating (参保人逆向参保); false contribution base, make false report, potentially fraudulent and other acts. Forecast the revenue and expenditure of the fund for a certain period; make early warning to operational risk; provide comprehensive social insurance information application based on big data. Government, companies and the public could get public service on the social insurance big data platform. 

  VI - Steps and main indicators of promoting the development of old-age insurance for 13th five year plan

 

  Reform and improve the pension system is a long process. In accordance with the principle of focusing on the current situation, aiming for the long-run, having an overall design, while implementing the plan step by step, strive to do the work well during the 13th five year plan, resolve outstanding contradictions and problems. Suggested steps to reform and develop old-age insurance during the 13th five year plan are in Table 2.

Table 2 - China’s old-age insurance reform plan during the 13th five year plan

Time

Key tasks

Purpose

13th five year plan

Year

2016 – year

2020

1Improve policy for self-employed labourer and flexible employment to participate in social security and pay

Expand the coverage, reduce interruptions of payment 

2Fully implement operation rules for basic old-age insurance fund investment

Achieve to keep and increase the value of the fund, add to the fund

3Establish system of providing allowance for the sick and the disabled

Improve the old-age insurance system for the old, family of the deceased and the disabled

 

 

4Introduce policy on compensating family members of the deceased

 

 

5. Fully implement reform on old-age insurance system in government organizations and institutions

Achieve the goal of almost full coverage of old-age insurance, realize social equity

 

6. Introduce national coordinating program 

Improve anti-risk ability, divide central and local powers reasonably

 

7. Improve the mechanism for employees and residents to normally adjust basic pension

Guarantee basic living, share the results of social and economic development

 

8. Announce the scheme of gradually delay retirement age

Lead the whole society to achieve consensus

 

9. Implement the plan of register everyone for social insurance 

promote universal coverage, promote government's social management and public service level

 

10. Research and formulate “Old-Age

Insurance Act”

Achieve the legislation and standardization of old-age insurance law

 

11. Research to extend the payment period

Consolidate payment, increase the Fund's revenue

 

12. Research to implement the scheme of delaying retirement age

Improve current situation of high support ratio, fully take advantage of human resources

 

13. Improve multi-layer old-age insurance system

Play              multi-level            role           in

achieving risk-sharing

 

14. Research on methods to enrich old-age insurance fund from multi channels

Enrich the fund, enhance its sustainability

 

15. Research on the use of social security strategic reserve fund

Ensure the smooth operation of ageing peak, achieve sustainability

 

 

 

 

Table 3 - A list of main criteria for social security development by the end of the 13th five year plan

 

Code

Criteria

Content

Rate 

Description of the criteria

1

Coverage rate of basic social security

%

Coverage rate of basic old-age insurance for urban employees, government organizations and institutions, urban and rural residents

95%

 

(The number of people who actually participating in social security/ The number of people who should participate in social security) X 100%

2

Replacement rate for basic pension insurance of employees (%)

Pension level of employees in terms of basic old-age security

45% 70%

( Average pension for statistical period / average wage for statistical period) X 100%

3

The number of Social Security Card issued

Refers to the number of cards that are currently active and held by participants (excluding reissued and lost cards)

1.2 billion

 

4

The percentage of business conducted on               the internet

Refers to the proportion of total business volume conducted by organizations and individuals via internet, cell phone, ATMs, telephone terminals. Businesses conducted include registration, payment and collect of pension.

80%

 

 

 

  

  Annex 1: China's evaluation criteria system for old-age insurance development

  China's basic old-age insurance system is comprised by two parts, basic old age insurance urban employees and basic old-age insurance for urban and rural residents. Old-age insurance index system comprised 15 indicators in four areas, coverage, moderate fund-raising, guarantee of adequate financing, and sustainability.   

1. Coverage criteria

  Coverage criteria picks basic old-age insurance participation and coverage rate for urban enterprise employees; urban and rural residents; total old-age insurance participation and coverage rate in urban and rural areas.

  Basic old-age insurance coverage rate for urban enterprise employees: the number of urban enterprise employees who actually participated in basic old-age insurance / the number of urban enterprise employees who are obligated to participate in basic old-age insurance. The number of people who actually participated in basic old-age insurance equals the number of urban enterprise employees (within work age); the number of people who are obligated to participate in basic old-age insurance equals the total number of urban employment (excluding government organizations and institutions, military servants and students).

  Basic old-age insurance participation rate for urban enterprise employees: the number of urban enterprise employees who are actually covered by basic old age insurance / the number of urban enterprise employees who should be covered by basic old-age insurance. The number of people who actually covered by basic old-age insurance equals the number of urban enterprise employees who participate in basic old-age insurance plus the number of people who collect pension; The number of people who should be covered by basic old-age insurance equals the number of urban employment (excluding government organizations and institutions) plus the number of company retirees.

  Basic old-age insurance participation rate for urban and rural residents: the number of people who actually participated in basic old-age insurance / the number of people who should participate in basic old-age insurance. The number of people who actually participated in basic old-age insurance equals the number of urban and rural residents who pay for basic old-age insurance plus the number of people who can get pension. The number of people who should participate in basic old-age insurance equals the number of people who are registered as urban and rural residents minus the number of students and the number of urban and rural population who already participated in the basic old age security for urban employees.

