China - From Enterprise Protection To Social Protection

A RT I C L E 45
From Enterprise
gsp
Protection to Social Protection
Pension Reform in China
PETER WHITEFORD
Directorate of Education, Employment, Labour and Social Affairs, Organisation for Economic
Co-operation and Development
a b s t r a c t The Chinese system of social protection has been subject

to significant reforms over the past 25 years, but it can still be regarded
as a system in transition. These reforms have been impressive in scope
and much has been achieved in extending coverage, pooling resources,
improving administration of payments, and in starting to address the
issue of future financing requirements. Nevertheless, the system is not
yet fully appropriate for the challenges facing China over the next
decade and beyond. This article assesses the main features of the
development of the Chinese pension system, and identifies a number
of issues to be addressed as part of future reforms. The article
compares the Chinese system with those operating in other world
regions, and also in other parts of Asia. Chinese developments are also
discussed in the context of global social policy developments and the
role of international organizations. The article also discusses possible
approaches to dealing with future challenges.
k e y wo r d s ageing, China, pensions, social security
Introduction
This article assesses developments in retirement income policies in China,
with an emphasis on reforms over the past decade. China is facing a number
of transitions, including the transition from a centrally planned to a
‘socialist market’ economy; the transition from a rural society to a more
urbanized and industrialized society; the transition accompanying rapid
economic growth from a low income to a middle income, but more unequal
society; and the demographic transition that will result in a substantially
higher proportion of older people in the population in the next 25 to 50
Global Social Policy Copyright © 2003

SAGE Publications (London, Thousand Oaks, ca and New Delhi)
vol. 3(1): 45–77. [1468-0181 (200304) 3:1; 45–77; 032011]
46 Global Social Policy 3(1)
years. Not unexpectedly, the institutions promoting social protection are not
necessarily appropriate for a society experiencing complex transitions in
these and other areas. Overlaying this is the fact that China is the largest
society in the world, so that the scope of the challenges to be addressed often
appears daunting if not overwhelming. Complexity is further increased by
the fact that changes are linked in important respects, so that, for example,
reforms to social protection are a component of reforms to state owned
enterprises (SOE) and collectively owned enterprises (COE). In this sense,
reforms involve more complex linkages than is common in assessing social
policy issues in OECD countries.
The article is structured as follows. The next section outlines the historical
development of the current system since the 1950s. This is followed by a
description of the current system. After examining trends in spending and
recipient numbers, the article compares the characteristics of the pension
system in China with those applying in other regions of the world, as well as
other significant Asian economies. This is followed by a discussion of the
main policy challenges facing China in this area, and a range of possible
approaches to deal with these challenges.
A number of caveats should be noted. The Chinese system of social
protection has been subject to significant change and experimentation over
the past 10 years, and is still in the process of transition. The pension system
was reformed in 1997, with changes being phased in across the country over
the subsequent two to three years. Those already retired were not affected
by these changes, while those already employed have transitional rules to
protect their entitlements. The discussion below describes the rules of the
post-1997 system, but in fact the vast majority of current pensioners are still
being paid under the old rules, which were more generous in terms of
replacement rates, for example. The situation is further complicated by the
rapidity of changes in outcomes (e.g. coverage) as the result of these reforms.
Moreover, the most recent data generally refer to 1999 or 2000, so that the
phasing-in process itself was not necessarily complete in the period covered
by the data.
The Chinese social insurance system involves central government
guidelines, which are adapted by provincial and city or county governments
to local conditions. Actual rules may differ across regions – for example,
replacement rates have ranged from 65 percent to 102 percent (Stanton and
Whiteford, 1998). Due to these variations of time and space, rather than
being one system, the Chinese pension system could be thought of as a
number of systems. This is not necessarily surprising in a country the size of
China.
As a result of these complexities, the discussion that follows should not be
regarded as definitive. At this stage it may be more appropriate to talk of
directions and tendencies. This situation may continue for many years, with
further modifications of the system in the light of new challenges.
Whiteford: Social Protection: Reform in China 47
Main Historical Developments

In 1951 the Communist government introduced Regulations on Labour
Insurance, providing the framework for the provision of various benefits
based on the principle of lifetime employment and association with a state
owned enterprise. The Regulations were patterned after the Soviet model.
Although in theory they covered only SOE and COE employees, they were
applicable to nearly all urban workers including government employees and
those in related sectors such as schools, youth organizations, universities,
health care, etc. Significantly, they did not apply to the majority of the
workforce in China, the rural peasants. Male workers became eligible for a
pension at 60 years of age after 25 years continuous employment. For female
workers the qualifying age was either 50 or 55 after 20 years employment.
(In the 1955–60 period, average life expectancy at birth was 43.1 years for
men and 46.2 years for women.) The pension was typically 50 to 70 percent
of the standard wage depending on the number of years in employment.
The scheme was administered at the local level by trade union committees
under the umbrella of the All China Federation of Trade Unions (ACFTU).
The ACFTU became responsible for administration at the national level in
1954. The scheme was funded through employer contributions set at 3
percent of the total enterprise wage bill, out of which 30 percent was paid
into a special ACFTU controlled fund responsible for the payment of
pensions. As the workforce was then relatively young, there were few
demands on the fund and throughout the 1950s and early 1960s, a
substantial surplus was built up.
This system practically ceased to exist during the Cultural Revolution
when trade unions were abolished and the funds were used for other
purposes. Individual enterprises became responsible for paying pensions and
other benefits out of current revenues. This practice continued after the
Cultural Revolution ended. The labour insurance pension scheme that had
existed before was not re-established and individual SOE continued to be
solely responsible for pension provision and other benefits including health
and housing.
During the Cultural Revolution many older workers had the grant of their
retirement pension postponed and continued to work beyond retirement
age. In 1978 the State Council amended the retirement component of the
Labour Insurance Regulations providing these and other workers
approaching retirement age with incentives to leave the labour force. This
was to secure employment for younger workers who had been sent to rural
areas during the Cultural Revolution and who were now returning to the
cities. The 1978 amendments relaxed the eligibility criteria to permit
pensions after 10 instead of 20 years of continuous employment. They also
introduced higher pension rates, ranging from 60 percent of standard wages
for workers with 10–15 years of employment up to 75 percent for those who
had worked for 20 years or more. They also extended the ‘substitute’ (‘ding
ti’) option to all state employees. A job in a state sector was promised to one
child per retiree. The parent would get full pension; the child would secure a
full state salary and benefits (Davis, 1988). In addition, the 1978
amendments formalized the practice of enterprises bearing full responsibility
for all of the labour insurance benefits (including old retirement pensions)
due to their employees (Fuery et al., 1996).
The number of pensioners nearly doubled in the year after the 1978
regulations. Expenditure increased almost 19 times between 1978 and 1988.
The increase in the number of pensioners after 1978 substantially changed
the ratio of pensioners to workers. In 1978, there were 30.3 workers per
pensioner; by 1988 the ratio had fallen to 6.4:1 (Chai, 1992). In recognition
of these emerging problems, in 1986 the Government introduced
regulations requiring all new SOE employees to make contributions of up to
3 percent of their basic wages, along with employer contributions of 15
percent of the enterprise’s pre-tax wages bill. Contributions were paid into
collective funds operated by newly established Social Insurance Agencies
(SIA). These funds superseded the practice of leaving individual enterprises
solely responsible for pension payments. By the end of 1991 all counties and
cities had set up their own SIA to administer the funds and two third of
workers in SOE were covered. In 1992 the establishment of pension funds
was extended to COE. It was also not uncommon for some enterprises to
require contributions from both new recruits and those employed before 1
October 1986 when the new scheme was introduced.
Although the major portion of contributions still came from employers,
the 1986 reforms introduced the concept of individual contributions into the
pension system. Another important innovation was the establishment of
agencies that managed pension funds independent of employing enterprises.
As a result enterprises gradually ceased to be seen by their employees as the
main provider of social security benefits. The reforms in the mid-1980s were
aimed at reducing costs for enterprises and establishing a more effective
funding base. They were initially introduced on an experimental basis with
local variations. As with the establishment of special economic zones, the
Chinese government chose to allow certain provinces to test a number of
new programmes. Two approaches gradually evolved. One was outlined in
the 1991 State Council Resolution on the Reform of the Pension System for
Enterprise Workers, promoting the integration of local programs at the
provincial level and eventually at a national level. Alternatively, some cities
and provinces were developing new programs that differed from the national
norm, setting up fully funded pension programs that often extended
coverage to include private and joint-venture enterprises.
The 1991 Resolution constituted a significant step in the further
development of the system. It aimed to bring all workers in SOE into a
uniform pension scheme with three tiers. These were a basic pension for all
retirees jointly financed by the state, enterprises and the workers; a

