China Power

Tackling Social Insurance

China’s social insurance system is complicated. But will Chinese start to trust government more with their money?

Tackling Social Insurance
Credit: Daniel Foster

Last Friday, on the 90th anniversary of its founding, the Chinese Communist Party gave itself a birthday present appropriate for a nonagenarian: a package of legislation intended to reform and expand social insurance in China came into effect after being adopted by the government last October.

China’s social insurance system is difficult to make sense of – a patchwork of overlapping locally- and provincially-administered programmes further divided into coverage for urban, rural, and migrant workers, each with different rates and benefits. But it bears watching as a mainstay of the government’s long-term efforts to ensure social stability – as well as ‘rebalancing’ the Chinese economy toward domestic consumption. It’s a high priority for governments around the world, but still a seemingly distant goal.

The economic side of social insurance has been well-covered, and reports from the OECD and McKinsey have laid out the argument that weak provision for illness and retirement drive China’s high household savings rate. But the issue is equally important to political observers, as it’s a major plank of the Hu Jintao administration’s goal of establishing a ‘harmonious society,’ which has seen an increasing emphasis in recent years on shoring up social stability by improving economic equality.

Chinese leaders fear that unemployment could create political instability. During the economic crisis of 2008, China’s leaders took emergency measures to head off unrest. The massive stimulus programme focused on creating jobs in inland rural areas to employ migrant workers laid-off by export-oriented factories on the coasts.  As economists are talking about the beginning of an economic slowdown in China, the government has reason to fear another brush with large-scale unemployment.

The new social insurance law is hard to decipher – in fact, the best piece of analysis I’ve found about it in English is from an editorial in the China Daily, written by Grayson Clarke of the EU-China Social Security Reform Project (EUCSS).  Like much Chinese legislation, the law is written in ‘guideline’ form, and only a few specific regulations have been issued so far, such as centralizing the collection of payroll taxes and including expatriates working in China.

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The most important definite provision will allow workers to transfer pension accounts between different systems, which will resolve the problems of migrant workers who move frequently and have been left with a range of tiny pension funds spread across the country.  The law will also extend medical insurance to workers receiving unemployment benefits who can’t afford premiums and a guarantee that the state will cover work-related injury compensation when employers fail to pay.

The most recent revision comes after two decades of efforts to establish social insurance for private sector workers, dating back to 1991, summarized by a 2005 report from EUCSS.  But progress has been patchy. Contributions to most forms of social insurance are optional, and workers remain wary of corruption and policy changes – between 2000 and 2004, for example, the rural pension system lost almost a third of its users. In 2008, the most recent year for which numbers have been reported, the pension systems claimed to include only 214 million people, while only 124 million had unemployment insurance (much of this difference is due to farmers, who want pensions, but presumably face little risk of unemployment).

Expanding coverage will mean making the system much more efficient – Clarke estimates that contributions for full social insurance coverage, including medical care, work injury insurance, and benefits for childbirth, total half the average salary in many areas. But the biggest obstacle to wider pension coverage is the trust gap: with a history of sudden policy turnarounds and near-constant corruption and embezzlement scandals, few people are willing to trust the Chinese government with their savings.

David Cohen is a freelance journalist. He blogs at and his writing has appeared in the Christian Science Monitor, the Guardian Online, the Global Times, the China Daily and the Lowy Interpreter among other publications.