Worker response to Chinese pension system reform.

• Author: Xiao, Jing Jian

Abstract

This study examines workers' responses to the current reform of social security in China. Based on a survey conducted in June,1998 among 500 workers with various backgrounds in Guangzhou (Canton), the paper draws seven conclusions. First, over eighty percent of workers support the reform. Second, there is consensus that the responsibility for providing old-age insurance should be shared among individuals, society, and the government. Third, workers prefer a partially-funded pension system to either the pay-as-you-go system or a fully-funded system. Fourth, most workers do not want the government to increase the legal retirement age at the present time. Fifth, a majority of workers worry about their future retirement income adequacy and consider it a potentially serious social problem. Sixth, workers perceive that state-owned enterprises offer the best pension plans while foreign-owned companies provide the worst. Finally, the survey shows that most workers desire, and would participate in, a program that would educate them about investment alternatives. These findings provide important insights for both Chinese policy-makers and future research into China's social security reform.

Introduction

Before general economic reform started in the late 1970s, the Chinese employment system was often called "the iron rice bowl." Workers of state-owned enterprises were tied permanently to their respective work units and enjoyed lifetime benefits that included housing, medical care, and pensions. Work units took the sole responsibility for providing old-age insurance for their employees and retirees (Song and Chu, 1997; World Bank, 1997). Since urban pension reform started in 1984, the "iron rice bowl" has been broken and the employment system is moving to a labor contract system. Though this contract system improves labor mobility and efficiency, it makes pension benefits less secure. In fact, many Chinese workers believe that their retirement income security is threatened.

The older system was not sustainable. At the macro-level, China's population is aging rapidly due to the one-child policy and longer life expectancy. This aging of the population leads to a much higher dependency ratio, indicating a much heavier pension burden. Without reform, the old pay-as-you-go pension system would not be sustainable in the long term. At the micro-level, enterprises still carry a large share of pension responsibilities for their retirees. Hence, pension burden and benefits vary greatly across enterprises, especially between older and newer enterprises and between state-owned and other types of enterprises. This disparity not only reduces pension income security for retirees in older enterprises and private- or foreign-owned companies but also puts older and state-owned enterprises at a disadvantage when competing against newer and private- or foreign-owned companies.

China started its social security reform in 1984, with pilot pension pooling programs in some cities and counties. Many studies have documented this reform and its progress (e.g. Hussain, 1994; Wang, 1997; World Bank, 1990, 1997; Zhang, 1997; and Song and Chu, 1997). Most studies have focused on such issues as why the old system did not work or on how to build a new pension system to accommodate the structural changes and demographic trends in China. No study has investigated workers' responses toward the on-going pension reform. Yet workers' perceptions and opinions on pension reform have economic, social, and political implications for the long-term growth of Chinese economy. Workers will be affected most and directly by the success or failure of pension reform, which could result in a major political victory or disaster for the government. Understanding workers' preferences would help policymakers plan reforms that facilitate achieving the goals of economic reform. Workers' understanding and cooperation would reduce the social costs of the reform and speed up the reform process.

This study fills the gap in prior research. Based on a recent survey in Guangzhou (Canton), a southern Chinese city, the study documents responses to the reform of the Chinese pension system from 500 workers in various types of enterprises. Specifically, this paper examines workers' responses (and their implications) to the following questions: (1) Should China reform the pension system? (2) Who should bear the major responsibility for old-age insurance? (3) What kind of pension system do workers prefer? (4) Should the current legal retirement age be changed? (5) Do workers worry about the inadequacy of their retirement income? (6) What type of company has the best or worst pension plans? (7) Should educational programs on savings and investments be offered to workers?

The next section of the paper provides background on the current pension reform efforts in China and its challenges. Section Three describes the survey used in this paper. Section Four discusses survey findings and implications. The final section summarizes the study's findings.

Pension System Reform in China

The Chinese social security system has two central features. First, it consists of separate urban and rural subsystems with different organizations and benefits. Second, the urban system is segmented according to the ownership status of the employment unit (Hussain, 1994). In this paper, pension system reform refers to the urban system only.

The old pension system in urban China was started in the early 1950s. Generally speaking, the system was a pay-as-you-go defined benefits system that mainly covered workers in state-owned enterprises. At the beginning, workers' retirement benefits, which depended on working years, were paid partly by their work units and partly by a labor insurance fund managed by the National Workers' Union, a government agency in charge of workers' welfare. During the Cultural Revolution, the responsibility of the National Workers' Union disappeared and the retirement benefits became the sole responsibility of work units. In consequence, social security became enterprise-based insurance. This downgrade of risk-sharing reduced income security for retirees and caused a larger disparity of pension burdens across enterprises and localities. Without reform, this enterprise-based pension system would hinder general reform and economic development in China.

Pension reform started in 1984 with pension pooling experiments in some cities and counties. Enterprises participating in pooling programs put a portion of their total wages into pension funds managed by local old-age insurance bureaus. Workers could voluntarily contribute their savings to have individual supplemental pension accounts for their future retirement incomes. City and county governments set uniform contribution rates and benefits within their respective jurisdictions. Actual reforms in different places, therefore, are different (see Song and Chu, 1997 for many examples and World Bank, 1997 for relevant statistics). For example, Shanghai started pension reform in 1993. All enterprises are eligible to join the retirement insurance program. Workers contribute 3 percent of their annual income and their respective work units contribute 13 percent to workers' individual retirement accounts. Hence, higher income workers would accumulate higher retirement incomes in their accounts (Tian, 1997). Pension pooling programs achieved steady progress. By 1991, 2270 cities and counties had established pension pools at city or county levels for state-owned enterprises, covering more than 50 million permanent workers, 12 million contractual workers, and 10 million retirees. By 1994, the coverage had expanded to more than 80 million workers and 18.5 million retirees State Statistical Bureau, March 1995).

Between 1991 and 1995, the State Council issued several rules to promote pension system reform. For example, the State Council made twelve decisions about old-age insurance reform on June 28, 1991. These decisions provided guidelines for all major areas of pension system reform such as specification of responsibilities and determination of contributions and benefits. In November, 1993, the Chinese Congress announced three fundamental principles to guide social security reform. The first is to establish a multi-layered social security system. Social security practices for urban and rural residents should be different (the word "should" is typically used in Chinese government documents). Commercial insurance should be developed as a supplement to social insurance. Second, expenditures for old-age pensions for workers and staff in cities and towns are to be shared by work units and individuals and by combining mutual assistance funds with individual accounts. Retirement benefits should be determined on a contribution basis. Third, the administration of social security and management of social insurance funds should be separated. On July 5, 1994, the Chinese Congress passed a Labor Law that requires all enterprises and individual workers to join social security pooling programs. In August 1997, the State Council issued a rule that calls for four types of unification: "unified system, unified standard, unified management, and unified fund usage." These are to apply to all types of enterprises and workers.

The current reform is to establish a three-tiered old-age insurance system. The first tier provides a basic pension to all workers in urban sectors. The second tier consists of enterprises' additional contributions to the basic pension and depends on the availability of enterprise bonus and welfare funds. The third tier is mandatory individual pension accounts layered on top of the first two tiers (Song and Chu, 1997). Future retirement incomes will come from two major sources: one paid by work units and another paid by workers themselves.

The new pension system moves away from the old system in the...