supplementary scheme funded by the enterprise from its trading surplus; and
an account funded by individual worker, on a voluntary basis, and payable at
retirement as a lump sum. As on previous occasions, the 1991 Resolution
laid down guidelines rather than binding directives. The Resolution
recommended that social insurance funds should be set up at the provincial
level and once established, the distinction between the permanent and
contract workers’ fund should be abolished and they should be unified under
a system of pooling. The old practice of requiring individual enterprises to
pay the pensions of their retired workers was now to be replaced by
collective funds where the responsibility was shared between the state, the
enterprise and individual worker. Some provinces also began experimenting
with a more individually-focused, two tiered approach funded by employee
and employer contributions without the guaranteed government-backed
basic pension. This approach was particularly popular with employees in
private and joint-venture enterprises. They often had few retirees on their
payrolls and thus saw pooling as a form of subsidising state-sector retirees.
Furthermore because contributions represented a percentage of payroll,
private firms that paid higher salaries had to shoulder a greater burden.
The Government attempted to broaden coverage by introducing pension
schemes for the rural population, initially on an experimental basis. In
January 1991, under the ‘Basic Plan for Old Age Social Insurance in the
Countryside’ the State Council decided to develop old-age social insurance
in rural areas and designated the Ministry of Civil Affairs to be responsible
for the project.
In the 1990s the success of various experimental approaches, together with
the sustained growth of the economy, encouraged the authorities to continue
their efforts to reform the pension system, but in more unified way than
before. The two crucial policy documents were the 1995 State Council
Circular on Deepening the Reform of the Old Age Pension System for Enterprise
Employees and the 1997 State Council Document No. 26. In the first, the State
Council offered provinces a choice of two plans. Despite the fact that the
provinces, in fact, adopted a wider range of variants the regulation
established the principle that policy on pension design was a Government,
and not an enterprise, responsibility. The 1997 Document approved a plan
to finally establish a unified nationwide basic pension insurance system to
replace all pilot programmes in each province by the end of the century.
Current Social Security Arrangements

O V E RV I E W
China now has a range of social protection mechanisms, including social
insurance programmes, as well as social assistance and welfare programmes.
The social insurance programmes cover many of the contingencies usually
50
table 1 An overview of social protection programmes in China
Expenditure Expenditure Revenue Revenue Recipients Contributors

Programme (million yuan) % GDP (million yuan) % GDP (million) (million)
Old Age Insurance 192,485.43 2.350 196,511.51 2.399 29.84 95.02
Occupational Injury 1,541.64 0.019 2,087.81 0.025 – 39.12
Maternity 712.74 0.009 1,074.88 0.013 – 29.30
Health insurance* 6,907.35 0.084 8,986.60 0.110 5.56 15.09
Unemployment Insurance 9,160.00 0.112 12,520.00 0.153 1.01 98.52
Total Social Insurance 210,807.20 2.570 221,180.80 2.700 – –
Global Social Policy 3(1)
Disaster Relief 3,405.00 0.042 – – – –

Social Welfare and Relief Funds 4,852.00 0.059 – – – –
Lowest Cost of Living Guarantee – – – – 5.32 –
Urban – – 2.66 –
Rural – – 2.66 –
Persons in rural households – – – – 16.60 –
receiving relief funds
Persons in urban households – – – – 1.57 –
receiving relief funds
Recipients of the 5 guarantees – – – – 3.04 –
Pensions for handicapped and 5,460.00 0.067 – – – –
bereaved families
Other 4,280.00 0.052 – – – –
Total social security and welfare 17,990.00 0.220 – – – –
Memorandum:
Subsidies to social security 32,536.72 0.397
programmes
Price Subsidies 38,371.20 0.468
Expenditure on Retired in 36,015.35 0.440
Administrative Departments
Public Health Expenditure 43,849.3 0.535
* In addition to those actively contributing to health insurance there are a further 5.56 million retired people with health insurance coverage, giving total
coverage of 20.65 million people
Source: Ministry of Labour and Social Security, 2000 and National Bureau of Statistics, 2000.
covered in OECD countries, including old age, unemployment, health care,

maternity and occupational injury. Table 1 shows the main social insurance
and assistance programmes in 1999, together with the level of spending and
recipient and contributor numbers where relevant. Overall, spending on
social insurance programmes in 1999 amounted to 2.57 percent of GDP (not
including civil servant’s pensions). Social assistance programmes are much
less significant (about 0.2% of GDP), and include disaster relief plus a
number of restrictive schemes for the very poor who have no other forms of
support from their families.
Administration of social protection programmes is divided across a
number of Ministries. Since 1997, social insurance has been the
responsibility of the former Ministry of Labour, now called the Ministry of
Labour and Social Security (MOLSS). Rural issues are largely the
responsibility of the Ministry of Agriculture (although there is a Department
of Rural Social Insurance under MOLSS.). The Ministry of Civil Affairs
(MOCA) supervises social assistance.
RETIRMENT PENSIONS
Retirement pensions are by far the most significant social protection
programme in China. In 1999 expenditure was around 2.35 percent of GDP.
There were around 95m contributors to the system and around 30m
pensioners. The urban pension system now covers 90 percent of all active
workers within the groups for whom it is compulsory. As a proportion of
estimated total urban employment, the pension system has covered about 45
percent of the urban labour force since the early 1990s, or around 60 percent
including civil servants.
The main features of the system are as follows. Most importantly, the
system involves central government guidelines, which are adapted by
provincial, city or county governments to local conditions. The basic old-
age pension has two components: a notional defined contribution plan with
an individual account established for each worker, and a defined benefit plan
known as the social pension, based on a social pooling account. Pools are
based on location (cities, prefectures or provinces) or industry (civil aviation,
railroads). The current level of employee contributions to individual
accounts is increasing to 8 percent. The maximum enterprise contribution is
set at 20 percent of total payroll, but in practice there is substantial variation
ranging from 15–30 percent.
The retirement age is 60 (men) and 55 (women in salaried positions) and
50 (women in blue-collar jobs). Those working in designated harsh or
dangerous conditions may retire five years earlier; senior professionals may
retire five years later. The recommended consecutive length of service to
qualify for a pension is not less than 15 years, although practice varies. Early
retirement is allowed at 50 for men or 45 for women who have 10 years’
coverage and are totally disabled.
A basic pension is payable from the pooling fund. This is 20 percent of the
city-wide or countywide average wage of the preceding year. No pension is
payable for those with less than 15 years’ contributions, except in the case of
approved early retirement. On retirement, the accumulated contributions
and interest in individual accounts will be translated into monthly benefits
equal to 1/120th of the total balance. The combination of social pooling and
annuities from individual accounts could be expected to provide a
replacement rate of around 60 percent.
By definition, those who live for more than 10 years after retirement will
benefit from redistribution. This is because they will continue to receive
pensions even though their individual accounts have ‘run out’. Workers with
less than 15 years’ contributions receive a lump sum of the balance in their
account. A disability pension is payable for those who have total incapacity
for work and are ineligible for early retirement. This is payable at 40 percent
of wages, with provincial and city or country governments setting minimum
benefits according to local standards of living. The basic payment for
survivors involves a lump sum of between 6 and 12 months wage (depending
on the number of surviving dependants) if the deceased was in covered
employment or a pensioner. The legal heir also receives a lump sum equal to
the balance of the employee’s total contributions, plus interest.
OTHER RETIREMENT INCOME SYSTEMS

There is also an enterprise supplementary insurance scheme that is
employer-sponsored but voluntary. Involvement in supplementary
occupational pension plans is very limited in scope. An enterprise must first
meet its obligations to the basic pension scheme before it can offer an
occupational pension. All contributions by employees and employers go into
individual accounts, which on retirement can be drawn on either as a lump
sum or in regular withdrawals. This scheme, which was introduced in 1991,
covers some 5m workers with a total accumulation of 6.4bn yuan (about 0.08
percent of GDP).
There are a number of other relevant systems. There is a different
programme for civil servants and employees of State organizations and
institutions. This is a pay-as-you go system, financed by government or the
working units, with no individual contributions. For civil servants, all their
basic wage and seniority wage is paid after retirement, with the proportion
of their position wage and their post wage paid increasing from 40 percent
for those with less than 10 years service to 88 percent for those with more
than 35 years service. For employees in State institutions, a proportion of
their basic wage and post wage is paid – ranging from 50 percent for those
with less than 10 years service to 90 percent for those with 35 years or more
of service. This system covers 30m people (MOLSS, 2000). Expenditure in
1999 is estimated at 0.44 percent of GDP.
The Government in its Basic Plan for Old Age Social Insurance in the
Countryside (1991) outlined plans to introduce pension schemes for the rural
population. Individual contributions are made monthly or annually, at one of
10 levels (between 2 and 20 yuan a month), according to the member’s
financial capacity. This represents 80 percent of the total contribution, with
the member’s employer (rural collective or township village enterprise)
paying the remaining 20 percent. Contributions are paid into individual
accounts managed by the local social insurance fund and invested in banks
and government bonds at set rates of return. Pensions are payable from age
60, but individual contributions are made at a very low rate and only
marginally supplemented by employers, so pensions represent only a very
basic form of protection for the rural aged. There are around 82.25m rural
people covered by this system. Current payments are made to around
500,000 rural people (MOLSS, 2000). Accumulated funds have reached
nearly 120bn yuan (Zhou Jianguo, 2001).
There is also a range of social assistance programmes, including the
minimum living guarantee, a means-tested programme. While programmes
exist in rural areas, the greatest policy attention is paid to urban areas, where
benefit amounts are higher and where the need for a last resort is seen as
higher because of rising unemployment. The reported number of urban
beneficiaries in 2000 was 3.8m, up from 2.7m in 1999 (MOLSS, 2001).
MOLSS has estimated that a further 10m urban workers were eligible but
did not receive benefits in 2000. About 80 percent of the reported
beneficiaries in 2000 belonged to groups, such as the laid-off, retired persons
with low pensions and disabled persons.
In rural areas, the biggest social support programme assists poor farmers
after natural disasters. In practice, such support is largely concentrated in
regions that are not only poor but also characterized by frequent droughts.
Another rural programme is the ‘five guarantees’ (meals, clothes, housing,
funeral and education), which essentially is locally financed. It applies to
persons suffering ‘three noes’: no children, no family, and no resources.
Most beneficiaries are elderly persons and orphans, and they typically stay in
nursing homes or receive grain.
Trends in Spending and Recipient Numbers