  Total old-age insurance participation rate in urban and rural areas: the total number of enterprise employees plus the total number of urban and rural residents who actually participated in basic old-age insurance / the total number of them who are obligated to participate in basic old-age insurance 

Total old-age insurance coverage rate in urban and rural areas: the total number of enterprise employees plus the total number of urban and rural residents who are actually covered by basic old-age insurance / the total number of them who should be covered by basic old-age insurance 

 

  2. Criteria of moderately fund-raising

  This criterion reflects the financial burden and coordination between the two systems. The criteria are as follows:

1 actual contribution rate of basic old-age insurance for urban enterprise employees, enterprise contributions ratio 2individual contribution growth rate of basic old-age insurance for urban and rural residents, individual payment

  Actual contribution rate of basic old-age insurance for urban enterprise employeesthe average money paid by urban enterprises and employees / the average wage of urban enterprise employees. This criteria reflects the financial burden for enterprises and its employees, the determination of contribution rate need to ensure balance of payment for basic old-age insurance fund while inspire social vitality (which means stimulating the production enthusiasm of enterprises and workers)funding levels to high or too low are both not desirable. 

  Financial burden for enterprises in terms paying for basic old-age insurance for urban enterprise employees: money paid by enterprises for basic old-age insurance / total profits of the enterprises. This criterion reflects the crowding effects that old-age insurance payment has on corporate profits. As a result of increasing degree of internationalization and marketization for China’s economy, competition became fiercer. The increase of labour cost cannot be easily transferred by raising prices; the stronger the crowding effects old-age insurance payment has on corporate profits, the less favour that has on the long-term development of enterprises. That could also threat to the stability and sustainability of basic old-age insurance fund raising.

  Individual contribution growth rate of basic old-age insurance for urban and rural residentsgrowth rate of payment made by urban and rural residents in terms of basic old-age insurance this year compared with payment made last year. Payment made by urban and rural residents in terms of basic old-age insurance include: the sum of total payment made by individuals, total financial aid, and collective subsidy (or financial aid given to individuals, social groups and others) / the total number of individuals who pay for basic old-age insurance.

It reflects the financial burden for urban and rural residents.

  Financial burden for urban and rural residents in terms of participating in basic old-age insurance: average individual payment / average net income of farmers per person. It reflects the financial burden for urban and rural residents.

  3, Guarantee of adequate financing

  For the criteria of pension distributed, we pick pension replacement rate to reflect the function of old-age insurance to ensure basic daily life. It cannot be too low or too high, and should be kept between reasonable ranges.

  Pension replacement rate for urban enterprise retirees: average pension for urban enterprise retirees/ average individual contribution wage for urban enterprises employees who participated in social insurance.

  Pension replacement rate for urban and rural residents: average pension for rural and urban residents / net income for rural residents per person. The level of insurance that urban and rural residents get can refer to five indicators: 

minimum living standard for urban areas;

minimum living standard for rural areas

minimum living allowance for urban areas

minimum living allowance for rural areas

the per capita consumption expenditure of rural households.

 

  Considering the level of insurance that urban and rural residents get is to protect the basic living standards, not the lowest cost of life, therefore, urban and rural minimum living standard is relatively low, and cannot be used as the main reference criteria. However, the standard can be used as a minimum standard. The per capita consumption expenditure for rural residents is relatively reasonable, therefore, rural residents net income per person is used as the main reference criteria for judging the level of insurance that urban and rural residents get.

 4Sustainability of the fund

  Because the process of reform on urban and rural enterprises employees old age insurance system, channels of payment for transition costs were not specified, co-coordinated fund embezzle personal accounts, in fact, it is still pay-as-you-go, only some provinces (municipalities) take personal accounts as pilot project. Thus the following are chosen as main criteria for sustainability, urban enterprises employees’ basic old-age insurance fund accumulated surplus rate, individual account investment yield, urban and rural residents’ individual old-age insurance accounts investment yield and rate of realization of fiscal aid. 

Urban enterprises employees’ basic old-age insurance fund accumulated surplus rateyears of accumulated surplus for old-age insurance fund / total annual expenditure of social insurance funds. This criteria reflects the financial sustainability of the pension fund, and is generally considered appropriate when accumulated surplus rate ranges between 1 and 2. Too low, it means insufficient financing, the sustainability of pension is at risk; too high means that the funding levels are too high, and that will increase labour costs for enterprises, and in turn risk the sustainability of the system.

  Individual old-age insurance account investment yield for urban enterprises employees: individual account investment profits (deduct investment operational costs) / total investments from individual account. This criterion reflects the investment performance of individual accounts. Investment yield too low could impact accumulation of personal accounts, and affect the old-age insurance pattern of “co-coordinating accounts with individual accounts”; investment yield too high means that fund investment is facing high risks, and could affect fund safety. Ideal investment yield equals to the average wage growth rate for urban enterprise employees.

  Urban and rural residents’ individual old-age insurance accounts investment yield: investment profits of urban and rural residents’ individual old-age insurance accounts / total fund investment.

  Rate of realization of fiscal aid: central fiscal aid that are realized and funded for urban and rural basic old-age insurance during report period plus regional fiscal aid that are realized and funded during report period/ (central fiscal aid that should be realized and funded for urban and rural basic old-age insurance during report period plus regional fiscal aid that should be realized and funded during report period).

 

 

Topic 1.3.2

Social pooling of the basic pension component (Evaluation of the combination of social pooling and individual accounts techniques in pension schemes for employees)

Song Xiaowu

Mr. Song Xiaowu graduated from Peking University of Economics with a master degree in Economics. He has acted as the Deputy Secretary-General of China Managers’ Studies Society, Deputy Director of International Labor Research Institute of Ministry of Labor, Standing Vice President of China’s Academy of Labor, Director of Distribution and Social Security Department of State Structural Reform Commission (SSRC), Director of Workers’ Health Insurance Reform Leading Group Office of the State Council, Director of Macro Structure Department, Secretary-General, Members of Party Leadership Group and Party Secretary of the State Council Structural Reform Office, Members of Party Leadership Group of National Development and Reform Commission(NDRC), President of Academy of Macroeconomic Research of NDRC, Deputy Director ( Deputy Ministerial Level) of North Eastern China and Other Old Industrial Regions Rejuvenation Leading Group Office, President of China Society of Economic Reform, etc. Mr Song has a rich international experience in the field of labour and social security, ntoably with the International Labour Organisation adn the International Social Security Association.

