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China’s Pension System Is Not Aging Well

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China Power

China’s Pension System Is Not Aging Well

There may be more pressing issues, but the simmering pension crisis cannot be put on the back burner for much longer.

China’s Pension System Is Not Aging Well
Credit: Flickr / timquijano

This week, China’s leaders are gathering in Beijing for the Two Sessions — back to back meetings of the Chinese People’s Political Consultative Conference and the National People’s Congress — to assess the country’s policies and priorities for the coming year. Leading up to the meetings, state-run media outlet the People’s Daily asked the Chinese people to weigh in on which social, political, and economic issues matter most to them. The annual online poll, which opened on February 12 this year, has so far garnered about 4.5 million responses. The survey prompts netizens to choose from a list of 18 “hot topics,” among which are familiar buzzwords like fighting corruption, alleviating poverty, international relations, the housing system, a strong military, technological innovation, cultural confidence, educational reform, and more. This year, the top three “hot topics” were 1) fighting corruption, 2) rule of law, and 3) social security. The results of the survey show that within the topic of social security, respondents emphasized the need to “improve the basic pension for retirees and base pension for urban and rural residents.”

As a perennially top-ranked concern that affects billions, it is no surprise that social security cracked the top three for the fifth year in a row in 2019 amid a series of major reforms to the system. Against a backdrop of slowing economic growth and a rapidly aging population, the Chinese government is acutely aware that it needs to figure out how to take care of its elderly. The stakes are extremely high: in a culture that has long placed a high premium on age and respect for the elderly – and where the state has recently re-embraced and foregrounded Confucian ideals and values as a means to buttress social harmony and stability — care for the elderly and social security are linked closely to the state’s legitimacy.

Indeed, few social issues today stir sufficient concern and indignation to incite Chinese people to take to streets (or online message boards), but concerns about access to quality healthcare and eldercare are among them. According to China Labor Bulletin’s Strike Map, in 2018, there were 172 instances of workers protesting or striking over social security and pension-related concerns. Notably, in summer 2018, thousands of veterans across several cities staged protests over inadequate healthcare and pensions.

The current system — notorious for its highly disarticulated, localized nature and inefficient collection processes — has led to apprehension among China’s middle class, the exclusion of some of the country’s most vulnerable populations, and a headache for government officials watching as the pension shortfall grows. For Chinese leaders, the pressure to respond to more immediate concerns brought on by declining GDP growth and fallout from U.S.-China trade tensions is great — but the simmering pension issue cannot be put on the back burner for much longer.

On the Brink

Accounting for nearly 70 percent of national social security collections in 2017, China’s pension funds are critical to the country’s social insurance infrastructure. But without generous central government subsidies, China’s pension funds would be deep into the red, with deficits projected to rise from 234 billion yuan (roughly $35 billion) in 2018 to 534 billion yuan by 2022. Already, nearly half of China’s provinces are slated to report operating shortfalls in their basic pension funds by 2022, compared to six in 2015, according to a report by the China Academy of Social Sciences. Some provinces are being hit harder than others. In July 2018, Heilongjiang, a province in northeastern China’s rust belt, was forced to delay pension payments because even with state subsidies, they could not meet last year’s pension liabilities.

Some of this discrepancy can be chalked up to employers — in both state-owned and private enterprises — not paying their due. Employer contributions in China are high, and to cut costs, companies often cut corners by underreporting wage payments, or hiring more part-time and temporary workers. A 2018 survey by social-insurance information provider 51Shebao found that only 27 percent of companies paid the entire sum of their social security contributions. Mark Frazier, professor of politics at the New School, and an expert on the Chinese pension system, points out that the highly fragmented nature of the social security system has both enabled and perpetuated tax evasion: “Social security collections are coordinated at the city level, so even across a province, the landscape can be highly unequal. Who will collect money from enterprises? The local tax bureau or the local Ministry of Human Resources and Social Security? Officials have trouble collecting from larger companies because in many cases, the executives outrank them, so it is relatively easy for enterprises to negotiate with local governments for favorable terms.” Complexities in collecting contributions and the high degree of fragmentation also mean workers and retirees face reduced pension benefits — and sometimes none at all.

