Some suggestions from the U.S. experience on how to establish a social protection system with Chinese characteristics.

• Author: Chu, George S.-F.

Abstract

This paper examines the Chinese social protection system within a broader framework. First, it points out some of the valuable U.S. experience. It then discusses policy implications that are relevant to the current reform in China. From the U.S. experience, ten suggestions are proposed on how to establish a social protection system with Chinese characteristics. Specially, this paper suggests that China (1) reform the social protection system gradually, (2) broaden and improve social assistance and welfare programs, (3) encourage the development of private insurance, (4) establish a social protection system with multiple layers, (5) determine insurance benefits based on basic needs, (6) ensure adequate funds for all social protection programs, (7) establish an income record system, (8) establish a poverty-line system, (9) establish a social protection trust fund commission, and (10) unify the management and administration of social protection programs.

Introduction

The social protection system of the United States has been evolving for many years. It has accumulated a vast amount of experience through path-breaking changes and reforms. Some of this experience is general and broad. Although it has emerged in the design of a social protection system of a developed country, it can be used to help formulate social protection policies for developing countries. Therefore, to the extent that the U.S. experience reflects basic principles of social protection, people in China should be able to learn from this in order to shorten the process of trial and error, and thus save a tremendous amount of time and money. In so doing, we should not ignore the differences in each country s social, political, and cultural backgrounds. We need to examine the development of the U.S. social protection system and selectively recommend those elements that are relevant to the special conditions existing in China.

There is a growing literature on the subject of social security reform in China (Deng et al., 1997; Hussain, 1994; Liu, 1991; Liu et al., 1994; Song et al., 1998; World Bank, 1997). However, most previous articles have focused on pension system and health-care reforms. Little has been done in other social protection areas such as social assistance, welfare programs, and private insurance. In this paper, we examine Chinese social protection within a broader framework. First, we point out some of the valuable U.S. experience that can help develop a better Chinese social protection system. We then discuss policy implications that are relevant to the current reform in China. From the U.S. experience, we propose ten suggestions on how to establish a social protection system with Chinese characteristics.

Reform the Social Protection System Gradually

The U.S. social protection system has evolved gradually over decades. Although politics was involved in the system development and expenditures on some programs at times exerted pressure on government fiscal imbalances, the system has not suffered serious consequences as in many other western countries. This is because the introduction of different types of benefits and the determination of benefit payments in the U.S. have been based on the actual economic status of the country. When the Social Security Act was first promulgated in 1935, for example, retirement benefits were limited to the worker himself/herself. In 1939, the Congress made the Old-Age Insurance system a family program when it added benefits for dependents of retired workers and surviving dependents of deceased workers. Benefits to husbands, wives, and widowers of 65 and over were started in 1950. The scope of the basic national social insurance system was significantly broadened in 1956 through the addition of Disability Insurance. Benefits were provided for severely disabled workers aged 50 or older and for adult disabled children of deceased or retired workers. Benefits to dependents of disabled workers were added in 1958. In 1960, the age-50 requirement for disabled-worker benefits was removed. The 1967 amendments provided disability benefits for widows and widowers aged 50 or older. The 1972 amendments provided for automatic cost-of-living increases in benefits tied to increases in the consumer price index, and created the delayed retirement credit. The 1977 amendments changed the method of benefit computation to ensure stable replacement rates over time. Earnings included in the computation were to be indexed to account for changes in the economy from the time they were earned. The 1983 amendments made coverage compulsory for federal civilian employees and for employees of nonprofit organizations. State and local governments were prohibited from opting out of the system. The amendments also provided for gradual increases in the age of eligibility for full retirement benefits from 65 to 67, beginning with persons who attain age 62 in the year of 2000. The 1994 amendments raised the threshold for coverage of domestic workers' earnings from $50 per calendar quarter to $1,000 per calendar quarter. Adjustments in benefit payments were also made gradually. Retirement benefits are an example. The average monthly payment for retired workers was $22.60 in 1940, $43.86 in 1950, $74.04 in 1960, $118.10 in 1970, $341.41 in 1980, $602.56 in 1990. In December 1995, the average monthly payment was raised to $745 (Social Security Administration, 1997). It is clear that a well developed social security system like that of the United States has been evolving through a long period of time.

Other programs also made gradual advances. In 1937, a public housing program was enacted for low-income people. In 1946, the National School Lunch Program was established for students from poor families. For federal civilian employees, programs were enacted providing group life insurance in 1954 and health insurance in 1959. The government started the Medical Assistance Program for the aged in 1960 and the Food Stamp Program for low-income families in 1964. One of the most important pieces of social legislation was the establishment of the Medicare program under the Social Security Amendments of 1965. The program provided for the medical needs of people aged 65 or older, regardless of income. The 1965 legislation also created Medicaid that provides medical assistance for persons with low incomes and resources. Public health insurance and nursing benefits to students were made law in 1965. In 1972, the State-administered cash assistance programs for the aged, blind, and disabled were replaced by the essentially federally administered Supplemental Security Income (SSI) program. The Women, Infant, and Children program was enacted to improve the nutrition of women, infants, and children. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 resulted in significant changes to public assistance programs. The Aid to Families with Dependent Children (AFDC) program has been replaced by block grants to the States for Temporary Assistance for Needy Families.

China is a developing country with the largest population in the world. Its per capita capital accumulation and labor productivity are relatively low. In addition, regional and sector differences exist in the level of economic development. Currently, China is moving towards a socialist market economy. Reform has been proceeding in both the economic and political systems. To develop a workable social protection system for China, Chinese characteristics should be recognized. On one hand, insurance coverage and premiums must consider the "needs" of reasonably protecting people's livelihood. On the other hand, benefits should depend on what can be supported by economic conditions. Policy makers must bear in mind of the unique situation that China is in currently and learn from the experience of the American system that is relevant to Chinese social protection reform. The U.S. social protection system has been evolving for many years. Chinese policy makers should not expect to establish and reform its social protection system hurriedly.

Broaden and Improve Social Assistance and Welfare Programs

In the United States, social assistance and welfare is one of the most important social protection programs. Benefit recipients are numerous and payment expenditures are huge. Though some benefits have been cut because of fiscal imbalances, in general the size and scope of the programs have been maintained. Take 1995 as an example, payments were $159.5 billion for Medicaid, $116.4 billion for Medicare, $27.6 billion for SSI, $23.6 billion for AFDC, $22.8 billion for Food Stamps, and $22.1 billion for Unemployment Insurance. These payments add up to a total of $371.9 billion which is 56% of the total expenditure on OASDI (Old-Age, Survivors, and Disability Insurance) (Social Security Administration, 1997). No doubt, the US social...