 

 

Evaluation of the combination of social pooling and individual accounts techniques schemes for urban employees

 

Song Xiaowu

 

 

 

Abstract

As for selection of a direction for perfection of basic pension insurance individual account system of China, arguments between shorting and full funding have always existed. Under the condition that pilot of full funding is very difficult in every move for many years, Notional Defined Contribution System (NDC) seemingly becomes a more practical solution. However, great controversies in this regard still exist in different government departments and academic circles. This report conducts theoretic analysis on the focus of arguments at present and puts forward a reasonable direction for perfection of “Social Pooling and Individual Account Combination” System (hereinafter referred to as pooling-account combination system) based on retrospective analysis of evolution of pooling-account combination system. To be specific, it is not to expand the scale of individual accounts but stick to the essential directions of fairness priority and narrowing but not expansion of initial distribution gap without any deviation. It aims to promote organic combination of social pooling and individual accounts, drive the reform of relevant supporting systems and implement nationwide pooling of basic pension insurance, so as to realize fairer and more sustainable development of system. This report puts forward two schemes for perfection of pooling-account combination system as well as relevant supporting policy measures.


 

CONTENTS

Introduction  69

1.    Changes of Pooling-Account Combination System for Basic Pension Insurance of Urban Employees in China  70

1.1 Primary Exploration of Pension Insurance System Reform (1984-1993) 70

1.2 Construction of Pooling-Account Combination System Model (1993-2000) 74

1.3 Efforts for Perfection of Pooling-Account Combination System (2000-2010) 80

1.4 Review and Top-level Design of Basic Pension Insurance System (2010-Now) 84

2.    Main Problems Faced by Pooling-Account Combination System of Basic Pension Insurance and Causes 85

2.1 Main Problems Faced by Pooling-Account Combination System of Basic Pension Insurance 85

2.2 Primary Causes for Great Difficulties Encountered by Pooling-Account Combination System  90

3. Overall Idea for Perfection of Pooling-Account Combination System of Basic Pension Insurance  92

3.1 Main Idea  92

3.2 Basic Principles 92

3.3 Proper Handling of Several Major Relations 93

4. Pooling-Account Combination System Model of Basic Pension Insurance  94

4.1 Arguments of Different Viewpoints on Perfection of Basic Pension Insurance 94

4.2 Theoretic Analysis Based on Cross Matrix 96

4.3 Practical Inspection of Focus of Contradiction  98

4.4 Viewpoint of This Report 101

5. Nationwide Pooling of Basic Pension  103

5.1 Arguments of Different Viewpoints 103

5.2 Analysis of Advantages and Disadvantages of Different Viewpoints 104

5.3 Viewpoint of This Report 105

6. Supporting Measures for Perfection of Pooling-Account Combination System of Basic Pension Insurance  106

6.1 Expansion of Capital Sources beyond System  106

6.2 Progressive Postponement of Retirement Age 107

6.3 Full Funding of Pension Insurance Payment Base Number 107

6.4 Institutionalization of Treatment Adjustment Mechanism  108

6.5 Enhancing of Openness and Transparency of Pension Insurance System  109

Several Conclusions  109

 


 

 

Introduction

It was pointed out in the Third Plenary Session of the 18th Central Committee of the CPC that, “It is required to establish a fairer and more sustainable social insurance system, and stick to the social pooling and individual accounts combination and perfect individual account system”, which has made clear of the reform direction of basic pension insurance system. However, arguments between shorting and full funding have always existed on how to perfect individual account system design based on the adherence to “pooling-account combination” basic system model,. Under the condition that pilot of full funding is very difficult in every move for many years, NDC seemingly becomes a more practical scheme. However, great controversies over whether the scale of nominal individual accounts should be expanded still exist in different government departments and academic circles. It is thus urgently required to conduct systematic theoretic analysis of pooling-account combination system model and put forward practical and feasible policy suggestions acceptable for each party joined in the system.

This report plans to review the changes of “pooling-account combination” system of basic pension insurance of urban employees of China, analyse the main problems faced by the system and the causes, and put forward direction and policy suggestions for the perfection of “pooling-account combination” system of basic pension insurance of urban employees. The structure of this report is as follows: Part I briefly reviews the changes of pooling-account combination system of basic pension insurance of urban employees of China, highlights retrospective analysis on three argument climaxes concerning individual account system, and demonstrates that pooling-account combined partial fund system finally selected by China is a decision made based on experiment of abundant fierce theoretic arguments and policy choices; Part II analyses the main problems faced by current pooling-account combination system and their causes, and clarifies the logical relationships among various problems; Part III puts forward a general idea for the perfection of pooling-account combination system of basic pension insurance of urban employees of China as well as basic principles to follow; Part IV conducts a comparative analysis of different viewpoints on the perfection of pooling-account combination system of basic pension insurance based on theoretic and practical inspection, and puts forward the viewpoints of this report; Part V analyses nationwide pooling of basic pension insurance which is closely related to the perfection of pooling-account combination system and puts forward a scheme for promoting nationwide pooling of basic pension insurance; Part VI analyses policy measures supporting the viewpoints put forward in Part IV and Part V of this report; Part VII, the final part, draws conclusions of this report.

1.    Changes of Pooling-Account Combination System for Basic Pension Insurance of Urban Employees in China

China’s reform and opening up started from rural reform in 1978, while urban reform was not involved. In 1984, China began to carry out urban state-owned enterprise reform focusing on enhancing enterprise vitality, which impacted the traditional retirement system in the charge of the state and monopolized by the entities under the original planned economic system. In order to copy with the challenge of aging of population and adapt to the transformation from planned economy to market economy, China’s pension system was gradually changed from accounting on the cash basis to partial fund accumulation system since the middle term of the 1980s.