Table 2 shows trends in spending on the main social insurance benefits, plus
social assistance and relief payments over the period 1989 to 1999. In brief,
for the periods for which data are available, all the contributory programmes
show very significant increases in spending. In every period, however, it is
spending on retirement pensions that predominates. Table 3 shows trends in
the urban pension system. Between 1989 and 2000 spending increased from
0.7 percent to 2.35 percent of GDP. The number of retirement pensioners
increased from around 9m to 32m, or from about 0.8 percent to 2.5 percent
of the Chinese population. Average benefits per recipient have increased
54
table 2 Spending on social security in China, 1989 to 1999 (% of GDP)
Social Pensions for

Occupational Total welfare handicapped
Age Health injury Maternity Unemployment social and Disaster and bereaved
Year pensions insurance insurance Insurance insurance insurance relief funds relief families Other Total
1989 0.70 – – – – 0.70 0.064 0.076 0.085 0.017 0.95

1990 0.81 – – – – 0.81 0.065 0.072 0.089 0.018 1.05
1991 0.80 – – – – 0.80 0.061 0.104 0.080 0.019 1.06
1992 1.21 – – – – 1.21 0.054 0.060 0.069 0.020 1.41
1993 1.36 0.004 0.001 0.001 – 1.37 0.049 0.044 0.060 0.023 1.54
1994 1.41 0.006 0.002 0.002 – 1.42 0.044 0.041 0.053 0.022 1.58
1995 1.45 0.012 0.003 0.003 – 1.47 0.041 0.047 0.050 0.021 1.63
1996 1.52 0.024 0.005 0.005 – 1.55 0.043 0.058 0.048 0.024 1.73
1997 1.68 0.054 0.008 0.007 – 1.75 0.049 0.046 0.050 0.027 1.92
1998 1.93 0.068 0.012 0.009 0.066 2.08 0.045 0.067 0.052 0.034 2.28
1999 2.35 0.084 0.019 0.009 0.112 2.57 0.059 0.042 0.067 0.028 2.77
Source: Calculated from Ministry of Labour and Social Security, 2000 and National Bureau of Statistics, 2000.
table 3 The urban old-age pension insurance system, 1989–1999

A. Workers for whom contributions are paid
Covered Covered Systemic Average

workers as workers as dependency Surplus contribution
Millions percent of percent of ratio: Revenue as (deficit) as as percent of
of total urban contributors percent of percent of average
Year workers population employment per recipient GDP GDP SOE wage
1989 48 4.3 33 5.4 0.9 0.2 15

1990 52 4.6 31 5.4 1.0 0.2 15
1991 57 4.9 33 5.2 1.0 0.2 15
1992 78 6.6 45 4.6 1.4 0.2 16
1993 80 6.8 46 4.4 1.5 0.1 18
1994 85 7.1 46 4.1 1.5 0.1 17
1995 87 7.2 46 3.9 1.6 0.2 19
1996 88 7.2 44 3.7 1.7 0.2 21
1997 87 7.0 43 3.4 1.8 0.1 23
1998 85 6.8 41 3.1 1.9 (0.1) 22
1999 95 7.6 45 3.2 2.4 0.0 24
2000 104 8.2 50 3.3 na na na
B. Pensions and pensioners
Recipients as Average Average

Recipients percent of pension as pension as Average
Millions as percent population Spending as percent of percent of real pension
of of 60 years percent of GDP per average (1999 yuan
Year recipients population and over GDP capita SOE wage per year)
1989 9 0.8 – 0.7 89 65 2,739

1990 10 0.8 10.0 0.8 96 68 3,089
1991 11 0.9 10.8 0.8 85 64 3,074
1992 17 1.4 – 1.2 85 67 3,475
1993 18 1.6 – 1.4 88 72 4,049
1994 21 1.7 – 1.4 82 66 4,054
1995 22 1.9 19.5 1.5 78 67 4,118
1996 24 1.9 – 1.5 79 70 4,400
1997 25 2.1 – 1.7 82 73 4,832
1998 27 2.2 – 1.9 89 72 5,465
1999 30 2.4 – 2.4 99 76 6,451
2000 32 2.5 23.5 na na na na
Source: Ministry of Labour and Social Security, 2000, National Bureau of Statistics, 2000 and information
from MOLSS. The figures refer to the main urban pension system and do not include civil servants.
very significantly in real terms, from around 2700 yuan per year to nearly
6500 yuan per year, or from around 89 to 99 percent of GDP per capita.
The average pension has also increased from around 65 to 75 percent of the
average wage of SOE employees.
The number of contributors to old-age insurance more than doubled to

around 104m in 2000, rising from 4.3 to 8.2 percent of the total population.
Coverage correspondingly increased from one third to one half of the urban
workforce. However, as the number receiving pensions has more than
trebled, the ratio of contributors to pensioners has fallen from around 5.4 to
1 to 3.3 to 1. Revenues for retirement pensions have increased from 0.9 to
2.4 percent of GDP, with the result that there have been small surpluses for
most years. The average payment per person contributing to the pension
system has increased from around 20 percent of GDP per capita to nearly 32
percent, with the increase as a percent of the average SOE wage being from
15 to 24 percent.
Overall, these figures suggest a rapid increase in pension spending, albeit
from a low base. While the number of contributors has increased
significantly, the system dependency ratio (recipients per contributor) has
increased. As pension benefits have also increased – in real terms, as a
percentage of GDP per capita, and relative to average wages – the level of
contributions per worker has also risen, both as a percentage of average
wages and relative to GDP per capita.
There are important differences between regions, shown in Table 4. For
example, the age dependency ratio varies between 7.7 in Ningxia and Tibet
to 19.0 in Shanghai. The ratio of contributors to pension recipients also
varies widely across provinces, from more than 4.5 to 1 in Henan and
Shandong to around 2.5 to 1 in Sichuan and less than 2 to 1 in Shanghai.
While Shanghai has only just over 1 percent of the national population, it
has more than 2 percent of the population aged over 65 years, and more than
7 percent of the population of those retired or resigned from SOE. The
situation in Beijing is similar, with it having an above average share of older
people and an even higher share of those retired from SOE. It is the
provinces of Liaoning and Heilongjian that show the most marked
discrepancies in relation to the costs of pensions. For example, Liaoning has
just over 3 percent of the national population and a slightly higher share of
the population over 65 years. However, the province has nearly 9 percent of
those retired or resigned from SOE. It also receives 14 percent of the social
security subsidies from central government, designed to make up shortfalls
in the pooling funds.
Table 5 shows trends in the role of transfer income, including pensions, in
the income distribution of urban households. Between 1985 and 2000
transfer income increased from 13 to 23 percent of average urban household
disposable income. Most of this increase occurred in the 1980s, with the role
of transfer income fluctuating around the 20 percent level over the 1990s.
The second part of the table shows the distribution of transfer income,
separating out pensions from private transfers. Pension income is around 15
to 18 percent of household income per capita for each income quintile,
being slightly more for the richest quintile. The poorest quintile of urban
table 4 Indicators of provincial differences in age structure, retirement and receipt of pension
subsidies, China, 1999
Share of Share of Ratio of

Share of Share of Age Social retired or Contributors
total population dependency Security resigned to recipients
Region population 65 and over ratio subsidies from SOE of pensions
Total 100 100 11.2 100 100 3.20

