Social Security in China

Is there Social Security in China? You bet! The average Chinese contributes a staggering 40 percent of her salary – 3 times the US rate in the USA and is 4 times Northern Europe’s – to mandatory Social Security. The Chinese savings, trillions of RMB, funds China’s huge infrastructure investments. The Chinese government makes infrastructure investments pay off by developing land around the projects and collecting rising taxes as the development attracts higher value jobs and housing. The profits go back into Social Security.

Chinese employees contribute 11 percent and businesses contribute 29.8 percent, which ranks #1 in the world. The Chinese are savers!

China Social Security Card

China Social Security Card

 [File photo of the social security card of China]

Currently, 12 local governments, including Shanghai, Guangdong, Tianjin, Gansu, Jiangxi, and Beijing, have released schedules to cut required contribution rates to social security funds, focusing mainly on occupational injury, unemployment, and birth insurance. Shanghai, Hangzhou and Xiamen, also plan to cut contribution rates to pension and medical insurance, the Beijing Times reported on March 28.

Generally speaking, a smaller social security burden will bring benefits to the real economy. Since China set up its pension insurance system, the burden on enterprises and individuals has increased as contribution rates to pension insurance have gotten higher. According to related data,  In a sluggish economic situation, high contribution rates increase production and operating costs, causing more and more businesses to cut jobs.

Obviously, it’s difficult for local governments to cut down contribution rates to social security funds, since China is currently facing significant pressure from a growing elderly population and large pension expenses. But the bold move will help to demonstrate local governments’ steadfast determination to reduce operating stress and provide support to the real economy.

Firstly, cutting down contribution rates to social security funds reduces the operating costs of enterprises, which benefits middle, small, and micro-sized businesses. According to a calculation by the Hangzhou Municipal Human Resource and Social Security Bureau, after their cuts, some 1 billion yuan (US$153.6 million) worth of medical insurance payments will be saved in downtown Hangzhou.

Secondly, in the currently sluggish economic situation, cutting down contribution rates to social security funds will optimize the resilience of businesses, helping them step out of difficulties.

Thirdly, cutting down contribution rates to social security funds would favor accumulation and increase effective investments, so as to expand production scale. It would help to leave businesses more capital to speed up transformations and upgrades optimize Chinese industrial structure and enhance economic stability.

However, in the current situation, the extent of local governments’ cuts to contribution rates could remain at a low level. The cut-downs so far announced mainly relate to occupational injury, birth, and unemployment insurance, but not on pension and medical insurance. Since these three kinds of insurance do not account for a large part of overall social security funds, the cut-downs cannot relieve much of the burden on businesses. And the actual cut-downs are also limited, for instance, Tianjin lowered the employer’s contribution rate to unemployment from 2 percent to 1 percent and the contribution rate to birth insurance from 0.8 percent to 0.5 percent. In Shanghai, the required contribution rate to pension insurance for businesses was dropped by 1 percent to 20 percent; required contribution rate towards medical insurance for businesses was also cut by 1 percent to 10 percent. This range of the cutting is too small to cause significant effects.

Therefore, local governments are expected to maximize cuts to contribution rates within the scope of guaranteeing the payment safety of the social security funds. By doing this, the Chinese real economy could have more capital to speed up development.

In addition, a dynamic social security payment mechanism should be set up to change the contribution rates in accordance with economic reality.

The writer is a researcher at China Academy of Regional Finance. Translated by Lin Liyao.


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