1.1 Primary Exploration of Pension Insurance System Reform (1984-1993)

In this stage, pension system reform was adopted as a supporting measure for state-owned enterprise reform. The state explored the implementation of pension social pooling and multi-party paying and determined the transformation from accounting on the cash basis to partial fund accumulation system combining social pooling and individual accounts.

1.1.1 Causes for Launch of Reform

In the beginning of the 1980s, pension method of “enterprise self-insurance” in the era of planned economy already caused imbalance of pension burden among enterprises. As for long-established enterprises in industries like textile, grain, salt manufacturing and moving, the retirement expenses were equal to over 50% of total amount of wages of in-service employees. The retirement expenses of some enterprise even exceeded the total amount of wages; in some emerging industries and newly established enterprise such as enterprises engaged in electronics, instrumentation and chemical engineering, the retirement expenses were even less than 5% of total amount of wages. With the increase of retirees of long-established enterprises year by year, the expenditure of pension increased greatly. The contradiction of imbalance of pension burden between long-established and old enterprises became increasingly severe. The method of paying retirement expenses by enterprises could no longer guarantee the lives of retirees especially for some enterprises suffering from serious losses. They had to reduce or stop paying of pension due to failure to pay retirement expenses. Some enterprises lowered and even cancelled retirement treatment for the sake of interests of in-service employees, which triggered strong dissatisfaction from the retirees and their family members and affected social stability, which was a primary cause for launch of reform.

The second cause was that the establishment of labour contract system promoted pension security socialization. In 1986, China practiced labour contract system nationwide. The government could not monopolize employment. As for new employees, employment was no longer a lifelong hired “iron bowl” system. They began to enter into labour contracts with enterprises and they were able to select jobs and go anywhere they liked freely, which broke the lifelong stable relation of subordination. It meant that it was impossible that a certain enterprise was the only pension supply source of employees. Instead, a set of socialized pension security system matched with market employment mechanism must be established.

The third cause was that the endogenous defects of traditional pension system were gradually exposed and the system was continuously impacted. The burden of traditional pension insurance system was very sensitive to the composition structure of in-service employees and retirees of enterprises. Under normal circumstances, the aging of pension insurance system should be slow. However, in 1978, the state opened “Children Substitution” policy according to G.F. [104] Document. To be specific, when an employee retired from a state-run enterprise or public institution, one of his/her children was allowed to fill his/her shows. This policy was initiated upon the end of school graduates going to the countryside. Millions of school graduates returned to cities but the inflexible labour planning system could absorb so much surplus labour within a short time. As a result, many school graduates could not be arranged to work. In order to ensure employment of children, many employees from state-run entities chose to retire ahead of time and make room for their children in consideration of relatively stable and high-level retirement treatment commitments at that time. It directly caused the quick aging of traditional pension system. The dependence rate within labour insurance system climbed straight and number of retirees and retirement expenses increased at a relatively fast speed.

Table 1-1 - Increase of Number of Retirees and Retirement Expenses from 1978 to 1984 - Unit: %

Year

Entity under ownership by the whole people

Enterprise under collective ownership

Number of retirees

Retirement expenses

Number of retirees

Retirement expenses

1978

100.0

100.0

100.0

100.0

1979

165.5

177.3

410.0

360.0

1980

224.6

266.3

593.3

700.0

1981

260.6

326.9

700.0

900.0

1982

304.6

380.9

826.7

1100.0

1983

357.4

453.9

923.3

1330.0

1984

374.1

519.0

1320.0

2120.0

Data source: Organized by the author according to data indicated in China Labour and Social Security Statistical Yearbook in relevant years.

1.1.2 Main Moves of Reform

1Implementation of social pooling of enterprise retirement expenses: In 1983, relevant department of the government put forward the launch of social pooling of retirement expenses of enterprises under ownership by the whole people. In 1984, social pooling of employee retirement expenses of state-owned enterprises was initially tried out in Jiangmen and Dongguan of Guangdong Province, Zigong of Sichuan Province, Taizhou and Wuxi of Jiangsu Province, Heishan of Liaoning Province, etc. and successful experience was primarily obtained. In January 1986, State Commission for Restructuring the Economic System and Ministry of Labour and Personnel jointly printed and distributed Circular on Forwarding Retired Staff Pension Insurance Pooling System Implemented in Wuxi which requested each place to expand pilot projects. As of May 1987, there were already 600 cities and counties in China implementing social pooling of retirement expenses. Relevant departments required that cities and counties with favourable conditions should implement social pooling of retirement expenses within two years. Social pooling of pension insurance of state-owned enterprises was an important move for the development of pension insurance from “enterprise self-insurance” to socialization, despite low pooling level and poor mutual aid degree of pooling implemented in the scope of cities and counties.

2Implementation of enterprise and employment individual payment and establishing of pension insurance system for employees under labour contract system. In 1986, the State Council released four regulations for reform of enterprise labour system and decided to implement labour contract system for all workers newly recruited by state-owned enterprises. In addition, measures for pension insurance of workers under labour contract system were stipulated. Enterprises paid retirement pooling pension according to approximately 15% of total amount of wages of workers under labour contract system, while workers under labour contract system paid retirement pooling pension not exceeding 3% of their standard wages.

