Historical debt: a critical issue in financing policy on unemployment insurance and pension under economic transition.

• Author: Yu, Wei

Abstract

This paper examines problems in financing pension and unemployment insurance under China's economic transition. Before the economic reform, the state government provided social safety programs that were financed through an economic plan. Contributions to these social programs were implicitly transferred to the State through profit of state-owned-enterprises (SOEs). The economic reform shifts financial responsibility of these programs from the government to enterprises. Because many SOEs are unable to finance pension and unemployment insurance, middle-aged and retired SOE employees lost benefits from those programs although they contributed before the economic reform. This created a historical debt. This paper shows that historical debt is the key to solve financing problems in unemployment insurance and pension. Without wealth redistribution through both central and local governments, a large number of middle-aged and retired SOE employees would become victim of the economic reform.

Introduction

Since 1978 when economic reform began, China's economy has been growing rapidly. From 1981 through 1990, the annual average increase in Gross Domestic Product was 10.1%; from 1991 through 1995, the average increase was 11.6% (China National Statistics Bureau, 1996: p. 30). Although reform has improved considerably the average standard of living, it also profoundly changed the country's industrial structure. State-Owned Enterprises (SOEs) have declined in productivity while other types of enterprises (private, collective, foreign investment) have grown dramatically (Tian, 1997: pp. 219-231). Among the enterprises registered at township or higher government levels, SOEs accounted for 72% of total output in 1985, but only 47% in 1995. During the same period, the total share of output by enterprises with foreign investment, including investment from Hong Kong and Taiwan, jumped from almost zero to 16.5% (China National Statistics Bureau, 1996: p. 30).

Implications under such a sharp change in economic structure are far beyond the boundary of economic reform. The political legitimacy has shifted from communist ideology to economic performance (Wu, 1999: p. 1). The unemployment and social security programs discussed in this paper reflects one of many aspects affected by changes of political legitimacy. Under the old socialist regime, financing social safety programs was built into the central planned economy. The political legitimacy was very simple: everyone contributed to the State and the government would take care of everyone through a centrally planned economy. When the political legitimacy is shifted, financing policy for social safety programs was completely changed. The middle-aged and older generations suffered substantially from such a sharp policy shift.

The major policy change in financing social safety programs is shifting financial responsibility from the government into enterprises. Because enterprises owned by private, collective, or foreign investors are new and have much younger employees than SOEs, this policy shift created a heavy burden to SOEs. According to Xinhua News, in Shanghai, for every 100 yuan paid to an employee by SOEs, the SOEs must pay 46 yuan for fringe benefits including pension contributions, unemployment insurance, health insurance, housing fund contribution, public transportation restructuring, etc (Zhong and Luo, 1997: p. 1). Management of the government and SOEs in Shanghai is the most efficient in the nation. If SOEs in Shanghai can barely support the social programs, other SOEs across China may not be able to afford such a system at all.

Under the new economic policy, many SOEs are in financial insolventy and unable to support social safety programs for their employees (Li, 1998: pp. 4-7). A large number of middle-aged and older employees are laid off and many retired SOE employees are left without pension (Yang, et al., 1998: p. 213). These people become a vulnerable cohort under the economic reform and fall into poverty under the rapid economic growth. The economic reform and new financing policy in social safety programs, in fact, created a historical debt. Contributions made by these people under the planned economy from 1950 through 1980 are not reflected in the new financing policy for social safety programs. Middle-aged and retired SOE employees strongly feel that they are robbed by the policy shift (Deng and Zhang, 1998: p. 2).

This paper discusses the basic problems of financing unemployment and pension insurance in urban China. It focuses on effects of wealth redistribution under the policy change in financing these programs on middle-aged and retired SOE employees. It points out that it is necessary for both central and local governments to jointly finance social safety programs to eliminate the impact of the historical debt created by economic transition on the middle-aged and retired SOE employees.

Unemployment Insurance

Communist Ideology and Socialist Unemployment

The communist party was developed during the industrial revolution in the 19th century. Marx and Engels observed the industrial revolution in 1840s in England (Engels, 1845 [1987], 1885 [1971], and Marx and Engels, 1953) and developed the communist ideology for a better society (Marx and Engels, 1848 [1992]). Marx and Engels pointed out that under the capitalism, workers were forced to "sell themselves piecemeal" to the bourgeoisie; they "live only so long as they find work, and ... find work only so long as their labour increases capital ... [They] are consequently exposed to all the vicissitudes of competition, to all the fluctuations of the market" (Marx and Engels, 1848 [1992], p. 9). Under the influence of their theory, a group of socialist countries were established and capital was nationalized and shared by all citizens. The theory predicts that under such a new production relation, labor productivity would be greatly improved and a fast growing economy will be shared equally by all.

In theory, a socialist state provides all citizens with an equal opportunity of working (universal employment), and thus provides everyone with social insurance through universal employment. The theoretical basis of a socialist economy is to let the state allocate resources in production, including human resources. In theory, therefore, unemployment should not exist under a centrally planned economy. But since the planned economy can not compete with the market economy, most socialist countries have reformed their economic systems and introduced market mechanisms. As a result of market adjustment, unemployment appears.

Current Financing Plans to Assist SOE Layoff

Establishing an unemployment insurance program cannot solve unemployment in major industrial cities. In many such cities, SOEs laid off 10% to 30% of the total SOE labor force (China Daily, 1998, Zhong and Luo, 1997: p. 1.). Because SOE layoffs are so extensive, simply pooling SOEs with other enterprises to finance unemployment insurance is equivalent to asking other enterprises to rescue the SOEs. Also, in the planned economy, much of the profits of SOEs were disbursed to...