Now updated! Your plain English Guide to the Basics of the Chinese Social Security System

1. Now updated! Your plain English Guide to the Basics of the Chinese Social Security System The Chinese Social Security System 1st Edition

2. Housing Health Care Pensions State-Owned Enterprises Agricultural Communes and Collectives Employment Education Subsistence Pre 1997 – Cradle to Grave care……

3. Mid 1980s – Series of municipal social security pilots began that eventually became a ‘national’ system From 1997 national frameworks for five mandatory Social Security Schemes started to be introduced: • Old Age Insurance (1997) • Basic Medical Insurance (1997) • Unemployment Insurance (1999) • Maternity Insurance (2001) • Work Injury Insurance (2004) All five schemes are contributory with contributions paid by the individual and/or the employer

4. The five main benefits can be defined as: Old Age Insurance – Basic scheme which is in two parts: A social pool funded on a PAYG basis by employers which should pay out a pension equivalent to 30% of the average income of the locality of the pooling area; and an individual account which pays out a pension over 15 years based on an individuals own earnings related contribution and accrual rate which is usually linked to interest rates available on term bank deposits. Basic Medical Insurance – Also made up of a social pool and individual account. The social pool funded on a PAYG basis provides partial reimbursement for the costs of in-patient care and some out patient care for certain chronic diseases. The individual account funded by the employees contribution pays for outpatient expenses. Unemployment Insurance – provides unemployment benefit for up to a maximum of 24 months for those who have suffered involuntary unemployment. The scheme is restricted to paying benefits although a pilot introduced in 2006 widened the funds use to employment promotion in certain designated areas. Benefit levels are set at less than the minimum wage but more than the minimum living standard allowance. Contributions to the fund are made by employers only. Maternity Insurance – To provide support for designated hospital expenses for delivery and ante/post natal care. Contributions to the fund are made by employers only Work Injury Insurance – The regulations prescribe different levels of work injury and for those over a certain category, work injury insurance will pay for medical related costs of treatment and rehabilitation plus an income allowance to compensate in part for loss of earnings and additional expenses incurred as a result of the injury. Contributions to the fund are made by employers only

5. But there are complications to the system! Complication #1: Primary Legislation • Until October 2010 no primary law • System defined mainly by different scheme regulations • New Law comes into effect July 1 • But requires many supporting regulations to make it effective – not yet in place with no real timetable *The new Social Security law is expected to go before the National Peoples Congress in October 2010.

6. Good points Transferability of contributions Unified Collection Better financial transparency and management Definition of fraud and specification of penalties Inclusion of foreign residents ? Bad points Codifies what is there already – very short only 97 Articles Doesn’t resolve some key scheme issues E.g whether individual account should be funded or not Doesn’t resolve a lot of difficult organizational in-fighting Law : Good Points and Bad Points

7. National Level Ministry of Finance and National Development Reform Commission Ministry of Human Resources and Social Security Fund Supervision Department Information Centre Social Insurance Administration Centre This structure is replicated down to District and County Government with policy being made in Bureaus of Human Resources and Social Security and operational functions being carried out by executive agencies. There are 31 provinces, 4 city provinces, 333 municipal and 2862 county level executive agencies. There is no standard organisational model and no standard processes for the administration or management of contribution collection, or payment of benefits across China. Provincial Level Which leads to…Complication #2: Organisational Structures

8. Complication #3: Inconsistencies in administration • Each province applies its own policies and procedures. Therefore contribution rates and benefit entitlement differs between areas • E.g. For pensions in principle, national guideline rates for employer contributions is 20%1 and individuals its 8%. Whilst there is increasing standardization being applied at a provincial level in some areas, differences still remain, with some provinces levying 8 – 10% and others charging 22%. • In addition benefit rates are linked to average salaries and fiscal capabilities at county and district level. Salaries differ depending on the area. For example in Xian the minimum wage per month is 600RMB, in Shanghai it is 960RMB2.So your benefit entitlement rate depends on where you retire. • An example of the variance in benefit standards in the rural pension scheme: in Wuxi Municipality pension benefit levels range from 55 – 180 RMB across 6 county areas whilst in neighbouring Suhou Municipality, its from 135 RMB to 265 RMB3. 1% of payroll 2 As at Jul 2008 3 1.00 GBP=10.36RMB