3 Pilot project of “pooling-account combination” system in Hainan Province and Shenzhen. In March 1989, the State Council formally approved Hainan Province and Shenzhen as comprehensive reform pilots of China’s social security system. Partial accumulated fund-raising model was adopted for the pension schemes of these two places. The difference lied in that Hainan Province adopted “Large Pooling (18%) and Small Accounts (3%)” while Shenzhen adopted small pooling and large account model. Over 2/3 of enterprise payment entered individual accounts and the scale of individual accounts was 16%. It was worth noting that these two places had very different understandings of nature of individual account. The pension scheme adopted by Hainan Province regarded that the private attribute of individual account pension was stronger than its public attribute. It should be regarded as mandatory occupational pension. However, the scheme adopted by Shenzhen regarded that individual accounts and social pooling jointly formed basic pension insurance.

The unified understanding of pooling-account combination ratio and nature of individual accounts by Hainan Province and Shenzhen revealed gaming and competition of different reform ideas during the period of reform at the back. Even after the Third Plenary Session of the 14th Central Committee of the CPC already made clear of reform principles of “pooling-account combination” in November 1993, the decision-making level still had different understandings of specific meaning of “pooling-account combination”. One opinion held that social pooling corresponded to basic pension insurance while individual accounts were established in the supplementary pension insurance. Another opinion held that “pooling-account combination” should be realized in the level of basic pension insurance while supplementary pension insurance did not belong to the category of mandatory social insurance. The opposite reform ideas of these two parties could be used to exactly explain the differences of model selection of two “pooling-account combination” policy pilots in Hainan Province and Shenzhen.

Table 1-2 - Measures for Social Pension Insurance System Reform Pilot of Hainan Province and Shenzhen

System stipulation

Hainan Province

Shenzhen

Fund-raising ratio

Enterprise

18%

16%

Individual

3%

5%—10%

Total

21%

21%—26%

Method for determination of treatment

Social pooling

18%

5%—11%

Individual accounts

3%

16%

Data source: Organized by the author according to relevant documentation.

 

The exploration in this period established “pooling-account combination” system model of basic pension insurance of urban employees of China. In 1993, the Third Plenary Session of the 14th Central Committee of the CPC approved Decisions of the Central Committee of the Communist Party of China on Several Problems Concerning Establishing of Socialist Market Economy System which, for the first time, made clear of “pooling-account combination” system as a reform direction of China’s social basic pension insurance system and acknowledged the public attribute of individual accounts.

Table 1-3 - Primary Exploration of Pension System Reform

Content of reform

Nationwide reform

Social pooling of retirement expenses

In 1984, the State began pilot projects of social pooling of retirement expenses and popularized it nationwide since 1987.

Relatively standardized social pension insurance fund management mechanism

In November 1994, the Ministry of Finance issued Interim Regulation on Strengthening of Enterprise Employee Social Insurance Fund Investment Management.

Pension insurance multi-party bearing mechanism

In June 1991, the State Council released Decision on Reform of Enterprise Employee Basic Pension Insurance System.

Establishing of pooling-account combination system structure

In November 1993, the state released Decisions of the Central Committee of the Communist Party of China on Several Problems Concerning Establishing of Socialist Market Economy System.

Data source: Organized by the author according to relevant documentation.

 

1.2 Construction of Pooling-Account Combination System Model (1993-2000)

The highlights of reform in this stage were to explore how to organically combine social pooling and individual account system as well as determine national unified pooling-account combined partial fund accumulation system.

1.2.1 Construction of National Unified Pooling-Account Combination System

On the basis of summarization of exploration experience of each place, the State Council formally issued Circular on Deepening the Reform of the Pension System for Staff and Workers of Enterprises (G.F. [1995] No. 6) in March 1995 and put forward two implementation measures of “pooling-account combination”. The main difference of these two measures lied in the scale of individual accounts. Each region might select either of these two measures based on actual conditions. Public proposal of competitive public policy choice schemes was very rare in the government documents of China. This move reflected openness and exploration orientation during China’s social security reform. It should be pointed out though the pension system reform scheme originally designed by former Ministry of Labour did not set up individual accounts in the basic pension insurance system. Later, according to the requirements of the State Council, the original scheme was revised and individual accounts were added.

During the subsequent reform pilot for two years, there were already 21 provinces and cities and 4 national pooling industries in China establishing “pooling-account combination” pension system. In the first half of 1996, about 150,000 employees obtained pension according got the new system or the transitional measures. However, the basic system of each region was not unified and the management was decentralized. Due to different individual accounts, employees’ flow was obstructed. A typical case was that Wuhan adopted 16% of individual accounts while Hubei Province adopted 12% of individual accounts. As a result, employee transfer between municipal enterprises of Wuhan and provincial enterprises encountered with certain difficulties.

Table 1-4 - Comparison of Two Reform Schemes of Social Pension Insurance System of Urban Employees

System provision

Measure 1

Measure 2

Start-up

Final goal

Fund-raising ratio

Enterprise

13%

8%

Generally maintain social pooling level of labour insurance.

Individual

3%

8%

8% or smaller

Total

16%

16%

-

Method for determination of treatment

Social pooling

5%

5%

Generally remain unchanged.

Individual accounts

11%

11%

About 10%

Data source: Organized by the author according to relevant documentation.

 

In 1996, the State Council instructed former Ministry of Labour and former State Commission for Restructuring and the Economic System to take the lead and organize relevant departments to form a joint survey group which should go to each place and get to know the progress of enterprise employee basic pension insurance reform. To sum up, the survey group listened to the opinions of local leaders from 14 regions and held a series of forums and demonstration meetings. Based on the summarization of practical experience of each place and through discussion in premier work meetings in August 1996 and July 1997, the State Council released Decision on Establishing of a Unified Enterprise Employee Basic Pension Insurance System (G.F. [1997] No. 26) in July 1997. The core content of this document was “three unifications”: Unification of standardization of payment ratios of enterprises and employee individuals. The payment ratio of enterprises should usually not exceed 20% of total amount of wages. The specific ratio should be determined by each local government according to actual conditions. The payment ratio of individuals should not be lower than 4% of their wages in 1997. This ratio would be increased by 1% for every two years later to finally reach 8%; unification of scale of individual accounts. Each place should establish individual accounts for employees according to 11% of wages of employees of enterprises. Individual payments were all included in individual accounts and the insufficient part should be transferred from enterprise payments. With the payment ratio of individuals being gradually improved to 8%, the ratio of part transferred by enterprises should be reduced to 3% accordingly; unification of pension calculation and paying measures. Pension payment included two parts, namely, basic pension and individual account pension. The monthly standard of basic pension was 20% of monthly average wages of local employees in previous year, while the monthly paying standard of individual account pension was accumulated deposit in individual accounts dividing 120.

