Extending social security coverage to the rural sector in China
- Helpful comments from David Rajnes and two reviewers are acknowledged. This article is supported by the Fundamental Research Funds for the Central Universities and the research project Social Security Actuarial Research (11JJD840017).
In late 2009 China launched an innovative, voluntary programme that by 2011 had extended pension coverage to 326.4 million people in the rural sector, including contributors and beneficiaries. It requires one contribution per year and provides a flat-rate benefit and a contributions-related benefit through a contributory individual account, with a government guarantee that the benefit will continue for life. The programme encourages participation of persons who do not pay income taxes, and thus have no tax incentive to participate, by providing substantial government subsidies. As a further incentive, old-age benefits are provided to older parents when all their adult children participate in the contributory programme.
L'extension de la couverture de la sécurité sociale au secteur rural chinois
Fin 2009, la Chine a lancé un programme volontaire innovant qui, fin 2011, avait permis d'étendre la couverture de la sécurité sociale à 326,4 millions de personnes – cotisants et bénéficiaires – résidant en milieu rural. Ce dispositif permet de percevoir, en contrepartie d'une cotisation annuelle, une prestation forfaitaire et une pension liée aux cotisations versées sur un compte individuel. En outre, la poursuite du versement jusqu'au décès est garantie par l'Etat. Des subventions publiques relativement élevées ont été prévues pour favoriser l'adhésion des personnes non imposables, qui n'ont pas d'intérêt fiscal à s'affilier au dispositif. Un autre mécanisme incitatif permet aux parents âgés dont tous les enfants adultes sont affiliés au régime contributif de bénéficier d'une pension de vieillesse.
Extensión de la cobertura de la seguridad social al sector rural chino
A finales de 2009 China puso en marcha un programa innovador, de carácter voluntario, gracias al cual en 2011 la cobertura de las pensiones se extendió a 326.400.000 de personas en el sector rural, incluidos cotizantes y beneficiarios. Este programa exige una cotización anual y proporciona una prestación de importe fijo y una prestación relacionada con las cotizaciones por medio de una cuenta individual contributiva, que el Estado garantiza de por vida. El programa alienta la participación de las personas que no pagan impuestos sobre la renta y, por lo tanto, no tienen ningún incentivo fiscal que les haga participar, proporcionándoles importantes subsidios gubernamentales. Otro incentivo consiste en prestaciones de vejez que se conceden a aquellos padres mayores cuyos hijos mayores de edad participan en el programa contributivo.
Ausweitung der Deckung durch die soziale Sicherheit im Landwirtschaftssektor Chinas
Ende 2009 lancierte China ein innovatives freiwilliges Programm, durch das die Rentendeckung bis 2011 auf 326,4 Millionen Menschen – sowohl Beitragszahler als auch Leistungsempfänger – im landwirtschaftlichen Sektor ausgeweitet werden konnte. Bedingung ist ein Beitrag pro Jahr, und dafür bietet das Programm eine Pauschalleistung sowie über ein beitragsabhängiges individuelles Konto eine Leistung je nach Beiträgen, deren lebenslange Auszahlung die Regierung garantiert. Das Programm setzt mit den umfangreichen staatlichen Beihilfen einen Anreiz für Personen, die keine Einkommenssteuern zahlen und deshalb nicht durch steuerliche Anreize erreichbar sind. Als weiteren Anreiz erhalten Eltern im fortgeschrittenen Alter Rentenleistungen, wenn alle ihre erwachsenen Kinder an diesem beitragsabhängigen Programm teilnehmen.
Пасширение охвата социальным обеспечением сельского населения Китая
В конце 2000-х годов в Китае стартовала инновационная программа добровольного пенсионного страхования, охват которой к 2011 г. составил 326,4 миллиона человек (получателей пособий и плательщиков взносов) из сельских районов. Программа предусматривает уплату одного взноса в год и предоставляет пособия фиксированного размера, а также пособия, привязанные к обьему уплаченных взносов через индивидуальные счета, при этом государство гарантирует пожизненную выплату пособия. Программа предусматривает серьезные государственные субсидии и предназначена для лиц, которые не платят подоходный налог и поэтому не имеют экономических стимулов к участию в государственных пенсионных программах. Кроме того, престарелым гражданам выплачивается пособие по возрасту, если их взрослые дети являются участниками программы с уплатой взносов.
توسعة الشمول بالضمان الاجتماعي لتغطية القطاع الريفي في الصين
في أواخر العام 2009، أطلقت الصين برنامجاً تطوعياً ابتكارياً يتم بموجبه توسعة الشمول بالتقاعد ليشمل 326.4 مليون شخص في القطاع الريفي بحلول 2011 بين مشتركين ومنتفعين. يتطلب هذا البرنامج اشتراكاً واحداً في السنة ويقدّم بالمقابل منفعة في شكل مبلغ جزافي واخرى متصلة بالاشتراكات من خلال حساب اشتراك فردي في حين تضمن الحكومة دوام هذه المنفعة مدى الحياة. يشجع البرنامج على مشاركة الأشخاص الذين لا يدفعون ضرائب دخل وبالتالي الذين لا يمكنهم التمتع بالحوافز الضريبية التي تقدمها الحكومة في إطار برامج الدعم الأساسي لتشجيع المواطنين على الاشتراك في نظام التقاعد. و و من ضمن الحوافز الاضافية التي أتى بها هذا البرنامج تقديم منافع الشيخوخة للوالديْن المتقاعدين بمجرد اشتراك جميع أولادهما البالغين في البرنامج.
