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Aging and Old-Age Support

Still another factor that exacerbated the demographic pressures faced by the state was the urban retirement system. When the central planning economy was established in the 1950s, the government created separate systems of social benefits for working people in urban and rural areas. Urban employees were entitled to receive essentially free healthcare, subsidized housing, and a pension after retirement. Basic healthcare for rural residents was provided through a cooperative medicine system subsidized by people’s communes. Housing was privately owned in the countryside. But there was no pension for those with rural resident status after they entered old age.

The official retirement age for the urban workforce was set at fifty for ordinary female employees, fifty-five for female administrative personnel (known asganbu or cadres), and sixty for male employees.[1] After retirement an urban employee could receive a lifelong pension equivalent to 60%-100% of his or her basic wage or salary, depending on rank, seniority, and type of work organization. Housing and healthcare benefits would continue to be provided after retirement and to be extended to the dependent members of the retiree’s immediate family. All the costs of these social benefits were borne by the work units of urban employees.

When the system was established in the 1950s, the work-age population was very young, as noted above. The urban sector absorbed only a small fraction of the total workforce. More importantly, the resource allocation bias under the central planning system throughout the Mao era provided the necessary funding for various urban work units to sustain the social benefits to their employees and employees’ families.[2] Over time, however, these conditions changed. Although proportionally the majority of China’s workforce continued to be deployed in the rural sector, the urban sector experienced significant growth under central planning. Into the 1980s, employees who had joined the urban workforce in the 1950s began to enter retirement, and their number steadily rose throughout the decade and beyond.[3] Table 2.4 shows that from 1978 to 1998 the total number of urban retirees increased by more than eleven times—from 3.1 million to 35.9 million. Unlike subsequent cohorts, these retirees were full-benefit recipients on the old social welfare scheme. Financing the related expenses became a growing challenge to the government, as can be seen from the rising costs in absolute and relative terms shown in the table.

Adding to the challenge was the fact that the old system was based on provisions by urban work units in the public sector, where the workforce- retiree ratio declined from 30.3 to 1 in 1978 to 4 to 1 in 1998. Starting from the mid-1980s, most of these organizations experienced a transition from central planning to markets (Naughton 1995). They faced more uncertainties

Table 2.4 Urban retirees on old (mainly work-unit based) benefit schemes, 1978-1998

Year

Retired staff and workers (zhigong)

Expenditure on retirees

Total

(millions)

Share (%) of public sector

Ratio of workforce to retirees

Amount

(100

million

yuan)

Expenses equivalent to % of fiscal spending

% of costs borne by work units (state-owned)

i978

3.i

i00

30.3

1979

6.0

i00

16.7

1980

8.2

i00

i2.8

86.8

7.1

92.4

1981

9.5

i00

ii.5

i0i.3

8.9

93.8

1982

ii.3

i00

10.1

ii7.5

9.6

94.8

1983

i2.9

i00

8.9

i37.3

9.7

95.7

1984

i4.8

99.7

8.0

i6i.5

9.5

96.5

1985

i6.4

99.7

7.5

2i0.2

i0.5

96.8

1986

i8.i

99.7

7.1

257.i

ii.6

97.7

i987

19.7

99.7

6.7

3i5.6

i3.9

97.7

1988

2i.2

99.6

6.4

426.3

i7.0

97.0

i989

22.0

99.5

6.2

505.4

i7.8

97.1

1990

23.0

99.5

6.i

622.6

20.i

97.7

i99i

24.3

99.5

6.0

735

2i.6

98.0

1992

26.0

99.3

5.6

896.7

23.8

98.i

i993

27.8

98.5

5.4

ii47.2

24.3

98.i

i994

29.3

97.9

5.i

i2i8.9

20.6

98.0

1995

30.9

97.7

4.8

i522.4

2i.8

98.2

1996

32.2

97.5

4.6

1797.7

22.i

98.5

i997

33.5

97.3

4.4

2043.8

2i.5

98.4

i998

35.9

94.4

4.0

2330.9

20.4

98.3

Note: “Staff and workers” includes employees in state-owned enterprises, urban collective enterprises, share-holding companies, and foreign-invested companies.

Sources: LSYC1996,1998,1999, 2000; SCTE; CTEAPPY2009.

in government funding and sharp declines in profits due to both intensifying competition and moral hazard in the behavior of supervising officials (chapter 4). For many of them, supporting rising numbers of retirees became an increasingly unbearable undertaking.