Beijing 1.01 1.36 13.7 0.98 4.67 2.47
Tianjin 0.78 0.95 13.0 3.02 2.55 2.58
Hebei 5.33 4.61 9.5 3.51 3.85 3.62
Shanxi 2.57 2.16 9.6 3.41 2.65 3.64
Inner Mongolia 1.9 1.46 8.1 2.81 1.84 3.72
Liaoning 3.37 3.45 10.6 14.05 8.61 2.70
Jilin 2.14 1.91 9.1 5.92 3.04 3.38
Heilongjiang 3.06 2.17 7.3 11.9 5.24 3.09
Shanghai 1.19 2.15 19.0 1.26 7.45 1.93
Jiangsu 5.83 7.5 14.0 1.89 6.51 3.41
Zhejiang 3.61 4.52 13.3 1.02 3.28 3.70
Anhui 5.02 4.88 11.0 3.25 3.08 3.53
Fujian 2.68 2.82 12.1 1.03 2.04 3.15
Jiangxi 3.4 2.99 10.1 2.35 2.07 3.76
Shandong 7.17 8.08 12.3 3.17 4.61 4.57
Henan 7.56 7.01 10.6 3.94 4.32 4.61
Hubei 4.79 4.49 10.6 4.48 4.46 3.79
Hunan 5.27 5.52 11.6 5.42 3.81 2.91
Guangdong 5.79 5.99 12.3 5.02 5.02 3.72
Guangxi 3.79 3.96 12.3 1.45 1.78 3.38
Hainan 0.61 0.53 10.2 0.56 0.85 2.81
Chongqing 2.48 2.87 13.0 3.20 2.41 2.63
Sichuan 6.89 7.52 12.2 4.64 4.95 2.59
Guizhou 2.97 2.35 9.2 1.66 1.40 3.06
Yunnan 3.36 3.01 10.4 2.25 2.02 2.57
Tibet 0.2 0.11 6.7 0.22 0.06 2.58
Shaanxi 2.92 2.73 10.7 2.62 2.44 2.82
Gansu 2.04 1.5 8.4 1.60 1.49 3.41
Qinghai 0.41 0.29 8.1 1.47 0.42 2.91
Ningxia 0.44 0.26 6.7 0.57 0.43 3.62
Xinjiang 1.42 0.87 6.9 1.36 1.25 2.93
Source: Calculated from Ministry of Labour and Social Security, 2000, Tables 4–7, 21–56 and 8–20.
households receives around 8.5 percent of total pension income, and the
richest quintile around 33 percent of pension income. This implies that
pension income is more unequally distributed than in any OECD country
for which data are available (OECD, 1998a), although not strikingly more
unequal than Italy or Japan, for example. In this context, it is important to
recognize that pension income will appear less equally distributed in
table 5 Urban household income trends and composition

A. Average disposable income by source
Percent distribution
1985 1990 1995 1998 1999 2000

Wages, staff and workers 77 68 70 70 68 65
Other employee income 8 9 9 5 5 –
Part-time work income 2 1 2 3 3 –
Property income 1 1 2 2 2 2
Transfers 13 20 17 19 21 23
Total 100 100 100 100 100 100
Total, 1999 yuan per year 2,438 3,016 4,664 5,349 5,854 6,280
Annual real growth rate, – 4.3 9.1 4.7 9.4 5.4
per cent*
B. Urban households’ disposable incomes by quintile and source
Percent distribution
Quintile
Medium Medium
Low low Middle high High Average
SOE income 50 57 61 64 58 59
COE income 12 9 6 5 3 6
Other employee income 3 3 4 3 4 4
Other work income 9 6 5 4 4 5
Business income 4 3 3 2 3 3
Property income 2 2 2 2 3 2
Transfers 20 20 19 20 26 21
Pensions 16 16 15 16 18 16
Private transfers 4 4 4 4 8 5
Total 100 100 100 100 100 100
Total as per cent of 52 75 94 118 177 100
average income for
urban households
Pension income 43 73 88 114 163 100
distribution by income
group
* Average growth rates for the periods between indicated years. Yuan amounts deflated by the
consumer price index
Source: National Bureau of Statistics, various years, Tables 10–4, 10–5, 10–6 and 10–14. The
data are derived from official household budget surveys using partly different definitions in
urban and rural areas. The urban surveys only count monetary incomes and rural migrant
workers are not covered
countries where higher proportions of pensioners share households with

adult children. This will be the case in China. Having said this, the more
important disparity is that this income source is not generally available to
the rural majority in China. For example, in 2000 average transfer income in
rural households was only 79 yuan per year, or 3.5 percent of average net
rural household income, and only 5.4 percent of the average transfers
received by urban households (National Bureau of Statistics [NBS], 2001).
The Chinese System in Comparative Perspective

How does the Chinese system compare with other areas of the world and
with other Asian economies? Table 6 provides a range of comparisons of the
Chinese pension system with those in other major regions of the world.1 On
the basis of these comparisons, a number of conclusions can be reached. In
the mid-1990s, China still had a relatively low ratio of pensioners to the total
population, below the average for the Asia-Pacific region, and well below the
average for other world regions apart from Sub-Saharan Africa. This was
despite the fact that the older population share was above the average for its
own and a number of other regions. This is because pension receipt among
the older population in China is relatively low, because coverage is limited to
the urban population.
Despite the fact that Chinese pensioners are a relatively low proportion of
the total population, spending is nearly two to three times the average for
the Asia-Pacific region, and approaches the average level in North Africa
and the Middle East and Latin America and the Caribbean. An index of
standardized spending – the average pension as a percentage of GDP per
capita – suggests that spending in China was nearly the highest of all world
regions, apart from Sub-Saharan Africa. However, many individual countries
will also be higher than their regional average, as is shown in subsequent
discussion of the Asian region. Pension replacement rates in China (average
monthly benefits as a percent of average monthly wages) also appear to be
among the highest in the world, although some countries of North Africa
and the Middle East are higher. Given the high level of replacement rates
and the fact that covered workers are among the higher income groups in
China, it is not surprising that average pensions are comparatively high.
Coverage of social security among the labour force and the working age
population is relatively low, however, although the difference between the
two measures of coverage is less than in many other regions. This implies
that a relatively low percentage of the labour force is required to contribute
towards the costs of relatively expensive pension benefits. As a consequence,
it is not surprising that the level of employer pension taxes and of all social
insurance taxes are high. The level of employer pension taxes, for example, is
close to the OECD average and to those of the countries of Eastern Europe
and the Former Soviet Union (FSU). This is despite the fact that the share
table 6 Comparison of pensions in China and selected world regions

A. Participating active workers, contribution rates and income replacement ratios (%)
All social Average Average

Pension insurance income pension as
Participants/ contributions/ contributions/ replacement percent of
Region labour force wages wages ratio GDP per capita
China
1995 18* 20** ca 25 69** 78**
1999 18* 25** ca 30 77** 99**
OECD 90 19 34 38 54
Range 79–98 6–35 14–57 25–49 23–98
Asia and the Pacific 26 14 17 na na
Range 3–73 3–40 4–46 na na
Central and Eastern 66 22 31 44 39
Europe and Former
Soviet Union
Range 32–97 20–45 24–61 24–69 13–92
North Africa and 41 13 23 55 71
Middle East
Range 30–82 3–27 13–48 36–78 22–144
Sub-Saharan Africa 6 10 17 na 135
Range 1–18 3–24 6–33 na 40–207
Latin America and 33 12 21 39 50
Caribbean
Range 11–82 3–29 8–46 13–64 26–64
B. Dependency ratios and spending
Pension
Pensioners/ Pensioners/ Pensioners/ spending as
active Population population Total percent of
Region participants 60+/20–59 60+ population GDP
China
1995 26** 17 24* 2* 2*
1999 31** 20 27* 3* 3*
OECD 47 34 102 20 10
Range 27–74 27–42 54–135 8–29 5–15
Asia and the Pacific 20 15 39 3 1
Range 5–56 12–18 1–117 0–6 0–3
Eastern Europe and 63 28 136 20 7
former Soviet Union
Range 47–95 15–39 88–178 11–28 2–14
North Africa and 30 15 58 4 3