Extensão da cobertura da seguridade social ao setor rural na China
No fim de 2009, a China lançou um programa voluntário e inovador que, por volta de 2011 teria ampliado a cobertura da seguridade social para 326,4 milhões de pessoas no setor rural, incluindo contribuintes e beneficiários. Exige uma contribuição anual e oferece um benefício de taxa fixa e benefícios proporcionais às contribuições através de uma conta individual do contribuinte, com a garantia do governo de que o benefício será vitalício. O programa encoraja a participação de pessoas que não pagam impostos de renda e, assim, não têm incentivo tributário para participar, oferecendo subsídios governamentais substanciais. Há um incentivo a mais, segundo o qual são concedidos benefícios para idosos aos pais idosos cujos filhos adultos participem do programa de contribuições.
China is undergoing a period of important changes in its provision of old-age benefits. At the start of 2009, less than 30 per cent of its adult population was covered by a social security old-age benefits programme, but in 2012 that figure had increased to 55 per cent (The Economist, 2012).
Like in many countries, until recently people living in rural areas in China generally did not participate in a social security programme providing old-age benefits. Traditionally, older persons worked as long as they were able. Those no longer able to work lived with their children or received financial support from their children, with the support in China traditionally coming primarily from sons.
In countries such as China, however, where birth rates have fallen rapidly and where many adult children in rural areas are moving to urban areas to work, the traditional support system for older persons may be weakening. As evidence of this, it has been found that families in rural China with fewer children and with fewer sons tend to save more for their retirement (Ebenstein and Leung, 2010). These changes increase the need for extending social security old-age benefit coverage to people living in rural areas.
In late 2009 China launched an innovative programme – the National Rural Pension Scheme – for rural residents. This programme is a major development in the provision of pensions in China. It has features – including, among others, voluntary membership, a single contribution per year, coverage for the parents of contributing participants, and contribution payments subsidized by government – that may provide lessons for other countries wishing to extend pension coverage to the rural and informal sectors. While voluntary programmes often have limited impact, this programme is succeeding in enrolling large numbers of people. This article discusses that programme.
The rest of this article is structured as follows. First, as background, it provides demographic and economic statistics about China and then discusses characteristics of workers in rural areas in China. To help understand the context in which the new rural pension programme operates, it then provides an overview of old-age benefits programmes in China. Following that, an analysis of the features and sustainability of the new pension programme for rural residents is offered. To provide an international perspective, the discussion turns to a number of programmes in other countries which in some respects have similar features and may provide lessons for China. It also discusses possible lessons for other countries from China's experience. Lastly, possible changes to the rural pension programme are considered, followed by concluding comments.
China: Demographic and economic background
This section provides the demographic and economic background relevant for understanding China's social security programmes. From 1990 to 2012, the total population in China increased from 1,143.3 million to 1,354.0 million (Table 1). Besides, the population is rapidly ageing. From 1990 to 2012, the ratio of population aged 0 to 14 to the total population decreased from 27.7 per cent to 16.5 per cent, while the proportion of population aged 65+ increased from 5.6 per cent to 9.4 per cent. According to demographic projections, by 2030 the population aged 65+ will be 16.2 per cent, and by 2040 it will increase to 22.2 per cent (OECD, 2009).
Table 1. Population distribution in China by age category, 1990–2012
Partly because of the migration of younger workers to urban areas, the old-age dependency ratio is higher in rural than in urban areas, with the difference projected to grow considerably in the future. It is predicted that the gap in old-age dependency ratios between rural and urban areas will widen from 4.5 per cent in 2008 to over 13 per cent by 2030, when the old-age dependency ratio will reach over one third in rural areas and 21 per cent in urban areas (World Bank, 2012).
The ageing of the population is occurring to some extent because the total fertility rate is only 1.21 per cent and the natural rate of population growth is 0.5 per cent. The sex ratio at birth is 117.7 males per 100 females, a result in part of the preference for male children and the one child policy that was initiated in 1980 (National Bureau of Statistics of China, 2013). Life expectancy at birth increased from 68.6 years in 1990 to 74.8 years in 2010. In urban areas it is higher than the national average. By the end of 2010, it was 80.2 years in Beijing and 80.3 years in Shanghai (National Bureau of Statistics of China, 2012).
In China, all people are registered (Hukou system) as being either in the urban or rural sector. Since the 1990s, China has experienced rapid urbanization, which is creating challenges for the registration system. According to the statistics presented in the China Statistical Yearbook (see Table 2), the urbanization rate (percentage of the population with urban registration) increased from 26.4 per cent in 1990 to 52.6 per cent by the end of 2012, which means that the population in urban areas outweighs the population in rural areas.1 By the end of 2012, about 711.8 million people had urban registration and 642.2 million had rural registration.
Table 2. Urban and rural population distribution in China, 1990–2012
In China, nominal GDP per capita was CNY 38,355 by the end of 2012 and the GDP growth rate of that year was 7.8 per cent. Agriculture accounted for an estimated 10.1 per cent of GDP in 2012. China had reserves of foreign exchange and gold in 2012 of USD 3.3 trillion, which is the largest in the world (National Bureau of Statistics of China, 2013). The per capita disposable income of rural residents and urban residents in 2012 was CNY 7,917 and CNY 24,565, respectively. An estimated 13 per cent of the population live in conditions of poverty, and older persons in rural areas have higher poverty rates than urban workers, rural workers and urban retirees (Cai et al., 2012). The unemployment rate in 2012 was 4.1 per cent (National Bureau of Statistics of China, 2013).