9. Variances in Minimum Monthly Wage 2010 Source China Daily 19/01/2010

10. Complication #4: Legacies from pre-1997 • Pre-1997 very few contributions (some limited contributions towards pensions)… because there was no need to. • So you now have people whose working life have straddled the State Owned Enterprises (when they didn’t pay contributions) and the post 1997 Social Security era. • Local Governments are liable for the deficit of contributions….but this creates its own problems…like the local Pension pool not having the amount of funds to pay out everyone’s pension. This is a particular problem in areas with a large older population who previously worked for a State Owned Enterprise • The amount of Central Government subsidy to Social Insurance Schemes has gone up from 44 billion RMB in 2003 to 179.2 billion RMB in 2010* (this is mainly to subsidise old age pensions) *1 RMB = 0.095 GBP (rates at 30/08/10)

11. Information: The One Child Policy • If families have more than one child a fine is imposed. The fine for an extra child is based on the official measure of average annual income: 26,738 RMB (￡2527) for an urban Beijinger and 11,986 RMB (￡1130) for a rural resident. (Fines rise six to 10 times for a second baby or six to 20 times for a third or more) • This has led to people not registering babies – which mean these babies will have no rights or entitlements. They are known as the Floating Population. It is estimated that people not accounted for in the last census is 1.81% of the total population: more than 23 million people • If you are a civil servant and you have a second child you lose your job • There are exemptions to the one child policy; For example, two single people that get married can have two children. In rural areas if you have a daughter first you can try again (for a son!)

12. Complication #5: The Demographic Challenges • From 1949, under the Mao Regime people were encouraged and incentivised to have large families. In the 1980s the one child policy was introduced. • The effect of these two policies is an increasingly older population and therefore greater demand on pension funds – whilst at the same time China is facing a reduction of the size of the younger generation; meaning fewer workers will be paying social security contributions. • It will also mean increased in demand on care for the elderly as many children move to different areas to their parents (e.g. when they move away to study, get married etc). • China relies heavily on family support to care for the elderly. However, a 2006 MLSS Survey of around 17 million employees estimates that 52% of households are ‘Empty Nests’ i.e. children have moved to another part of China (or the world) to live

13. Complication #6: Management of Contributions • Contribution collection is extremely fragmented and involves three related processes of assessment, collection and enforcement. • Fourteen provinces use social insurance agencies to collect contributions, 17 use the State Administration of Taxes. Only three provinces use SAT to administer the whole process (i.e. collection and assessment). • Timing of collection also differs from Province to Province, for example in some poorer areas collection happens once a year. Limited on-line self assessment is used is some areas. • These variances coupled with the legacies from state owned enterprises plus demographics means there are differences to the way social security pools are funded. • In addition, individual accounts are invested in local banks which tend to offer a lower interest rates than the inflation rate. Low risk investments is cited as the reason – however a low return in investments is a risk in itself.

14. Complication #7: The Hukou • The Hukou affects all rights of each individual citizen and goes back to the days of the planned economy. The principle was based on every location requiring a set number of people to do a particular range of jobs and the guarantee that those jobs were available in that area. • All Civil and Legal rights are in your Hukou i.e. where you were born and grew up. So you can only get free medical care, education and get married (amongst other things) in your Hukou. • It is difficult to change your Hukou – although can be changed if you have a University degree or you get married to someone from a different Hukou. • The Government has just announced that it won’t abolish the Hukou (amid fears that migrants will bring their families into the cities which will impact social pooling arrangements) • The big complication! The Hukou has to fit into Social Security arrangements.