To limit the social benefit responsibilities for urban employees, the government replaced the lifetime employment system with a contract employment system in 1986. But that change did not have any retroactive effect on existing public sector employees, who totaled 105 million in 1985 (CSY2011, 45) and were slated to retire in the following decade and beyond. Nonetheless, in the meantime the government also began to experiment with pilot programs that aimed to transfer the provision of social benefits from urban work units in select locales to the corresponding local governments. What resulted from such experiments, however, was a shift of the administrative work of retirement account management to the local labor authority but not the financial responsibilities internalized to the public enterprises concerned. With the number of urban retirees and the cost of financing them continuing to rise, the government decided in 1991 to move to a system where the cost of financing pensions, bundled with that of financing healthcare, would be based on a combination of contributions from individuals, enterprises, and the government and the administrative work (concerning revenue collection and benefit dispensation) would be run by a unified authority.[4] Details of the new system were not finalized until 1997-1998,[5] when massive privatization of public enterprises began. It was first implemented in select sectors and locales and then gradually extended in the following decade to work organizations in the entire urban sector, including those outside the public sector.[6]

A proclaimed goal of the new social security system is to cope with the challenge of old-age support in face of China’s accelerated transition from a young population to an increasingly aging population. It is also said to be conducive to reducing inequalities in society. But a more practical purpose it has served is the creation of a new pool of funds that can be utilized to finance, with future beneficiaries’ contributions, the long-standing obligations of the government to retirees on the old scheme.[7] Indeed, since their inauguration virtually all the local social security funds have tapped to the fullest, and continued to rely on, the contributions in the individual accounts of employees on the new scheme. These people mostly work outside the public sector and are either years away from retirement or not yet eligible for full benefits.[8] What is important for the state is that their contributions have helped cover the dispensation of benefits to existing retirees, who are overwhelmingly former public sector employees covered by the old benefit scheme (Jia Yingzi 2008). By the time the new system was introduced in 1997, it had become clear that the state could no longer count on poorly performing urban public enterprises to continue their traditional role in social benefit financing. New sources of financing had to be found, expanded, and sustained. The new social security system, coupled with privatization, would enable the state to spread the responsibility beyond the public sector and create a buffer against an immediate crisis in socioeconomic governance in the face of changing demographics.

  • [1] When this rule was formulated in the mid-1950s, the life expectancy of the population was undersixty (Banister 1987).
  • [2] Aside from the inequalities associated with the urban-rural divide, there were also variations in theamount and quality of the social benefits among urban employees. More resourceful organizations, suchas centrally controlled SOEs, tended to have better benefits than those at the bottom of the hierarchyof urban work organization, such as collective enterprises under the purview of county governments.
  • [3] The positions vacated by retirees might have opened up some opportunities for new entrants intothe workforce, thus moderating the pressures on job creation. This is especially true in the 1980s, whenthe workforce of the urban public sector was still expanding. But the effect is likely to have faded subsequently, when the urban public sector experienced employment contraction, as noted above.
  • [4] The new system has been run mainly by local governments at the city/county level. In 2000 theNational Social Security Fund was established with a one-time allocation of seed capital (20 billionyuan) from the Ministry of Finance. It has since grown with IPO proceeds from SOEs listed on stockexchanges, lottery income, and investment returns. The main function of the fund is to provide backupsupport when the revenues of local social security funds are inadequate for covering spending.
  • [5] Under the new system employees are required to contribute up to 8% of their wages to a pensionfund, 2% to a healthcare fund, and 1% to an unemployment fund. Employers are required to makematching contributions equivalent to 20%, 6%, and 2% of the total wage bill to these funds respectively.Such contributions by employers are counted as operating costs. The implicit tax exemption constitutes the “contribution” from the government (Zhu Rongji 2011, 2:379). Upon retirement, employeeshaving contributed to the pension fund for fifteen or more years will be eligible to receive a pension(equivalent to some 20% of the local average wage), plus an amount calculated as a fraction of thesum of the cumulative individual contributions. After enrollment, they are also eligible for discountsand/or partial reimbursements for certain healthcare services and can get an allowance for limitedduration in the event of being unemployed.
  • [6] In 2007 the government announced a plan to extend the system to the entire rural sector by 2020.
  • [7] See, for example, the progress report on the new social security system presented by Zhang Zuoji,minister of labor and social security, to the Standing Committee of the National People’s Congress inOctober 2001 (http://www.npc.gov.cn/wxzl/gongbao/2001-12/12/content_5281324.htm).
  • [8] Under the new scheme a retiring employee who has not attained the fifteen-year threshold of cumulative contributions will not be eligible for a pension. Instead he or she will receive a lump-sum paymentequivalent to the cumulative contributions to the individual account. This rule effectively limits thenear-term pressures from new retirees for benefit dispensation, thereby creating an interim window foraddressing the shortfalls in the funding for retirees on the old scheme.
 
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