Characteristics of workers in rural areas in China
This section looks at the main contributors to, and participants in, the National Rural Pension Scheme: rural workers. Workers in rural areas in China share some characteristics in common with workers in rural areas in other middle- and lower-income countries. Having relatively low incomes compared to workers in urban areas in general, they earn income mainly by selling products produced on farmland and do not pay income taxes, while workers in urban areas generally do pay income taxes. Thus rural workers have no tax incentive to participate in social security or pension programmes.
Rural workers do not work only in agriculture; they may also work in other occupations, such as in small stores. The rural elderly depend far more than do the urban elderly on continued work in old age. Many rural workers continue working into their 70s, but income from work declines sharply for workers during their 60s. Family support becomes increasingly important as the elderly age (Cai et al., 2012).
For many rural families, the adult children are moving to urban areas to work. Many workers who are registered as part of the rural population have migrated to urban areas: the total number of people who live in areas other than their place of registration had reached 279 million by the end of 2012 (National Bureau of Statistics of China, 2013). The process of mass rural-to-urban migration can be seen in the rapid shift in living arrangements in rural areas, where the co-residence of rural elderly persons with their adult children fell from 70 per cent in 1991 to 40 per cent by 2006 (World Bank, 2012).
Differing from many countries, workers in rural areas in China commonly have bank accounts, which play an important role in the delivery of old-age benefits. Also, China has a strong culture of saving in banks, which is not present in many countries. This form of savings has in the past served as a substitute for financial savings through pensions. The average deposit level is high when compared to the average disposable income level in China. By the end of 2010, the average bank deposit amount of rural and urban residents counted together was CYN 13,305 per capita (National Bureau of Statistics of China, 2013).2 Individual savings thus play an import role in guaranteeing basic income security in old age.
Overview of social security old-age benefits programmes in China
China has three main social security old-age benefit programmes, covering three different groups of people. Urban areas have two old-age benefit programmes – the Urban Employees’ Pension Programme and the Urban Residents’ Pension Programme. The former is for people who have a formal job in urban areas with rural or urban registration, and the latter, started in 2011, is for people with urban registration who do not have a job.3 The National Rural Pension Scheme, which is the focus of this article, is for most people with rural registration.
National Rural Pension Scheme (NRPS)
Before 2009, relatively few people in rural areas qualified for a pension in old age (Yang, Williamson and Shen, 2009). In late 2009 China established the National Rural Pension Scheme (see Table 3),4 launching the programme in more than 300 counties on a pilot basis. The programme reached 23 per cent of counties by the end of 2010 (Mu, 2010), 60 per cent of counties by the end of 2011, and was expected to be operational in all counties by the end of 2012 (Yang, 2012).5 The scheme is sponsored by central government and run by the county or municipal government, with oversight from the Ministry of Human Resources and Social Security. Another voluntary national pension scheme for rural residents preceded this programme, but the contribution level and benefit level were low, the programme was not subsidized by the government, and the programme was not successful in covering a substantial portion of rural residents. The launch of the current programme was preceded by a period during which different pension arrangements were tried on a pilot basis in different parts of the country in an attempt to see which arrangement would work best (Cai et al., 2012).
Table 3. China's National Rural Pension Scheme, 2012
|Minimum contribution||CYN 100 a year, made as a single payment; higher in some provinces|
|Maximum contribution, central government rules||CYN 500 a year; higher in some provinces|
|Age of benefit entitlement||60 (men and women)|
|Flat benefit||CYN 55 a month; higher in some provinces|
|Average benefit for persons aged 60+||CYN 74 a month|
|Number of years for vesting||15 years of contributions|
|Per cent of counties covered at the end of 2011||60 per cent|
|Per cent of counties expected to be covered at the end of 2012||100 per cent|
Although the NRPS is structured as one scheme, it has two parts providing benefits to two different groups under different but related arrangements. The first part is a contributory scheme – participants must contribute in order to receive benefits when they reach age 60. The second is a non-contributory scheme for people who are currently aged 60+. The relationship between the two parts of the rural scheme is explained below.
All people with rural registration aged 16+, who are not students and who do not participate in another pension plan, can voluntarily participate in the NRPS. They can participate whether they work in a rural or urban area, whether they are employed or self-employed, and whether they work for pay or are in non-remunerated work. As shown in Table 4, participation in the scheme had grown from 103 million in 2010 to 483.7 million in 2012, with benefit recipients growing from 28.9 million to 133.8 million. The ratio of beneficiaries witnessed small variations from 2010 to 2012 (around 28 per cent).
Table 4. Coverage of the National Rural Pension Scheme, 2010-2012
Contributions to the scheme are not calculated on the basis of earnings and anyone meeting the age requirements can contribute. The central government has established minimum levels for contributions at CYN 100 a year. The lowest maximum contribution, set by the central government, is CYN 500 a year (approx. USD 80 in 2013), with only 5 per cent of participants contributing that amount (Dorfman et al., 2013b). Each county can decide the exact contribution range applying in its jurisdiction (Gao, Su and Gao, 2012).