1.2.2 Reasons for China to Select Pooling-Account Combination System

If viewed from the development history of world social insurance system, China’s pooling-account combination model is a system innovation. This system is neither traditional pay-as-you-go system nor fund accumulation system or partial accumulation system often discussed in the social security circles. Instead, it realizes organic integration of four key system elements, i.e. two financial balance methods (pay-as-you-go and fund accumulation) and two methods for determination of treatment (determination of payment and determination of payment) under a system framework.

As a matter of fact, Chinese decision makers didn’t finally choose pooling-account combination model only in action. As analysis in the previous part, abundant theoretic arguments and policy choices were involved. Even before the release of Circular on Deepening the Reform of the Pension System for Staff and Workers of Enterprises in 1995, the scheme reported by Ministry of Labour to the State Council still continuously insisted on expansion of socialized pooling coverage of labour insurance system but didn’t support establishing of individual accounts. The scheme was adjusted only with the insistence of the State Council. If viewed from the perspective of retrospective analysis, each related part finally unified the understanding of establishing “pooling-account combination” model mainly based on the following considerations:

Table 1-5 - Prediction of the UN for China’s Population (2005-2050)

Year

Total population (unit: 1,000 persons)

Population aged 65 and above (unit: 1,000 persons)

Ratio of population aged 65 and above (%)

2005

1312979

100464

7.7

2010

1351512

112941

8.4

2015

1388600

133902

9.6

2020

1421260

169567

11.9

2025

1445782

197382

13.7

2030

1458421

236414

16.2

2035

1458292

285868

19.6

2040

1448355

321762

22.2

2045

1431488

328493

22.9

2050

1408846

333668

23.7

 

(1) Aging of population age structure decided the discontinuity of pay-as-you-go model. In the beginning of the 1990s, Chinese decision makers realized that China’s population age structure would go through radical changeover within several decades and the population age structure would be aging at a relatively quick speed and the number of retirees would continuously increase. The basis of continuity of pay-as-you-go system was relative stability of population age structure (which meant that there was enough in-service generation to supporting the retired population). Therefore, this kind of pension insurance system based on transfer of inter-generation income could not cope with the impact of financial crisis resulting from quick aging of population. The pension financing of fund accumulation system was originated from savings accumulation of individuals during work. The influence of this model on the change of population age structure was neutral and it could hedge old age crisis risk in a relatively favourable way.

 (2) Relatively heavy historical burden of China decided that fund accumulation model could not be fully implemented. Although complete accumulation model had born advantages in improvement of economic efficiency and resistance of aging risk, pension transition would result in the necessity to search for extra financial sources in order to fulfil the commitments made to the treatment of retirees, so as to form transformation cost. In particular, China already had 24 million retirees back then and therefore the transformation cost was tremendous. Under the condition of heavy historical burden, realization of complete transition of pension insurance system was not feasible. System innovation was needed. Based on equal consideration to the handling of old age crisis, too heavy burden should not be imposed on the in-service generation.

(3) Advantages of pooling-account combination partial accumulation system: Partial fund accumulation model has made the respective advantages of two systems complementary to each other theoretically. It not only reflects the characteristics of social insurance, i.e. social mutual aid, risk sharing and strong guarantee in a traditional sense but also highlights employees’ self-security awareness and motivation mechanism so as to establish a new pension insurance system combining fairness with efficiency and social mutual aid with self-security.

(4) Penetration of world social security reform trends. Since the 1980s, some international organizations highly praised pension individual accounts established by countries like Singapore and Chile and recommended giving up public pension system with pay-as-you-go system as financing method and government as management subject. It proposed the provision of more efficient economic guarantee for labourers by establishing a competitive individual accumulation pension plan. The rise of this ideological trend was exactly in a same time window with China’s pension system reform. Many foreign experts were involved in the demonstration of China’s pension reform scheme directly or indirectly. In 1995, with the assistance of relevant departments and research institutions of China, the World Bank completed a special research report titled as “Pension Reform in China”. Through these communication activities, foreign experts directly or indirectly participated in the decision-making activities of Chinese government, and their concepts were selectively absorbed and recognized by Chinese decision makers at that time and became important theoretic foundations for promotion of the establishing of individual accounts.