Middle East
Range 19–50 9–29 5–94 0–10 0–6
Sub-Saharan Africa 7 12 15 1 1
Range 0–37 10–16 0–121 0–10 0–3
Latin America and 25 17 46 4 3
Caribbean
Range 4–70 12–35 5–152 1–26 0–13
* The regular urban pension system and that for civil servants. ** The regular urban pension system.
N.B. employee contribution rates increased every year 1997-2001.
Source: Figures for China are calculated by the OECD. Calculations for other regions based on World
Bank data in Palacios and Pallarès-Miralles (2000).
of the population aged 60 and over is only around half the average for
OECD countries.
In summary, the Chinese pension system is marked by relative generosity
to a narrow share of older population and the total population. The
relatively low number of contributors as a percentage of the labour force has
meant that the contributions required to finance these benefits are relatively
high, compared to other world regions.
Table 7 sets out details of the coverage of retirement pensions in a range of
significant Asian economies, including some at much higher levels of
national income. The higher income economies – Korea, Malaysia and
Singapore – all have much higher levels of coverage among the labour force
and those of working age. The other lower income countries generally have
pension systems restricted to those in firms or businesses with a minimum
number of employees. Generally speaking, it is quite common to have
separate schemes for those in the government sector, the military or those
working on railways, for example. It is also worth noting that China appears
to have higher levels of coverage of persons of working age than does India,
Indonesia, Bangladesh, Pakistan or the Philippines.
Table 8 shows retirement ages and contribution periods. Retirement ages
for men and women are not notably lower in China than in other significant
Asian economies. Hong Kong has the highest retirement age, but this is a
general-revenue financed social assistance scheme. Similarly, the
contribution periods are broadly similar across countries, with the
exceptions of the Republic of Korea and Vietnam. Table 9 compares the
level of social insurance taxes across the region. China has the highest level
of social security contributions among the lower income Asian countries.
Generally speaking, only Singapore among the high-income group has a
substantially higher level of social security contributions, although in the
case of Singapore this is to a provident fund, rather than to a PAYG social
insurance system. As a result, social insurance taxes are a higher proportion
of total labour costs in China than in any other economy, apart from
62
table 7 Coverage of social security programmes for older people, selected Asian economies
% of persons of % of labour
Country Persons Covered working age force
China Employees in state-run enterprises. Collective, private, and foreign-invested (Chinese 17.4 (1994) 17.6
nationals only) and the self-employed may provide similar or separate programmes.
Employees of government and party organisations, and cultural, educational and scientific
institutions are covered under government-funded, employer-administered system.
India Provident fund, pension and deposit insurance schemes for employees of establishments 7.9 10.6
with 20 or more employees in 177 categories of industry. Excludes those earning more than
5000 rupees a month. Contracting out for those covered by equivalent private plans. Special
system for miners, railway and public employees. Gratuity scheme for employees of
factories, mines and firms with 10 or more employees.
Indonesia Establishments with 10 or more employees or payroll of Rp 1 million or more a month. 7.0 8.0
Coverage being gradually extended to smaller establishments and casual and seasonal
workers. Special systems for public employees and military.
Bangladesh Public employees only. 2.6 3.5
Pakistan Employees in firms with 10 or more workers. Special system for public employees, armed 2.1 3.5
forces, police, statutory bodies, local authorities, banks and railway employees. Excludes
family labour and the self-employed.
Philippines Compulsory for all private employees under 60, house helpers earning at least 1000 pesos 13.6 28.3
a month, and all self-employed with 1000 pesos or more monthly income. Special system
for government employees and military.
Sri Lanka Provident fund for employed persons, excluding family labour and those in approved 20.8 28.8
private funds. Special pension for public and local government employees.
Thailand Employees of firms with 10 or more workers. Voluntary coverage for self-employed. – –
Separate programmes for civil servants and private school teachers.
Vietnam Compulsory for state employees, employees of non-state enterprises with more than workers, 10.0 8.4
foreign-invested enterprises, processing zone, industrial zone, foreign and international
organisations. Special programmes for civil servants and employees in armed forces.
Chinese Taipei Employees of firms in industry and commerce, mines and plantations with 5 or more – –
workers; wage earning public employees, public utility employees; fishermen and some
self-employed in service occupations. Special systems for farmers, salaried public employees,
and staff of private schools. Voluntary programme for employees in firms with less than 5
workers and the self-employed.
Hong Kong Dual universal and social assistance for residents. – –
Korea All residents 18–59 (since April 1999). Separate systems for public employees, private 43.0 58.0
school teachers, the self-employed and military personnel.
Malaysia Mandatory coverage of provident fund for private sector employees, non-pensionable 37.8 48.7
public employees and foreign workers. Voluntary for domestic workers, self-employed and
pensionable public employees. Exclusions of armed forces and those belonging to equivalent
private sector plans.
Singapore Provident fund for employed persons earning more than S$50 a month, plus some self- 56.0 73.0
employed. Special pension system for public employees. Excludes those in approved
equivalent private funds.
Source: United States Social Security Administration, 1999; Palacios and Pallarès-Miralles (2000).
Whiteford: Social Protection: Reform in China
63
64
table 8 Retirement provisions in social security programmes for older people, selected Asian economies
Retirement Ages Contribution Period Years

Country Males Females Males Females Early Retirement/Other Notes
China 60 55/50 15 15 55/45 if arduous;

50/45 if disabled
India (1) 55 55 – – Lump sum if involuntary removal Provident Fund

from covered employment
India (2) 58 58 10 10 Pension scheme
Indonesia 55 55 66 months 66 months Incapacity Provident Fund
Pakistan 60 55 15 15 Reduced pension at 55/50. 55 for miners.
Philippines 60 60 120 months 120 months Retirement required at 65 –
Sri Lanka 55 50 – – Early retirement due to government Provident Fund
closing company
Thailand 55 55 180 months 180 months – –
Vietnam 60 55 20 20 55/50 with 15 years hazardous work;
other concessions
Chinese Taipei 60 55 1 year coverage Any age with 25 years, 55 for men with
15 years, 55 miners –
Hong Kong 65 65 5 years residence Universal from 70 Social Assistance
Korea 60 60 20 20 Retirement test below 65 Full pension

60 60 10 to 19 10 to 19 Retirement test below 65 Reduced pension
55 55 10+ 10+ Not earning Early pension
Malaysia 55 55 – – – Provident Fund
Singapore 55 55 – – Provident Fund
Source: United States Social Security Administration, 1999.

table 9 Social insurance taxes, China and selected Asian economies, 1990s
Percentage of gross wage Percentage of total labour costs

Pension Tax: All social All Social
Employer Employee Total insurance Pension Tax Insurance Taxes
China 20.0 4.0 24.0 36.0 18.0 27.0

India 9.0 8.3 17.3 22.2 15.4 19.7
Indonesia 4.0 2.0 6.0 12.7 5.4 11.5
Pakistan 5.0 0.0 5.0 12.0 4.5 10.7
Philippines 4.7 3.3 8.0 11.9 7.5 11.1
Sri Lanka 12.0 8.0 20.0 24.3 17.2 20.9
Thailand - – – 4.1 – 4.0
Vietnam 10.0 5.0 15.0 20.0 13.0 17.4
Chinese Taipei 4.6 1.3 5.9 12.4 5.3 11.1
Korea 2.0 2.0 4.0 8.4 3.8 8.0
Malaysia 12.5 10.5 23.0 24.3 20.2 21.3
Singapore 20.0 20.0 40.0 46.0 32.5 37.4
Source: Palacios and Pallarès-Miralles (2000).
Singapore. There is also a relatively high level of reliance on employer

rather than employee contributions in China.
Table 10 shows spending on social security, and average spending per
capita. Overall levels of spending were not particularly high in the middle of
the 1990s (but may have been higher by the end of the 1990s). Chinese
spending per capita appears higher than in the Philippines or Vietnam, as
table 10 Spending on social security programmes for older people, selected Asian economies,
1990s
Pension spending as Pensioners as %

Country % of GDP of total population Spending per capita
China
1995 1.5 1.9 78.0
1999 2.4 2.4 99.0
India 1.3 0.8 171.4
Pakistan 0.9 0.1 (850.0)
Philippines 1.0 6.2 16.6
Sri Lanka 2.4 – –
Vietnam 1.6 2.4 66.7
Korea 1.4 2.4 56.7
Malaysia 1.0 – –
Singapore 1.4 3.3 42.4
Source: Palacios and Pallarès-Miralles (2000). Figures for China are calculated by the OECD,
and for India are calculated from Shah (2000).
well as in Korea and Singapore. In contrast, spending per capita appears to

have been significantly greater in India and Pakistan (although the figures for
Pakistan are calculated from numbers that have been rounded in the source).
To sum up these comparisons with other Asian economies, it can be noted
that China is less unusual compared to other parts of Asia than compared to
other large regions of the world. China has comparatively high levels of
coverage among the workforce, but its contribution rates are higher than in
most other Asian economies. This appears to be because it is significantly
more generous in relative terms than are the high-income Asian economies,
but it covers a significantly higher proportion of the aged than do India or
Pakistan, for example.
The Chinese System in the Global Policy Context