Chinese residents in rural areas who choose to participate must register at their village government office, the lowest level of the hierarchy of government.6 It is to this office that they pay the entire contribution for the year as a single cash payment. At the end of the contribution period (month), the village government aggregates all the contributions and transfers these to the township government, which in turn transfers the contributions of all villages to the county government. Depending on local regulations, the rural pension fund generally is managed by the county government, but in some cities the municipal government is responsible. The future intention of central government is for the funds to be managed by provincial governments (Cai et al., 2012). Currently, the money is deposited in banks. The administrative expenses for the scheme are paid directly by local governments, which is a form of subsidy for the programme. Those expenses thus are not taken out of the contributions, which would reduce the amount of benefits.
Participants must contribute for 15 years in order to vest and be eligible to receive benefits at age 60. For participants who were older than age 45 when joining the scheme, to qualify for benefits they will have to contribute every year up to age 60 and then make a lump-sum payment to cover the shortfall in years (Cai et al., 2012).
The benefits for participants who have contributed a minimum of 15 years comprise two components. First, a basic benefit that is not means tested and is not financed by the contributions of participants. Persons who are aged 60+ can receive the basic benefit of CYN 55 a month if they are not receiving another pension and all their children are contributing to the rural pension scheme, regardless of whether the children are working. This amount equated to one tenth of the average monthly wage in rural areas in 2011 (Wang and Qing, 2012). This benefit represents the first time that the Chinese government has made a major financial commitment to a rural pension system (Shen and Williamson, 2010). The benefit will be adjusted for inflation, but the exact adjustment mechanism has not yet been determined (Cai et al., 2012).
In addition, a defined contribution benefit is provided based on the accumulation in the participant's individual account from the participant's contributions and accrued investment returns. That benefit is paid monthly and equals the individual account at age 60 divided by 139, which is the same factor used for calculating monthly pensions from the individual accounts in the urban scheme. Persons do not need to stop working to receive this benefit. The benefit payment is not limited to the amount in the individual account, but is guaranteed by the government for life, and thus is paid as an annuity. If the person dies before receiving the full amount in their personal account, the spouse receives the remaining amount; or the children in cases where the spouse is also deceased.
Urban Employees’ Pension Programme (UEPP)
Launched in 1984, the UEPP covers employed workers in urban areas. At present, government agencies and public institutions are not covered.
As shown in Table 5, participation has grown from 61.7 million employees in 1990 to 304.3 million employees in 2012, with beneficiaries accounting for 9.7 million and 74.5 million of these totals, respectively (National Bureau of Statistics of China, 2013). The proportion of beneficiaries among the total number of participants increased from 15.7 per cent in 1990 to 24.5 per cent in 2012.
Table 5. Coverage of the Urban Employees’ Pension Programme, 1990–2012
The contribution rate is 28 per cent of wages, of which the employee contributes 8 per cent to an individual account and the employer contributes 20 per cent to the social account for the basic pension. The contribution rates of 8 per cent plus 20 per cent are standards suggested by the central government, but the exact contribution rates can be decided by local government, and can be higher or lower. The contribution rates of Guangzhou city are 12 per cent for the social account and 8 per cent for the individual account, and they are contributed by employers and employees, respectively. Guangzhou has a considerably lower contribution rate for the social account because many younger migrants live in the city, so population ageing is less marked in this city. The contribution rates in Beijing are 20 per cent for the social account plus 8 per cent for the individual account. In Shanghai, which faces serious population ageing, the respective contribution rates in Shanghai are 22 per cent and 8 per cent. The 8 per cent contribution rate that workers make for the individual account does not vary across provinces, because the account is linked to the individual participant and is not affected by the province's age structure.
Workers must have 15 years of credits, based on years of contributions, to be eligible for monthly benefits when they retire. The retirement age is 60 for men and women working in certain professions, 55 for female managers, and 50 for other women. The retirement age is lower for those working in hazardous occupations.
The retirement benefit consists of two parts: a basic benefit and an individual account benefit. The basic benefit is calculated by multiplying the following two elements: i) a percentage determined by total contribution years, where one contribution year equals 1 per cent; ii) the average of the social average wage of the year prior to the employee's retirement age and the indexed wage of the employee. The social average wage used in this calculation is the average wage for the pooling area where the worker resides at the time of retirement.
The monthly benefit based on the individual account is the balance in the worker's individual account balance at the time of retirement divided by 139. Once benefit payments have started for a worker, initial retirement benefits are adjusted each year by an amount established annually by each provincial government. The adjustment is intended to take into account changes in wage and price levels and the financial health of the programme. There is no set formula for calculating the amount of the adjustment and it need not be the same in every province. According to statistics produced by the Ministry of Human Resources and Social Security (2012), the average monthly UEPP benefit level at the end of 2011 was CYN 1,721.
Urban Residents’ Pension Programme (URPP)
Launched in 2011, the URPP is a subsidized voluntary programme covering people with urban registration who do not have a job.
By the end of 2011, 5.39 million people participated in the URPP, of which 2.35 million were beneficiaries (Ministry of Human Resources and Social Security, 2012).
The annual contribution amount regulated by the central government varies from CYN 100 to CYN 1,000, divided into 10 levels by increments of 100. Participants can choose the contribution level. However, because the URPP is managed by the county or municipal government, the range of choice of contribution levels differs between areas. Local governments subsidize those who participate. The lowest subsidy level is CYN 30 per participant per year. Local governments can raise the subsidy level according to the health of their finances.
To receive monthly benefits, the participant must have 15 years of credits and be of retirement age. Those persons aged 60+ can receive the basic benefit from government without having contributed.