1.2.3 Problems Faced in Initial Operation Stage of Pooling-Account Combination System

(1) Transformation cost: Internal digestion path contained long-term paying risk. Due to existence of a relatively mature public pension system and coverage of 24 million retirees, transformation cost for transformation of China’s pension system from traditional labour insurance system to pooling-account combination model was relatively huge in scale. According to different research assumptions, scale of future pension gap estimated by different scholars differed significantly from RMB 1 trillion to RMB 12 trillion. Despite disagreement on specific figure, that the transformation cost was relatively huge as a whole already became a common understanding of decision makers and the academic circles. Since the state-owned enterprises encountered with great operation difficulties and low fiscal revenue back then, external financing was hard to realize and the pension reform had to become a closed-loop system. As a result, transformation cost had to be gradually digested inside the system. The first path selected was to overdraft individual account fund to pay the current pension. Consequently, social pooling and individual accounts were managed in a “mixed” way and “empty accounts” appeared in individual accounts; the second path was to gradually make up the increase of pension expenditure by improving payment rate. 28% of high payment rate of China’s enterprise employee pension insurance was greatly related to transformation cost; the third path was to expand coverage. From a long term, this kind of “coverage expansion” transferred the current paying pressure in other stages. It made relatively high treatment commitments to the new insured but only acquired fund revenue of a limited level. When the number of paying individuals in the system grew at a relatively fast speed, this policy choice was feasible. However, once pension system realized full coverage and the economic growth became stable and the number of employed population in the system was kept stable for a long term, the pension insurance system would face a situation that the coverage couldn’t be expanded any more. The treatment commitments made in the past required centralized payment but no new paying individuals were added to provide excessive financial sources for repayment. As a result, the paying pressure of pension fund would suddenly rise. Therefore, digestion of transformation cost through expansion of coverage contained huge paying risk.

(2) The coverage of the system was still limited: It mainly covered state-owned enterprises. The pension system reform in this period was no more than a supporting measure for reform of state-owned enterprises instead of independent system arrangement. The execution of enterprise employee pension insurance system in each place mainly focused on state-owned enterprises and collective economy was gradually included in the system. At the end of the 20th century, with the decline of effectiveness of collective economy, many collective enterprise assumed relatively heavy payment burden and found it difficult to join pooling-account combination system. This problem left over by history still exists in some regions now.

(3) Low pooling level of system: Weaken risk assistance and increase labour flow cost. In 1982, after China implemented tax distribution system, each city, county and district became independent financial budget entities. Social insurance pooling was conducted with district or county as unit once. Since the economic strength and local financial level of each county and district developed in an imbalanced way, different pooling entities did not have mutual aid and allocation, the funds among them were self-balanced and closed-operated, and there was no mechanism for super-solution and adjustment of superior finance established, the risk resistance of insurance system was thus weakened. Meanwhile, fragmentation of pooling regions not only affected the risk resistance of system but also obstacle reasonable flow of labour.

(4) The method for determination of pension was unreasonable: The pension treatment continuously declined. G.F. [1997] No. 26 Document stipulated a regulation mechanism centring on growth of pension with price and referring to increase of wages. However, in the reality, the pension treatment adjustment level of “middlemen” already joining work and “old men” already retiring before system transition could not catch up regional economic development and growing range of people’s income level. Relative treatment level of retirees continuously declined. As a result, the pension level gap between enterprise employees and public institution employees kept expanding, to result in many social contradictions.

1.3 Efforts for Perfection of Pooling-Account Combination System (2000-2010)

The highlights of reform in this stage were to review pooling-account combined partial fund accumulation system, adjust and try out the full funding of individual accounts, explore the enriching of pension insurance fund with state-owned assets, improve pooling level, expand system coverage, accelerate the development of enterprise annuity, etc.

 

1.3.1 Further Discussion of Pooling-Account Combination System Model in 2000

Since it was required to properly solve the problem of transformation cost during transformation from pay-as-you-go system to partial accumulation system, while China expected to solve the problem by improving enterprise payments and borrowing individual account payments, problems like “mixed” pooling and “empty” individual accounts would inevitably appear. In 2000, with the proposal of former Premier Zhu Rongji of the State Council, the former Economic Restructuring Office of the State Council and the former Ministry of Labour and Social Security jointly invited first-class economists like Stiglitz and Feldstein to demonstrate Pilot Scheme for Perfection of Urban Social Security System. When meeting with foreign experts involved in “China Development Forum: Social Security System Reform International Seminar”, Premier Zhu Rongji put forward five major issues in the social security reform: Should China improve payment rate? Should China give up individual accounts and fund accumulation and implement pay-as-you-go system again? How could China reduce or compensate the future pension deficit? How could pension fund be managed under the capital market condition of China? How could the Central Government reduce the subsidy for each province or only subsidize provinces most needed under provincial pooling?[2] These five major problems were discussed by decision-making departments and foreign and domestic famous experts in 2000 and finally Pilot Scheme for Perfection of Urban Social Security System was finally formed in 2001. It determined to continuously stick to pooling-account combined partial fund accumulation system and gradually try out the full funding of individual accounts.

1.3.2 Adjustment and Pilot of Full Funding of Individual Accounts

In 2000, the State Council issued Circular on Printing and Issuing Pilot Scheme for Perfection of Urban Social Security System and the pilot project was conducted in Liaoning Province first. The fund-raising ratio of individual accounts was adjusted from 11% to 8%. The employees shall pay in full amount. As for gap of individual account fund resulting from reasons like history, the central finance and the local finance would subsidize at a ratio of 75:25. In addition, National Council for Social Security Fund was formed and entrusted to invest and operate individual account fund subsidized by the central finance.