The reform of the Chinese pension system is of considerable significance to
future global social policy developments. At one level, this simply reflects
the sheer size of China. China is already the seventh-largest economy in the
world (OECD, 2002), and its relative growth rate suggests that it will
increase this ranking over the next 20 to 30 years. It is also forecast that by
2030 more than a quarter of the world’s older people will live in China
(James, 2001). Thus, how China adapts its pension system to make it
sustainable and equitable will potentially be directly relevant to more people
than any other national social protection system in the world.
The indirect effects of the reforms could also be significant. Depending on
the extent to which they are successful in managing the transition from a
system protecting a minority of the Chinese population to one providing
sustainable coverage for the majority of the population, Chinese reforms
could become a model for other developing countries – either positive or
negative. In addition, if there is a successful transition to an advance-funded,
multi-pillar pension system with a broader coverage of the population then
it is possible that China would also have one of the largest accumulated
pension funds in the world by the middle of the 21st century.
It is not straightforward to identify the role of international organizations
in influencing the reforms chosen by China. As is well known, the World
Bank (1994) proposed a ‘three pillar’ model as a basis for pension reform.
This approach has been most influential in Latin America, and in some of
the transition countries of Central and Eastern Europe. This ‘new pension
orthodoxy’ is commonly regarded as involving the downsizing of the public
pension tier and the introduction of mandatory individual accounts – in
short, the privatization or partial privatization of pensions (Müller, 2003).
The main arguments put by the World Bank for reforms of this type are that
changes are needed to make social security systems more fiscally sustainable,
and to avoid increasing social security contribution rates as populations age.
It is also argued that pre-funding can be used to increase saving that is
committed for long-term investments, and pension funds can be used as

engines of financial market development and to improve corporate
governance (James, 2001).
The World Bank supports a range of projects on pension reform in China.
In the social protection area, there are currently three ongoing World Bank
projects: a pension reform project (cost US$5m), an enterprise housing and
social security project (a commitment of US$350m), and a labour market
development project (a commitment of US$30m), plus direct technical
assistance and training on pension reform issues. However, these are only a
very small component of the Bank’s overall activities in China. At 30 June
2001, World Bank commitments in China approached US$35bn for 234
projects.2
The Asian Development Bank has also funded a range of activities on
pension reform in China. In 1999 the ADB approved a US$2.4m technical
assistance grant to China to support the formulation and implementation of
the various administrative frameworks for the new pension system. In 2001,
the ADB agreed to provide technical assistance of around US$1m to support
the social security pilot reform programme in Liaoning, and to strengthen
the institutional capacity of the National Council for the Social Security
Fund.3 While the ADB has been promoting pension reform in Asia for some
years, it has recently developed a wider social protection policy (Ortiz,
2001), which emphasizes the positive role of effective social protection in
achieving sustained poverty reduction, now one of the main focuses of the
work of the ADB. The strategy also includes a chapter on the operation of
pension systems written by Lawrence Thompson, critical of many of the
arguments put by some proponents of privatization and advance funding.
The position adopted by the OECD differs again. The OECD report on
Reforming China’s Enterprises (2000) identified pension reform as an essential
part of the process of reducing financial burdens on enterprises. For
example, in its opening paragraphs, the report noted that ‘. . . a third
component [of enterprise reforms] is provision of supporting institutions
and infrastructure needed for a market based enterprise economy. Key in
this regard is the development of social benefit programmes to deal with the
economy adjustments entailed by reforms, allow enterprises to focus on their
commercial objectives, and provide for the longer-term needs of the
population.’ (OECD, 2000: 7) This emphasis has been continued in more
recent studies (OECD, 2002). Thus, pension reform has been placed in the
context of the need for broader industrial changes and associated labour
market reforms.
It should also be noted that in making recommendations on pension issues
to member countries the OECD does not necessarily endorse ‘privatization’
of social security. For example, the OECD (1998b) sets out a range of
principles for pension reform, including that ‘retirement income should be
provided by a mix of tax and transfer systems, advance-funded systems,
private savings and earnings. The objective is risk-diversification, a better

balance of burden-sharing between generations, and to give individuals
more flexibility over retirement decisions.’
The approach adopted by China appears to have been influenced by
aspects of all these analyses, but it seems fair to say that China has not simply
adopted the multi-pillar pension model in an uncritical fashion. While the
new system has adopted features that make it appear to be a three-pillar
model, the fact is that the pension system basically remains a PAYG scheme,
where current contributions are used to pay for current benefits. Where
funding is in operation, revenues are mainly invested in government bonds.
Moreover, even if the individual contributions were actually being paid into
individual accounts, they would still amount to less than a third of the total
level of contributions. That is, the contributory, social insurance approach
remains predominant. Indeed, the basic pension remains highly
redistributive, and the design of the second pillar also contains many
redistributive features, with the proviso that this is redistribution within a
relatively small and privileged group. In fact, the system is subject to
continuing criticisms by the World Bank, on the basis that the system may
be creating unrealistic expectations by pretending to have funded elements
(James, 2001).
Overall, the Chinese government has consistently adopted a cautious
approach to pension reform. The evidence for this is provided by the
gradual reforms introduced, and the use of provincial experiments to test
reform proposals before their wider implementation. As noted by Tang and
Ngan (2001), ‘the model that has emerged is not a market-based retirement
system. It is not an endorsement for the privatisation of social security.
Rather, the continued involvement of government in the system represents a
pragmatic approach to deal with the social security issue’ (pp. 256–7).
Issues and Questions

I S T H E S Y S T E M A P P R O P R I AT E F O R C H I N A’ S C I R C U M S TA N C E S ?
China’s social security system dates back to the 1950s and in part reflects the
different economic reality of state ownership of virtually all enterprises,
where the State was practically the only employer. In a sense, the institutions
of society were mutually supportive, but with the consequence that the
solutions to some problems themselves become problems when other
institutions changed. For example, the traditional social welfare system in
China guaranteed urban SOE workers a wide range of social benefits,
including pensions, health care and housing. During the pre-reform period,
these benefits were partly borne by employees in the form of low nominal
wages (OECD, 2000), but there was no unemployment, and there was the
guarantee of state employment for one child of a retiree. These and other
features embodied the principle of the ‘iron rice bowl’ (tiefanwan), the
government’s commitment to ensure employment and incomes for urban

workers. The system was marked by security for workers, but low
productivity.
Even so, rural residents did not enjoy the same privileges. Under the
household registration system (hukou) they were specifically excluded from
the urban workforce and its privileges, originally as a response to the need to
ration scarce resources. However, under the rural Household Production
Responsibility system, which replaced collective farms in 1984, every
agricultural household had a right to cultivate a small plot of land, currently
averaging around one-half a hectare. The land entitlement constitutes the
principal element of social security in rural areas. However, one
consequence of the replacement of collective farms with the Household
Production Responsibility system was the effective phasing-out of the rural
co-operative medical system (including so-called barefoot doctors).
According to the World Bank (1997b), only 10 percent of the rural
population had access to subsidised health care by the mid-1990s compared
to 90 percent in 1978.
While replacement of collective farms substantially increased agricultural
productivity for an extended period, it appears to have subsequently reached
its limits. The average household farm of about 0.5 ha is too small to give
productive full-time employment to all individuals reported to work there.
Many must be underemployed unless they have off-farm jobs in addition.
Depending on the assumption of what level of productivity is regarded as
acceptable, rural hidden unemployment can be estimated to be between
170m and 250m (OECD, 2002). Thus, the principal form of social security
for the rural majority of the Chinese population can be regarded as the
source of one of the country’s major economic problems.
Economic reforms from the late 1970s created a new private sector with
alternative job opportunities, as well as new forms of employment in SOE
based on contracts. Nevertheless, in the 1980s and most of the 1990s, the
‘work unit’ was the chief vehicle for delivering social benefits. This system
has become an increasing impediment to modernization of China’s
enterprise sectors in several ways. The system imposes benefit expenses on
SOE that are relatively high on average and unevenly distributed. Total
outlays by SOE for social benefits have averaged around 30 percent of their
payrolls, but are 50 percent or higher in the most heavily burdened cases.4
These burdens have increased over time as the ratio of retired to active
employees has risen with the ageing of the population.
Despite major reforms to the pension system for enterprise workers, a
number of key problems remain. Financial burdens on SOE remain high,
partly because the new arrangements with reduced replacement rates apply
to new workers while current retirees continue to receive higher pensions.
Burdens have been shifted, but mainly from loss-making and low profit SOE
that are unable to meet their obligations to more profitable SOE, which in
some cases are required to pay more than the theoretical maximum of 20
percent of salaries. Moreover, because the pooling of contributions occurs
only within municipalities or provinces there are disincentives for new
businesses to establish themselves in the regions most affected by SOE
restructuring, precisely where new job opportunities are most needed. Thus,
the pension system in its current form continues to provide impediments to
wider economic reform.
I S T H E S Y S T E M S U S TA I N A B L E ?
The World Bank (World Bank, 1997a) identifies the longer-term
predicament arising from a rapidly ageing population and the urgent and
immediate problem of the pension burden placed on SOE as the two most
severe difficulties facing China’s pension system. Although China has a
relatively young population, this will change over the next 20 years and
beyond, as a result of increasing life expectancy and the impact of the ‘one
child policy’. It is projected that the proportion of the older population in
China will rise from around 10 percent in 2000 to 15.8 percent in 2020 and
just under 25 percent by 2040. The proportion of the urban population aged
60 and over to the population aged 20–59 will increase to 34 percent by
2040. While a much smaller group, the ‘old old’ (over 75) will increase at a
much faster rate, increasing the share of the most vulnerable, particularly
older women. The share of the population over 60 in China is projected to
increase from around half the OECD average to nearly three-quarters the
(higher) OECD average in 2040. China will have one of the highest shares
of older people of any Asian economy, apart from much higher income
economies, such as Korea, Hong Kong, Singapore and Japan.
In considering these future pressures it is important to bear in mind that
pension spending trebled over the past 10 years, from 0.8 to 2.4 percent of
GDP. It can be calculated that if everything else had remained equal, the
increase in the value of pensions relative to GDP per capita would have
increased spending by around 11 percent, and population ageing would have
increased spending by around 15 percent. This means that the main factor
contributing to increased spending has been the increase in coverage of the
older population, which has more than doubled. The factors impacting on
spending are multiplicative. Thus, the more significant increase in the future
share of the older population due to demographic ageing might be expected
to increase spending at an even faster rate. In a ‘worst case’ scenario, pension
spending in 2040 could exceed 12 percent of GDP. However, for this to
happen the average benefit level would have to stay at its current high level,
and coverage rates would have to double from their current level.
While it is true that spending has been increasing at a very rapid rate, this
seems unlikely to continue over the next decade. Recent reforms can be
expected to reduce replacement rates over time. It also seems unlikely that
coverage will increase as rapidly as in the past decade. A more conservative
estimate is that pension spending could reach around 3 percent of GDP by