These comprise two parts. One is the non-contributory benefit – CYN 55 per person per month (local governments can raise the non-contributory benefit level according to the health of their finances). The other comes from the person's individual account, which depends on the contribution level of the participant. The governments pay the cost of the non-contributory benefit. In the richer and eastern provinces of China, the central government subsidizes 50 per cent of the non-contributory benefit, and the local government pays the remaining 50 per cent. In the poorer middle and western provinces, the central government pays 100 per cent of the benefit, removing the need for a subsidy paid by local government.
Features and sustainability of the NRPS
The NRPS differs from the UEPP and the URPP in important aspects such as contribution level, government subsidy, benefit age and benefit level. In what follows we analyse the NRPS's main features and the issue of its sustainability.
Government subsidy and participation incentives
Central government and local governments play an important role in the NRPS contribution and benefit payment process (Table 6). Local government provides a flat matching contribution to encourage rural residents to participate. The government matching contribution and the person's contribution are paid into the person's individual account. The contribution subsidy is CYN 30 a year, where the minimum contribution set by the central government is CYN 100 a year (approx. USD 16 in 2013). The lack of a tax incentive for rural residents to participate may explain in some measure the matching contribution. The government subsidy presumably improves the participation rate of the rural population in this scheme. Moreover, as participants younger than age 60 have to contribute for at least 15 years to receive a benefit, the government's continued subsidy represents an incentive for the continued payment of contributions by participants beyond 15 years.
Table 6. Government subsidy for participants of the National Rural Pension Scheme
|Subsidy object||Personal account||Basic benefit|
|All areas||Eastern areas||Central and western areas|
|Subsidy level||Local government subsidizes CYN 30 per year per capita||Local and central government pay 50 per cent of basic benefits respectively||Central government pays 100 per cent of basic benefits|
However, some commentators have argued that the matching contribution is too low to be effective in encouraging participation (Cai et al., 2012). Besides, the flat matching contribution does not act as a strong incentive for participants to pay a higher level of contribution. No matter the contribution level chosen by participants, they receive the same level of government subsidy. Thus, nearly half of participants make the minimum contribution (Dorfman et al., 2013a and 2013b).
Further, the incentives to rural residents to participate differ greatly at different ages. A person who is more than 15 years from benefit entitlement and whose parents are still working, has little incentive to participate. However, if the person's parents are aged 60+ the incentive is large. The requirement that all the recipient's children contribute is called “family binding”. This incentive may work particularly well in China, which has a strong tradition of adult children taking care of their older parents. If a participant contributes CYN 100 a year, and if his or her siblings do also, the parents can receive CYN 55 a month; or CYN 110 a month (CYN 1,320 a year) for a married couple. If older persons do not have children, they automatically qualify. The “family binding” requirement on the adult children to contribute is made by the central government, but enforcement is a local-level responsibility. At the local level, however, the incentive to receive the central government subsidy for benefits for people aged 60+ works against the strict enforcement of this requirement, so that some local governments may qualify all persons aged 60+. In light of this generous arrangement, and perhaps because of lax enforcement of the “family binding” requirement, it appears that most elderly persons in rural areas are receiving benefits.
In eastern areas of China, local government and central government evenly share the cost of paying the basic benefit. By contrast, in central and western areas, the central government pays 100 per cent of the basic benefit. These differences occur mainly because local governments in eastern areas can bear this share of the cost. Policy simulation shows that both central government and local government can afford to finance the basic benefit.7
Contribution level and benefit level variations
While most small counties use the government minimum standards (CYN 100 to CYN 500 a year, with CYN 100 increments) for contribution levels, variation above those standards is permitted and occurs in some counties and cities that have a higher standard of living. As examples of regional variation in contribution levels, in Wuhan city the minimum annual contribution is CYN 200 and the maximum annual contribution is CYN 1,200, while in Shanghai the minimum and maximum annual contributions are CYN 500 and CYN 1,300 respectively. In both Wuhan and Shanghai, increases in contributions are permissible between the minimum and maximum amounts in CYN 200 increments. In some prosperous provinces, maximum contributions of up to CYN 2,500 are permitted (Cai et al., 2012). For all areas, levels of contributions will be adjusted upward over time to reflect increases in income.
The regional variation in contribution levels is set at the level of the provincial government. China has 33 provincial-level governments; Beijing, Shanghai, Chongqing and Tianjin are four municipalities that are treated as provinces. Besides, two Special Administrative Regions (Hong Kong and Macao) are treated as provincial governments. Also, the responsibility for paying contributions is divided among provincial, municipal, and county governments, and the exact per cent sharing by different levels of local governments differs in different provinces.
Unlike most national social security programmes, in China, social security benefit financing differs by region and it also involves financing in part by local governments. Localities can increase the benefit amount above CYN 55 a month if they have the financial resources to do so. The average benefit received by beneficiaries is CYN 74 a month (Yang, 2012).
A comparison of two localities provides an indication of the degree of variation in benefit levels across regions. If a participant from a small village in the suburbs of Beijing, which is a relatively high-income area, joins the pension scheme at age 20, when he or she reaches age 60, a monthly benefit of around CYN 270 will be paid from his or her personal account plus a government subsidy of CYN 280 per month through the basic benefit, as well as other bonuses. In total he or she will receive about CYN 600 per month (Yang, 2012). By contrast, in some districts of Wuhan city, those rural residents who are aged 60+ receive the basic non-contributory benefit (CYN 100 per month or CYN 1,200 per year). The basic benefit is not enough to meet the basic living needs of the elderly, especially in developed areas. For instance, the average per capita expenditure for food by rural residents in Wuhan was CYN 3,068 per year in 2011 (Statistical Information of Wuhan, 2012).