In 2003, the Third Plenary Session of the 16th Central Committee of the CPC approved Decisions of the Central Committee of the Communist Party of China on Several Problems Concerning Perfection of Socialist Market Economy System which put forward “perfecting enterprise employee basic pension insurance system, sticking to combination of social pooling and individual accounts, and fully funding individual accounts in a gradual way”. After summarizing experience of full funding of individual accounts in Liaoning Province, the State Council expanded pilot in Heilongjiang Province and Jilin Province in 2014. The two provinces started from 5% and gradually fully funded individual accounts. The capital required for full funding was subsidized by the central finance by 3.75% and local finance by 1.25% respectively. The monthly standard of individual account pension was determined by dividing number of months for calculation and paying of pension from amount deposited in individual accounts. The number of months for calculation and paying of pension was determined according to factors like average life expectancy of urban population, retirement age of employees themselves and interest upon retirement of these employees. In 2005, the State Council released Decision on Perfection of Enterprise Employee Basic Pension Insurance System which put forward expansion of pilot of full funding of individual account and adjusted scale of individual accounts from 11% of wages to 8% as well as adjust the measures for calculation and paying of basic pension accordingly. In the same year, Ministry of Labour and Social Security and Ministry of Finance jointly released Circular on Relevant Issues Concerning Expansion of Pilot of Full Funding of Individual Accounts of Enterprise Employee Basic Pension Insurance and decided to further expand the pilot of full funding of individual accounts. The short-term goal of full funding of individual accounts was 5%. Places with favourable conditions were encouraged to realize 8%. During the pilot, principles such as separation of old, middle and new, separation of East China, Central China, and West China, activeness and reliability and gradual launch were followed. The central finance offered subsidies to Central and West China, old industrial bases and Xinjiang Production and Construction Corps. In 2007, according to the deployment of the State Council, Ministry of Labour and Social Security and Ministry of Finance issued a document concerning further expansion of pilot of full funding of individual accounts and confirmed that provinces like Jiangsu and Zhejiang might launch pilot of full funding of individual accounts relying on their own capacity.

1.3.3 Exploration of Enriching Pension Insurance Fund with State-owned Assets

In January 1996, State Commission for Restructuring the Economic System definitely stipulated in Key Points to Implementation of Economic System Reform in 1996 that standard measures for compensation of insufficient social insurance fund by contributing a certain ratio from existing state-owned assets and land income were explored according to actual circumstances. Key Points to Implementation of Economic System Reform in 1997 and Key Points to Implementation of Economic System Reform in 1998 reaffirmed this content.

In September 1999, the suggestion of transferring state-owned assets to enrich pension insurance fund was written in Decisions of the Central Committee of the Communist Party of China on Several Problems Concerning Reform and Development of State-owned Enterprises approved in the Fourth Plenary Session of the 15th Central Committee of the CPC. In order to implement the spirit of Decisions, in June 2001 the State Council issued Interim Measures for Reducing Holding State-owned Shares to Raise Social Security Fund which requested companies limited by shares owned by the state to sell state-owned shares according to 10% of financing amount during IPO and increase of issues. The revenue from sales would be handed over to national social security fund. After this policy was issued, strong fluctuation of stock market and certain social emotional fluctuation were triggered. Therefore, it was halted by CSRC 4 months later. In June 2002, the State Council official declared the termination of execution of state-owned shares holding reduction measures against domestic listed companies.

1.3.4 Improvement of Pooling Level of Enterprise Employee Pension Insurance System

Starting from law of large numbers of social insurance, with the higher the pooling level of pension insurance and the stronger the fund strength, pension insurance burden of different regions can be better balanced and the effect of pension insurance can become more stable and lasting. As early as 1987, the former State Commission for Restructuring the Economic System and the former Ministry of Labour mentioned in a circuit issued, “social pooling of retirement expenses shall be implemented in most cities and counties in China and places with favourable conditions can also carry out pilot of provincial pooling”. It was the first time when the concept of “provincial pooling” was used in documents of competent departments of the State Council. In 1991, the State Council released Decision on Reform of Enterprise Employee Basic Pension Insurance System which clearly proposed, “Favourable conditions shall be actively created to gradually transit from current municipal and county-level pooling to provincial pooling”. In 1995, the State Council printed and issued Circular on Deepening the Reform of the Pension System for Staff and Workers of Enterprises which presented that the highlight of reform was placed in prefecture-level cities. In 2007, the former Ministry of Labour and Social Security and Ministry of Finance jointly released Circular on Relevant Issues Concerning Promotion of Provincial Pooling of Enterprise Employee Basic Pension Insurance which requested acceleration of realization of provincial pooling step and unification of basic pension insurance system model, payment mechanism, treatment standards, fund management and business flow of each place at provincial level. By the end of 2007, 13 provinces and regions in China, namely, Beijing, Tianjin, Jilin, Heilongjiang, Shanghai, Fujian, Chongqing, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia and Xinjiang realized provincial pooling, while four provinces and region, i.e. Henan, Hunan, Jiangxi and Tibet, as well as Xinjiang Production and Construction Corps issued provincial pooling measures.

1.3.5 Improvement of Pension Level of Enterprise Retirees

Since the pension insurance system reform of enterprises and government agencies and public institutions was not synchronous, the treatment calculation and paying measures and adjustment measures differed, and enterprises’ pension insurance system was changed from pay-as-you-go system to partial fund accumulation system while government agencies and public institutions still used the original retirement system, the gap of treatment between retirees of enterprises and retirees of government agencies and public institutions kept increasing and the treatment level formed “three steps” from high to low, i.e. government agencies, public institutions and enterprises, consequently triggering many social contradictions. Currently, the average substitution rate of pension of government agencies and public institutions was approximately 80% which was much higher than that of enterprises (58%). In order to balance this gap, the State Council has already decided to improve the pension level of retirees of enterprises for 11 consecutive years since 2005, with an annual average growth rate of 10%.

1.4 Review and Top-level Design of Basic Pension Insurance System (2010-Now)

The pilot of full funding of individual accounts encountered with great difficulties over one decade. By the end of 2011, only RMB 270.3 billion of individual accounts was fully funded. The State Council already agreed that Liaoning Province might tentatively borrow money from fully funded individual accounts to pay the current expenditure. Later another two provinces applied not to fully fund individual accounts anymore. In 2010, the Twelfth Five-year Plan for National Economic and Social Development of the People’s Republic of China definitely pointed out, “Bigger resolution and courage shall be presented to comprehensively promote the reform in each field and more attention shall be paid to reform of top-level design and general planning”. Later, the discussion of top-level design of pension system reform was increasingly heated, and people began to review the pooling-account combination system again.