2010. While this overall level is modest by the standards of OECD
countries, most OECD countries provide retirement income support to the
majority of their aged population in a way that substantially alleviates
poverty. Moreover, this represents a large share of overall government
resources in China, and it is important to ensure that the need to finance
pensions does not ‘crowd-out’ other important social priorities.
The social pooling component of the pension is now indexed to
contemporary wages. While this may not have had a significant impact to
date, it is likely in the future to exercise upward pressure on spending.
Having said this, expansions in coverage are likely to reduce the average
level of benefits simply as a result of the fact that new contributors will be
lower in the wage distribution than current contributors. As a result, the
same target replacement rate would produce lower pensions relative to GDP
per capita, and moderate the average cost of the scheme. At the same time,
the fact that China has experienced rapid economic growth and growth in
real wages means that pensions should be more adequate in real terms.
Nevertheless, expanded coverage, while it has alleviated the near-term
squeeze on funds, increases pension obligations over the longer term. The
system dependency ratio has actually become less favourable over the past
decade. This is a serious problem, as the average contribution has risen
significantly relative to average wages. If contribution rates are perceived as
over-high there will be stronger incentives to avoid contributions, with a
potential reinforcement of adverse incentives. Having said this, it should
again be emphasized that the rapid increase in spending and in the
contributions required to finance this spending reflects the fact that
previously hidden obligations have been made more obvious, as a result of
moving these obligations out of SOE and into the public sphere.
The future financial viability of the scheme is also questionable, given that
while it purports to be a funded system, much of the money is being used to
pay current retirees, so not enough is building up in the individual accounts.
Overall, the system has been managing to achieve moderate surpluses of
contributions over expenditure for the past decade, but continues to operate
effectively as a PAYG programme. For participating workers, around 35
percent of the total of employer and employee contributions should be being
paid into individual accounts. At 1999 levels of contributions this would be
around 0.85 percent of GDP. In fact, in that year the surplus of
contributions over expenditure was only 0.05 percent of GDP, even after the
direct government subsidy of nearly 0.4 percent of GDP. Should this
situation continue, the system would rapidly accumulate a significant level of
debt. Of course, the implicit pension debt before the introduction of
notional individual accounts was even greater, but reforms have made these
debts explicit and may raise expectations that cannot be fulfilled. Also, this
overall picture masks important provincial and municipal disparities. In
aggregate, government subsidies to social security programmes (around

0.4% of GDP) are equivalent to 17 percent of total spending. More than a
quarter of these subsidies go to two provinces – Liaoning and Heilongjiang –
even though these provinces contain only 5 percent of the Chinese
population over 65 years of age (NBS, 2000).
I S T H E S Y S T E M FA I R ?
Research on poverty and income distribution in China has suggested that
urban poverty and the income differentiation between rich and poor and
between urban and rural areas has increased since 1990 (Zhao et al., 1999).
This trend of unbalanced development suggests that the existing social
security system has failed to address new social problems or to meet social
protection needs appearing in the period of economic reform.
As shown earlier, pension spending mainly benefits a relatively well-off
minority, even of the urban population. The system does little to redistribute
income or to offset income inequalities between urban and rural residents.
While the system is not designed to achieve such redistribution, it can be
argued that it is important that social security programmes attempt to
balance the objectives of income maintenance and poverty alleviation
(Shang, 2000).
The existing rural social insurance system appears particularly inadequate.
Because individual contributions are made at a very low rate and are only
marginally supplemented by the employer, pensions represent only a very
basic form of protection for the rural aged. As the rural schemes typically
operate on a self-financing basis, without any mechanisms for the pooling of
resources between villages, the old age protection system depends, to a large
extent, on the relative wealth of a community. The disparity in regional
economic growth is thus reflected in the pension system, perpetuating rather
than reducing inequality.
Extending adequate social protection to the majority of the rural elderly is
one of China’s most important challenges. The emerging schemes are more
widespread and perhaps more effective than comparable rural pension
schemes in many developing economies and have potential for further
development. However, establishing a unified national system of rural
pensions may seem premature given China’s level of economic development,
with funds raised from the rural areas by themselves unlikely to fully cover
the cost of unified age pension system in the countryside. It can also be
asked whether the existing urban pension model is appropriate in rural areas.
While the system is not redistributive to the poor, this is simply because of
its limited coverage. In fact, the rules of the new system are much more
redistributive than the old rules, guaranteeing a basic pension of 20 percent
of the average wage after 15 years of contributions. It is difficult to envisage
extending this system in its current form to a wider population with much
greater income disparities, unless there is confidence of a commitment to
such redistribution among those who would be net contributors. This

problem does not reduce the importance of broadening the coverage of
social protection, but highlights the fact that considerable care needs to be
taken in designing a system that is sustainable as well as fair.
Conclusions
Overall, the Chinese system has been subject to significant reforms in the
last decade. The increase in the pension coverage of the urban population
can be regarded as a significant policy achievement, even though coverage of
the whole population remains modest by international standards. The urban
pension system now covers 90 percent of all active workers within the
groups for whom the government intended to make it compulsory. As a
proportion of estimated total urban employment, the pension system
covered about 45 percent for most of the 1990s before rising to 50 percent
in 2000, or approximately 65 percent including civil servants.
Management of the urban pension system has also effectively been
transferred to provincial and local governments from enterprises. This
‘socialization’ process, which should facilitate a restructuring of many SOE,
was nearly complete by the end of 2000. This has involved considerable
administrative effort and has contributed to a reduction in the previously
common pension arrears, reportedly with 99 percent of pensions paid on
time during 2000.
Despite these successes many of the underlying problems remain salient.
As noted by Han Liangcheng (1998), these include the limited coverage of
the system, the low degree of risk pooling, and the limited mechanisms for
financing the system, as well as more specific issues such as the method of
adjusting benefits, the period of contributions and the retirement age.
The issue with the most fundamental significance is whether the extent of
pooling should be extended, and whether the national government itself
should take direct responsibility for social insurance. In addition, the
retirement age remains relatively low, particularly as life expectancy is
increasing. The 15-year period of contributions required for the full basic
pension is short, and consideration could be given to extending this period
of required contributions. In this context, it also appears that older workers
who are approaching retirement age are being offered early retirement in
order to avoid being included as laid-off workers. This is a short-sighted
approach to this issue, as OECD experience suggests that early retirement
does not provide a real solution to the problems of unemployment, and may
create much larger demands on public expenditure in the medium to longer
term.
The formal replacement rate is very high by comparative standards. This
in part reflects the legacy of past low wage levels. As real wages increase in
future it should be possible to consider some reductions in this replacement
level, while continuing to provide adequate retirement incomes. This issue

has been partly addressed in the new system, which sets the basic pension
relative to average wages in the city or county. However, this raises the
problem that as average wages increase in real terms the costs of pensions
will also increase in line with them. It appears that this may give large
windfalls to retirees who have only recently begun to be covered by the
pension system – that is, their past contributions may not be sufficient to
meet the cost of paying their improved pensions. This is a difficult issue, as
in the long run there does need to be a mechanism for ensuring that retirees
share in rising average living standards. One possibility would be to consider
a system of price indexation with partial wage indexation.
Having said this, it would be a mistake to lay down a single framework for
future policy, given the diversity of China and the rapid pace of economic and
social change. An impressive feature of past reforms has been the experimental
approach adopted, with different regions adopting reforms on a pilot basis.
This appears to be a useful approach when developing future reform options.
In summary, there continues to be a mix of medium and long-term issues
to be addressed by Chinese policy makers. It is not clear that the long-term
sustainability of the pension system has been guaranteed by recent reforms,
important as they have been. In the next decade, it is also important to
pursue policies that provide the maximum degree of flexibility for
government finances to meet emerging needs. Most importantly, attention
needs to be given to the development of more balanced social protection
policies to address the needs of the majority of the Chinese population.
notes
1. These comparisons should be treated with caution. Regional averages are
calculated as the mean of separate national populations and are not weighted for
population size. The number of cases used in calculating each average may differ
depending on the data available in the original source.
2. Details can be found at http://www4.worldbank.org/sprojects/ (accessed 6 January
2003)
3. These amounts can be compared with US$100m allocated to the development of
a fully funded, defined contribution pension system in Kazakhstan.
4. OECD (2000) provides estimates that social benefit payments by Shanghai Textile
Holding Company to its workers averaged 42 percent of its payroll (nearly 15
percent of total revenue) since 1993. Social benefits paid by Baosteel group
amounted to nearly 55 percent of payroll in 1998.
references
Asian Development Bank (2001) Key Indicators of Developing Asian and Pacific
Countries. Manila: Asian Development Bank.
Chai Pui Phin (1992) ‘The Welfare Policy Implications of China’s Ageing
Population’, Working Paper No. 73. Perth, Australia: Murdoch University.
Davis, D. (1988) ‘Unequal Chances, Unequal Outcomes: Pension Reforms and