Both men and women can receive benefits from the NRPS at age 60. By contrast, although the retirement age is 60 for men and women who work in certain professions, it is age 55 for female managers and age 50 for other women covered by the UEPP. Also, these ages for benefit receipt are the mandatory retirement ages for most urban workers. Only a small percentage of urban workers are exempt from these requirements, for example some university professors. In addition, workers in hazardous or dangerous occupations can qualify for benefits up to 5 years earlier than these ages. The exception provided for workers in hazardous or dangerous occupations does not apply to workers covered by the NRPS. Research suggests that the effective retirement age in urban areas, for men and women combined, is age 53 (Sin, 2005), while in rural areas benefits cannot be received until age 60. The benefit eligibility age in the NRPS is thus considerably higher than in the urban pension system.
The 10-year difference (age 50 versus age 60) in the age of entitlement to benefits for women covered by the NRPS compared to those covered by the urban pension system is not justified by a difference in life expectancy. People in rural areas have lower incomes than people in urban areas, and presumably also have lower life expectancies. Clearly, the higher pension age in the NRPS makes the rural pension system less costly than the UEPS. However, the NRPS retirement age of 60 is actually in keeping with current practice in other countries, more so than are the early retirement ages in the UEPS. It is in line with a global trend to raise the retirement age for women to equal that of men.8
Currently, the NRPS is performing well from a financial perspective. As shown in Table 7, from 2010 to 2012, the revenue, balance (difference between revenue and expenditure), and accumulation of this scheme increased significantly.
Table 7. Balance of the National Rural Pension Scheme, 2010–2012 (CYN billion)
The divisor of 139 is the key parameter in determining the generosity of the individual account benefit. Thus, in assessing the financing of those benefits, it is important to determine whether that divisor provides benefits that are adequately financed, or alternatively, whether the benefits are overly generous. When financial planners in the United States advise individual account holders as to the sustainable amount that a retiree can withdraw from an account without overly risking that they will run out of money, they often advise that a retiree can withdraw 4 per cent of the initial account balance, adjusted for inflation, each year (McKenzie and Turner, 2012). That advice depends on the life expectancy of the individual and the expected rate of return received on the account. It would be a lower percentage for longer life expectancy and a lower expected rate of return. In China, the life expectancy at older ages is shorter than in the United States, but the expected rate of return is also lower, with the two factors having effects that offset to some extent.
The divisor of 139 for monthly benefits is equivalent to a divisor of 11.6 for annual benefits, which is equivalent to withdrawing 8.6 per cent of the initial account balance each year. Thus, it appears that the benefit divisor of 139 should be increased if the goal is to have a system that is financed primarily by the contributions of participants. That change would result in lower benefits, but would be more consistent with a sustainable, self-funding pension system. By one analysis, county governments will be liable for 40 per cent of the payments from the individual account pensions (Herd, Hu and Koen, 2010).
The experience with the urban pension system may provide lessons for the rural pension system with respect to the financing of the individual accounts. The pension for persons in urban areas also has the twin features of a basic benefit and a contributory individual account. However, the government has not segregated the money in the individual accounts from other social security funds, and has in fact spent much of the funds in the individual accounts, now in essence converting those accounts to notional accounts to which interest is credited (The Economist, 2012).
The government could contribute to the social account for a rural resident a total of CYN 450 over 15 years (CYN 30 a year) and that person receive the basic benefit, financed by the county government, of CYN 660 a year (CYN 55 a month), starting at age 60. Thus, the “break even” point, where the participant had received as much in benefits as the government had contributed, would occur in less than a year. This calculation indicates that the government heavily subsidizes the basic benefit beyond the government's initial contribution of CYN 30 per year. Thus, the benefit is not advanced funded, but will require government subsidies in the future when those benefits are paid.
In 2011, 61 per cent of the total revenue for the rural pension system came from government subsidies (Wang and Qing, 2012). This figure presumably will rise in the future as more participants eventually qualify to receive benefits. The individual pays for none of the basic benefit for parents and for none of his or her own basic benefit. The cost to the central government of providing the non-contributory benefit to all the 100 million rural persons currently aged 60+ would be about 2 per cent of the government budget (Shen and Williamson, 2010). This percentage presumably will decline over time as the current cohort of retirees who are receiving non-contributory benefits will gradually be replaced by a cohort of retirees that will be receiving benefits from the new contributory programme. The basic benefit the new cohort receives will still be entirely financed by the government, but that financing will presumably come in part from the amount currently being contributed by the government to meet that future expense.
The government also subsidizes a substantial portion of the individual account benefit. This cost is borne by local governments. Local governments differ considerably in their level of economic development, and thus their ability to bear this cost. Overall, individual contributors will only pay at most 18 per cent of the cost of their pensions, with the government paying the rest (Herd, Hu and Koen, 2010).
The government is thus incurring what appear to be substantial unfunded liabilities for the rural pension system. In addition, it has substantial unfunded liabilities for the urban pension system (Reuters, 2012). Thus, it appears that reforms may be needed in these systems to reduce their liabilities and increase their revenues. The central government has large non-pension reserves that could be used in the future to help pay for these liabilities (The Economist, 2012).