The convoluted system causes great anxiety for workers and retirees trying to collect their monthly pensions — particularly migrant and temporary workers. The localized system makes registering for an urban pension prohibitively difficult for many migrant workers. In 2017, 62 million migrants successfully signed up as urban employees, only about 22 percent of the total number of such Chinese workers. If a migrant worker is unable to successfully register for their city’s pension scheme, their pension continues to be paid to their hometown. Lacking a central process to integrate pension schemes across localities, urban and rural pensions vary dramatically: retirees in Beijing, Shanghai, and Shenzhen collect around 4,000 yuan ($596) per month, while their counterparts in small villages claim as little as 90 yuan ($13) per month. This means that due to high cost of living, many migrants are forced to retire to their hometowns after living and working for decades in the cities they helped to build.

Commenting on a news article outlining forthcoming changes to the social security system, one worker nearing retirement complained, “I was employed in a work unit for more than 20 years as a temporary workers and never got promoted to full-time. The unit never contributed one cent to my pension — I paid into it myself for 15 years. Now I’m 51 years old and can’t retire. My mother has dementia, and my kid hasn’t gotten married and settled down yet. What is there to do?” On a similar article, another agitated worker asked, “I’ve been working for a company for 20 years, but they have only paid me 11 years of social insurance. Isn’t this illegal? Is there any way to make them pay? Why can’t the Social Security Bureau enforce their own rules?”

Getting Old Before Getting Rich

These issues are more urgent in the context of wider demographic issues and work force trends. By 2050, as much as a third of China’s population will be over the age of 60. And due to falling birthrates, the workforce is shrinking. According to a national survey conducted last year by the Ministry of Human Resources and Social Security, the ratio of workers to pensioners has declined dramatically. In 2011, every pensioner was supported by 3.1 workers (contributors to the fund). By the end of 2017, that ratio had fallen to 2.8-to-one, and the Ministry estimates that by 2050, it will be just 1.3-to-one. This imbalance will exacerbate the pension shortfall, causing provinces to rely even more heavily on central government subsidies.

Hyper aware of the economic and social frictions these issues cause (or threaten to cause in the future), central and local authorities have taken a number of steps to respond. For example, they have attempted to increase penalties for corporate tax evasion, developed the commercial pension insurance system, and made the system more user-friendly with digital guides and instantly replaceable social security cards. However, these efforts have met with derision (several netizens joked that they could not navigate the guide on how to navigate the pension system, let alone the system itself), and seemingly have made little discernable impact.

The current level of government spending on social services and security is unsustainable. According to a recent study published in the New York Times by sociologists Wang Feng and Yong Cai, China’s public spending on education, health care, and pensions has increased from 6.3 percent of GDP in 2007 to 11.6 percent of GDP in 2016 – growing faster than spending on military or domestic security programs. That rate is projected to double to 23 percent by 2050, equal to the share of GDP for all current government spending. Short of a serious overhaul and reform, the chronic issues plaguing the system are only likely to worsen.

To create a more centralized collection system, China passed an ambitious, much-hyped tax reform plan in July 2018. At the heart of the reform was a structural overhaul of state’s method of collecting social insurance contributions from companies: consolidating a notoriously fragmented social security system and ensuring greater corporate contributions are vital to closing the widening pension shortfall. Effective January 1, 2019, all local governments transferred responsibility for collecting social insurance fees to tax authorities, seeking to streamline the system and to make it more difficult for companies to evade requisite contributions. However, according to a recent report from Caixin, at least 10 provincial-level regions that released implementation notices have not yet begun collecting fees from companies, presumably in an attempt to avoid putting additional financial stress on businesses.

This lack of implementation highlights a larger dilemma facing Chinese policymakers: will they follow through on the 2018 plan to replenish dwindling coffers in social security, or will they choose to cut the tax burden to stimulate economic growth, effectively digging the pension deficit so deep that it may reach an estimate in excess of half a trillion yuan by 2022? According Frazier, “as long as the economic outlook remains uncertain, it will be difficult to persuade the leadership to push for full implementation of pension reforms. Even if they do enact reforms, companies will continue to find ways to evade providing coverage for all their employees. The deficit is likely to just get larger in the medium term.” Certainly, the risk of implementing these reforms is great. Stimulus plans and tax cuts might provide temporary relief for falling GDP numbers and the ripple effects of the U.S.-China trade war. But considering longer-term structural and demographic trends, the risk of not implementing serious pension and social security reforms may prove even greater.

Viola Rothschild is a research associate in China studies at the Council on Foreign Relations.