Urban Inequality’, China Quarterly 114(June): 223–42.
Fuery, M., Stanton, D. and Walters, C. (1996) ‘Reforming Social Security in China’,
Social Security Journal (December): 128–47.
Han Liacheng (1998) ‘The Old-age Insurance System and Fund Management in
China’, in International Social Security Association (eds) Financing Retirement
Benefits: The Asia and Pacific Experience. Social Security Documentation No. 20 (pp.
81–91). Geneva: International Social Security Association.
James, E. (2001) ‘How can China Solve its Old Age Security Problem? The
Interaction between Pension, SOE and Financial Market Reform’, The Journal of
Pension Economics and Finance 1(1): 53–75.
Ministry of Labour and Social Security (2000) Social Insurance Year Book. Beijing:
MOLSS.
Müller, K. (2003, forthcoming) ‘The Political Economy of Pension Reform in
Central and Eastern Europe’, in P. Whiteford (ed.) Practical Lessons in Pension
Reform: Sharing the Experiences of Transition and OECD Countries (pp. 1–26). Paris:
OECD.
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China Statistics Press.
OECD (1998a) ‘Income Distribution and Poverty in Selected OECD Countries’,
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OECD (2000) Reforming China’s Enterprises. Paris: OECD.
OECD (2002) China in the World Economy: The Domestic Policy Challenges. Paris:
OECD.
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Palacios, R. and Pallarès-Miralles, M. (2000) International Patterns of Pension
Provision. Washington, DC: World Bank.
Shah, A. (2000) Issues in Pension System Reform in India. Bombay: Indira Gandhi
Institute for Development Research.
Shang Xiaoyuan (2000) ‘Rethinking “Social Welfare” and “Social Security” in
China’, paper presented to Theories and Policies: Social Welfare in China
conference, Beijing, 27 November–1 December.
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United States Social Security Administration (1999) Social Security Programs
Throughout the World, Office of Policy, Washington, DC.
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résumé
De la Protection d’Entreprise à la Protection Sociale: Réforme

de la Retraite en Chine
Le système chinois de la protection sociale a fait l’objet de réformes considérables
pendant les derniers vingt cinq ans, mais il peut toujours être considéré comme un
système en transition. Ces réformes ont été d’une envergure impressionnante, et
beaucoup de progrès ont été fait pour étendre la couverture sociale, mettre en
commun des ressources, améliorer la gestion des versements, et commencer
d’aborder le sujet des exigences de financement futures. Pourtant, le système n’est
pas encore tout à fait prêt pour les défis auxquels la Chine va faire face pendant la
prochaine décennie et au-delà.
Cet article évalue les traits principaux du développement du système de retraite
chinois, et identifie un certain nombre de problèmes qu’il faudra aborder dans des
réformes futures. L’article met en comparaison le système chinois avec ceux qui
fonctionnent dans d’autres régions mondiales, et aussi dans d’autres régions en Asie.
Les développements chinois sont aussi examinés dans le contexte des développements
globaux de politique sociale, et dans le rôle des organisations internationales. L’article
examine aussi différentes approches possibles d’aborder des défis futurs.
resumen
De la Protección en la Empresa a la Protección Social. La

Reforma del Sistema de Pensiones en China
El sistema social de protección social en China se ha visto sometido a reformas
significativas en el ultimo cuarto de siglo pero todavía es posible considerarlo como
un sistema en transición. Las reformas han sido impresionantes desde el punto de
vista de su alcance y se ha alcanzado ampliar la cobertura, unificar recursos, mejorar
el sistema de administración de pagos, e iniciar acciones para confrontar el problema
de las necesidades de financiamiento que surgirán el futuro. No obstante, el sistema
no es todavía suficientemente apropiado para abordar los retos que China enfrentará
durante la próxima década y posteriormente. Este artículo evalúa las principales
características del desarrollo del sistema chino de pensiones e identifica una serie de
cuestiones que deberá enfrentar como parte de las futuras reformas. El artículo
compara el sistema chino con los de otras regiones Asia y del mundo. Los
acontecimientos en China también se discuten a la luz de los acontecimientos en las
políticas sociales globales y del papel de las organizaciones internacionales y también
discute posibles enfoques para tratar los retos que encierra el futuro.
biographical note
PETER WHITEFORD is Principal Administrator (Social Policies) in the Non-Member
Economies and International Migration Division, Directorate of Education,
Employment, Labour and Social Affairs, of the OECD. In this position, he has
worked on the social policy implications of the Asian financial crisis and the
development of social safety nets, pension reform in China, and on pension reform in
Central and Eastern Europe. Previously he has been a Senior Research Analyst in the
Australian Department of Family and Community Services, a Senior Research

Fellow at the Social Policy Research Unit at the University of York in the United
Kingdom, and a Senior Research Fellow at the Social Policy Research Centre at the
University of New South Wales. [email: Peter.WHITEFORD@oecd.org]

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A RT I C L E 45

a b s t r a c t The Chinese system of social protection has been subject

Global Social Policy Copyright © 2003

Main Historical Developments

retirees jointly financed by the state, enterprises and the workers; a

Current Social Security Arrangements

Expenditure Expenditure Revenue Revenue Recipients Contributors

Disaster Relief 3,405.00 0.042 – – – –

covered in OECD countries, including old age, unemployment, health care,

OTHER RETIREMENT INCOME SYSTEMS

Trends in Spending and Recipient Numbers

table 2 Spending on social security in China, 1989 to 1999 (% of GDP)

Social Pensions for

1989 0.70 – – – – 0.70 0.064 0.076 0.085 0.017 0.95

table 3 The urban old-age pension insurance system, 1989–1999

Covered Covered Systemic Average

1989 48 4.3 33 5.4 0.9 0.2 15

B. Pensions and pensioners

Recipients as Average Average

1989 9 0.8 – 0.7 89 65 2,739

The number of contributors to old-age insurance more than doubled to

Share of Share of Ratio of

Total 100 100 11.2 100 100 3.20

table 5 Urban household income trends and composition

1985 1990 1995 1998 1999 2000

B. Urban households’ disposable incomes by quintile and source

countries where higher proportions of pensioners share households with

The Chinese System in Comparative Perspective

table 6 Comparison of pensions in China and selected world regions

All social Average Average

B. Dependency ratios and spending

North Africa and 30 15 58 4 3

Bangladesh Public employees only. 2.6 3.5

Hong Kong Dual universal and social assistance for residents. – –

Retirement Ages Contribution Period Years

China 60 55/50 15 15 55/45 if arduous;

India (1) 55 55 – – Lump sum if involuntary removal Provident Fund

Korea 60 60 20 20 Retirement test below 65 Full pension

Source: United States Social Security Administration, 1999.

Percentage of gross wage Percentage of total labour costs

China 20.0 4.0 24.0 36.0 18.0 27.0

Source: Palacios and Pallarès-Miralles (2000).

Singapore. There is also a relatively high level of reliance on employer

Pension spending as Pensioners as %

well as in Korea and Singapore. In contrast, spending per capita appears to

The Chinese System in the Global Policy Context

committed for long-term investments, and pension funds can be used as

private savings and earnings. The objective is risk-diversification, a better

Issues and Questions

government’s commitment to ensure employment and incomes for urban

estimate is that pension spending could reach around 3 percent of GDP by

aggregate, government subsidies to social security programmes (around

such redistribution among those who would be net contributors. This

level, while continuing to provide adequate retirement incomes. This issue

Davis, D. (1988) ‘Unequal Chances, Unequal Outcomes: Pension Reforms and

De la Protection d’Entreprise à la Protection Sociale: Réforme

De la Protección en la Empresa a la Protección Social. La

Australian Department of Family and Community Services, a Senior Research

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