In comparison to programmes in other countries, the total cost of the rural pension programme in China is relatively low at 0.22 per cent of GDP. This compares, for example, to 0.38 per cent of GDP for a means-tested programme in Chile (Herd, Hu and Koen, 2010). Thus, the programme combines a relative low cost, due to low benefits, and a high degree of government subsidy, due to the relatively small amount contributed by participants.
In China, the rate of return on provincial urban pension funds has averaged 2 per cent over the last 10 years, which is less than the rate of inflation over that period. However, in 2012 the national government announced a pilot programme that would permit the 13 provinces that manage pension funds for individual accounts to invest in domestic equities. The Council that manages the National Social Security Fund, which is China's public pension reserve fund, will act as the trustee and principal investor of each of these funds. The National Social Security Fund was established in 2000 to support China's future social security expenditures. The amount invested this way could be as much as CYN 360 billion (approx. USD 57 billion), roughly 20 per cent of the funds’ combined total assets under management (SSA, 2012).
In order to place China's new social security programme for rural workers in a broader perspective, this section presents international comparisons with benefit programmes that are similar in some aspects to the NRPS.
Comparison with unemployment insurance in the United States
Some of the complexities of the Chinese pension system arise due to regional differences in the programme. Those regional differences may be understood by recognizing that they have some similarities to the unemployment insurance system in the United States. While that is not a pension programme, it shares the similarity with the NRPS in China in that it differs across the states.
In the United States, unemployment insurance is based on a dual programme of federal and state laws. Each state administers a separate unemployment insurance programme, which must be approved by the Secretary of Labor (federal government), based on federal standards. A combination of federal and state law determine which employees are eligible for compensation, the amount they receive, and the period of time benefits are paid (Legal Information Institute, 2012).
Comparison with the Mbao Pension Plan in Kenya
In some countries, voluntary pension systems have been provided to informal sector workers as a substitute for mandatory social security programmes. Both the NRPS in China and the Mbao Pension Plan in Kenya are new, innovative pension plans that are succeeding in enrolling rural or informal-sector workers (Kwena and Turner, 2013). Both are voluntary plans for persons who typically do not pay income taxes, and thus do not have a tax incentive to participate. In both plans, contributions are not tied to earnings, and participants can determine the amount of their contributions, within limits.
Both have innovative approaches for dealing with small contributions, but their approaches can be considered to be exact opposites. In Kenya, participants can make numerous small contributions of as little as the equivalent of USD 0.25. In China, participants make a single annual contribution equivalent to as little as USD 16.00. Both plans have extra incentives for participating. In Kenya, workers can use their pension account as security for obtaining a mortgage for purchasing a house.
Comparison with pension programmes for rural workers in other countries
The contributory part of the NRPS has similarities to programmes for rural workers in some other countries. Extending social security programmes from the formal sector to the informal sector often does not work. This is partly because contribution rates, which may be reasonable for the formal sector, often appear to be too high a hurdle for participation in social security for workers in the informal sector. For this reason, some countries have separate programmes with lower contribution rates for the informal sector. In Tunisia, for example, agricultural workers have a lower contribution rate than urban workers. In the past, efforts to extend coverage to the informal sector have relied on a tax being levied based on some assessment of the earnings of those workers. The new programme in China differs from past efforts in most other countries in that it is not tied to the earnings of workers.
Another trend in providing pensions for low-income persons in old age is to provide non-contributory pensions. The non-contributory benefit for older persons and the basic benefit part of the contributory programme in China have similarities with some programmes for rural workers in other countries. A number of middle- and lower-income countries have established non-contributory, often means-tested, old-age pensions to provide benefits to poor people in old age and to extend the coverage of social security programmes (ILO, 2010). This trend has been motivated by an attempt to reduce poverty in old age and appears to be gaining greater acceptance around the world. These programmes are sometimes called social pensions. Countries with social pensions include Botswana, Brazil, India, Lesotho, Mauritius, Namibia, Nepal, and South Africa. Chile adopted such a programme in 2008, and also established a minimum benefit for participants who had contributed to the mandatory individual accounts and met certain other requirements. In 2008, Belize extended to indigent older men its non-contributory poverty programme that already applied for indigent older women. The Maldives adopted a programme in 2010. Peru and the Philippines both adopted programmes in 2011 (Turner and Rajnes, 2014). The non-contributory pension for older persons in China is similar in some respects to a social pension, but it differs in that it requires the contributions of children and it is not means tested.
Possible lessons for other countries
The NRPS has several innovative features that could provide a model for other countries seeking to extend old-age benefit coverage to workers in the rural and informal sectors. It is a voluntary programme, but it encourages coverage of workers who do not pay income taxes, and thus have no tax incentive to participate, through the provision of government subsidies. As a further incentive, old-age benefits are provided to the parents of participants who contribute, when all the adult children in a family are participating in the contributory programme.
An important feature of the NRPS is that the contribution rate is much lower than in the programme for urban workers, where the rate is 28 per cent of pay. The NRPS contribution is made by the individual, supported by a matching contribution made by government, with no contribution by employers. The programme covers self-employed workers and also non-workers.9
The NRPS provides a redistributive benefit, which is a flat-rate benefit, and a contributions-related benefit. To facilitate contributions, it requires only a single contribution per year. The government provides a guarantee for benefits, so that individuals will continue to receive benefits even if they have exhausted the amount in their individual account. The government essentially annuitizes the individual account at a generous rate. This guarantee will require subsidies by the government.