15. Complication #8: The Hukou and Social Security • Your benefit entitlement belongs in your Hukou. However, if you pay contributions in another area for more than 10 years you can transfer your entitlement. • For example, you pay contributions in Beijing where rates for both contributions and benefits are high. You want to retire in Xian, where benefit rates (and therefore pension rates) are lower. • Theoretically you can transfer your benefit entitlement from Beijing to Xian • BUT – In practice, transfer of benefits is incredibly difficult and complicated…. due to the lack of protocols and processes around transfer of contributions…. • …which means there are even bigger problems for the people that move around and work in different areas for periods of less than ten years.

16. Complication #9: The Hukou and Social Security – Migrant Workers* • In 2007 a law was passed making it mandatory to pay contributions if an Employment Contract was in place. However! • Many people don’t have an employment contract • The law isn’t always enforced. • Many employers are reluctant to pay contributions for migrants because they consider it to be a waste of funds. • In addition, conflicting guidance has been issued; whilst employees are supposed to pay towards three of the main benefits, migrants have been told they only need to pay Medical and Work injury Insurance. • And a further complication is that local schemes for migrants have also been set up – but these have absolutely no universal application • *Many professional occupations are undertaken by migrant workers.

17. Complication #10: Long & Medium Term Fiscal Planning • China’s fiscal planning arrangements are not transparent. • There is no systematic reporting routine – there are some limited local government budgets but these are not published. • Plus • there is no clear planning, budgeting or reporting framework, • the institutional financial framework in which to integrate long term planning is weak • there is a lack of understanding at a senior level on the implications of the accumulation of large liabilities of insurance schemes and • There is a lack of actuarial training across government

18. Complication #11: Long & Medium Term Fiscal Planning • There has been limited work on the impact of the aging population on health care – but not on how it will impact the medical insurance system • An unemployment simulation model has been piloted in three cities, but there appears to be a lack of resources and ownership to make wider use of it. This may well be because the unemployment pot is well funded – those that pay into the fund probably won’t use it and those that need it aren’t eligible to claim the benefits. • There has been work done on the actuarial implications on the Pension system. But compared to the UK it is very underdeveloped; there is no agreed model, no reporting routine (and no requirement for one) and extremely complicated. • It has been likened to developing and Actuarial Model for the 27 member states of the EU.

19. Complication #12: Annual Budget Planning and execution and internal controls • Budget planning is at a early stage of development - The budget was classed as a State Secret until 1989. • No high level oversight – and its not taken particularly seriously (apart from old age insurance where subsidy is required) • There is an over concentration on the revenue side • Absence of a proper cost accounting framework integrated into the Financial ledger. So there is very little financial data on which to develop forecasting information. • However, from 2010 there is a State Council Regulation under which each locality must produce a budget for the five main insurances. The plan is that by 2012 they will be able to aggregate these local budgets and present an overall budget to the Peoples National Congress*. (*That is the plan – however, there are 2000 pooling areas!)

20. Complication #13: Internal Controls and benefit fraud • There is no legal definition of social security fraud and no national anti-fraud regulations • Weak or non-existent controls have led to incidents of fund misappropriation and evidence of fund misuse • In the administration of benefits, particularly Unemployment Insurance, staff sometimes turn a ‘blind eye’ or simply do not care to investigate possible fraud • Employers often ‘misrepresent’ the numbers on their payroll to avoid paying insurance contributions • The problems of fraud is a growing concern - companies have even been set that specialise in fraudulent activity.

21. In Summary…. • China has made rapid advances in building its urban enterprise social insurance and started to tackle the social security deficit by expanding coverage urban and rural citizens • Some areas have made in roads in establishing consistent business processes and use of some self service tools (e.g. checking individual contribution accounts). • However, going forward: • It is unlikely that the current funding system will be sufficient to maintain financial sustainability • Current financial and administrative processes, systems and frameworks are insufficient to manage growth • Systems and processes need to be effectively joined up in terms of accrual and entitlement