Assessment and possible future changes in China
In particular because the social security programme for rural residents in China is so new, it can be expected that over time changes will be made to improve its functioning. Even though the system has grown rapidly, some aspects of its design have kept levels of participation below what it otherwise might have been. Although many people in rural areas may not be well informed about the NRPS, a disincentive for those who do know about it is that the assets in the system are invested entirely in one-year government bonds, which provide a rate of return that is less than the rate of inflation. In this respect, the participants in the system provide a reverse subsidy from participants to the government, but this reverse subsidy is more than offset by government subsidies for benefits. A more transparent arrangement might be to raise the interest rate on the assets in which the system invests, but also at the same time raise the contributions required of participants. An increase in participant contributions would help with the sustainability of the system, but would need to be balanced with the desire to have a high level of participation in a voluntary system. In addition, some rural residents may have chosen not to participate because they mistrust government programmes, suggesting a need to develop a strategy to encourage greater trust in the NRPS.
A possible change in financing would be to shift the burden from county governments to the central government, to reduce the burden on lower-income parts of the country. Specifically, rural areas are set to age at a greater rate than urban areas, so the burden of ageing would be shared more evenly across the country (Herd, Hu and Koen, 2010).
A change that has been discussed in China is combining the three different social security old-age benefit programmes. An intermediate change would be to facilitate the transfer of contributions and credits of years toward vesting between the three programmes. In 2011, a law was passed to facilitate workers relocating to different geographical areas by allowing them to transfer their accrued rights to the programme in the new area of residence (SSA, 2011). Another possible change is that contributions could be permitted, or required, to be paid more frequently than once a year. The incentive structure would be improved if the basic benefit of CYN 55 a month was increased for years of contributions beyond 15. For example, it might be increased by CYN 3 a month for each additional year of contributions, so that a person who had contributed for 16 years would receive an additional CYN 3 a month, for a basic monthly benefit of CYN 58.
At some point in the future, a possible change would be to allow participants who wished to do so to choose the investments for their individual accounts. Making this change, however, would then raise issues concerning financial literacy that have arisen in other countries where workers choose the investments for the funds held in their individual accounts (Turner and Muir, 2013).
Recognizing that China's economic success will enable continuing improvements in life expectancy, a policy could be enacted so that future retirement ages for benefit receipt will be higher than those currently in use. This change might be enacted years in advance of its implementation to enable workers to plan for the change and designed so that it would only be applied if life expectancy increased as expected.
In late 2009 China launched an innovative programme, the National Rural Pension Scheme, which by 2011 had already extended pension coverage to more than 326.4 million rural residents, including contributors and beneficiaries. The NRPS is thus a major development in the provision of pensions in China. It combines a voluntary contributory programme for current participants and a non-contributory programme for the parents of those participants. The contributory programme provides a flat-rate benefit and a contributions-related benefit through an individual account.
The financing of the scheme varies across regions, with the central government providing all of the financing for the basic benefit in the central and western parts of the country, but only half of the financing (with local government providing the other half) in the more prosperous eastern provinces. The level of contributions made by participants and the level of benefits they receive also vary across regions. Albeit designed as a voluntary programme, it encourages coverage of workers who do not pay income taxes, and thus have no tax incentive to participate, by providing substantial government subsidies. Additionally, old-age benefits are provided to the parents of participants who contribute, when all the adult children in a family are participating in the contributory programme. To facilitate contributions, it requires only a single contribution per year. Participants can choose the level of contributions from a range, but allowing for a relatively small contribution.
While social security old-age benefit programmes are generally uniform national programmes, at least for the group of workers they cover, the NRPS in China has regional variations that make the programme more complex, but that also relate to regional differences in the country's standard of living. Overall, its features may provide lessons for other countries wishing to extend pension coverage to the rural and informal sectors.
Usually, the urbanization rate would be measured as the percentage of the population living in urban areas. But when the urbanization rate is calculated in China, the rural population and the urban population refer to those residents with rural and urban registration, respectively. The urban population does not include the population that lives in the urban areas with rural registration.
In 2013, CYN 1,000 = USD 160 approx.
We use the term Urban Residents’ Pension Programme in this article as it is terminology used in Chinese policy regulation. Actually, the Programme was established for people with urban registration that are not employed.
Some translations refer to the NRPS as the National Rural Pension “Plan”.
The Chinese population aged 60+ was 193.9 million and accounted for 14.3 per cent of the total population by the end of 2012. China is therefore home to approximately 21 per cent of the world's 60+ population (UNDESA, 2007). Thus, social security old-age benefits programmes in China play an important global role in providing benefits for older persons. In turn, given that about 70 per cent of China's population aged 60+ live in rural areas, about 14 per cent of the world's population aged 60+ is covered by China's National Rural Pension Scheme.
From lowest to highest, the levels of government in China are village government, township government, county government, municipal government, provincial government and central government.
Projections suggest that the proportion of annual central government financial subsidy to annual central government fiscal revenue varies from 1.2 per cent to 1.5 per cent from 2010 to 2053; the corresponding proportion of local government financial subsidy to annual local government fiscal revenue varies from 0.1 per cent to 0.7 per cent (Xue, 2012).
For a discussion of this trend in OECD countries, see Turner (2007).
The term “non-worker” includes those persons engaged in non-remunerated forms of work.