Social Security System for a Harmonious Society

The Current Social Security Complex – An Overview
The assortment of social security schemes that currently exist do not constitute an integrated whole, hence the term ‘complex’ instead of ‘system’.
Broadly they are aimed at the following:

• Poverty alleviation;
• Income maintenance in the event of unemployment, occupational injury, sickness and retirement;
• Subsidized, including free, medical care as and when needed.

The schemes divide into the familiar categories of ‘social insurance’ and ‘social assistance (social safety net)’.(1) Both categories include a variety of schemes and the distinction between them is based on two salient aspects: first, the conditions attached to the provision of benefit (entitlement qualification) and second, the method of financing.

By design, social assistance is means tested, which in China can be stringent and intrusive. Being non-contributory, social assistance schemes have to be financed from general government revenue, which leads to the vexed issue of the apportionment of expenditure responsibilities among government tiers.

The contributory schemes fall into two categories: Social Insurance for the urban population; and the two rural schemes: the local pension schemes and the ‘Rural Cooperative Medical Insurance Scheme’ (RCMIS).

Two Salient Features
Taken together, the contributory and non-contributory schemes are characterised by two salient features:

• segmentation and striking differences in provision across groups;
• highly decentralized financing and management;

Segmentation
The abiding feature of the Chinese social security complex has been the deep division between the rural and the urban population and the glaring contrast between their respective social security entitlements. This division dates from the pre-reform period (pre-1978) and still survives, though increasingly blurred at the edges. The urban population benefits from a complementary combination of contributory Social Insurance, providing old-age pension, work injury compensation, health care insurance, maternity benefit and unemployment compensation, and means-tested social assistance (Minimum Living Standard Assistance - MLSA), which bridges any shortfall of household per capita income from the local poverty line.

In contrast, the social security provision for the rural population is sparse. Bar a few minor exceptions, the rural schemes are non-contributory social assistance schemes aimed at alleviating severe hardship and narrowly targeted, either on households passing a means test or the residents of designated localities. There are two professed rationales for the limited social protection cover in China’s rural areas. One is that each rural household is assigned a plot of agricultural land that serves as a floor to household income, a feature that is particular to China and a few other economies. The other is the high cost of introducing a social security regime comparable to the one in urban areas relative to the limited capacity to collect taxes and social security contributions in rural areas. Both are valid, but only under strong qualifications. The protection provided by land plots is highly variable and has diminished over time because of the combination of the increase in the rural population and the diversion of land to non-farm uses. The latter has given rise to a substantial rural population without any land.

Decentralization
Both rural and urban social security systems are highly decentralized, the former more than the latter. In the case of the urban schemes, although Social Insurance and MLSA are based on regulations issued by the central government, many of the details of the schemes are left to the discretion of the provincial or municipal governments. More consequential, for both Social Insurance and MLSA the budgetary units are 269 cities (excluding county-level cities and towns)(2); and generally cities are expected to cover from their own budgets any deficit on Social Insurance and the cost of MLSA in their respective jurisdictions. In many cases, cities with a comparatively heavier burden of MLSA have more strained budgets because the factors that cause households to slip into poverty also act as a drag on city finances.

There are ad hoc transfers from the central and provincial governments to lower tier governments so they can meet their social security obligations under Social Insurance and MLSA. But there is as yet no regular framework for fiscal transfers from higher to lower government tiers to cover expenditure responsibilities of the latter. An overhaul of the system of inter-governmental finances has been high on the reform agenda for a number of years but still remains to be realised. A pooling of Social Insurance contributions and expenditures at the provincial level is the policy aim. There are 11 or so provinces, including province-level cities, that in various ways pool contributions and expenditure. But there is as yet no preferred framework for pooling.

Integrated Social Security System
Though not spelt out explicitly, the common assumption is that the integrated system would provide to the whole population the same high level of protection that a section of the urban population currently enjoys. The promised system will not only close the rural-urban gap but also fill the large gaps in coverage that mar the present rural and urban systems. The goal is ambitious and the time allowed to achieve the goal is very limited. The closing of the rural-urban gap will require a lot more than simply raising the social security provision in rural areas to the level in urban areas. The rural-urban distinction is not confined to the social security field but runs wide and deep to the institutional structure of the government, public finances and the provision of social goods such as basic education and health care.

The establishment of an integrated system has to take into account the implications of the following:

1. The rural per capita income is a small fraction of the urban per capita income. In 2005, the rural net income per capita was slightly less than a third of the urban disposable per capita income;
2. The variation in rural per capita income is far wider than that in urban per capita income;
3. A large percentage of rural households have a piece of land each, which historically has served as a justification for providing restricted social security cover to the rural population;
4. Internal migrants are huge in numbers and mobile across localities.

The first suggests that applying the same schedule of contributions and benefits for Social Insurance schemes to both rural and urban population may lead to a much lower participation rate amongst the former than amongst the latter. There are two possibilities for raising the participation rate amongst the rural population to the level found amongst the urban population. One is to charge rural residents a lower contribution rate in return for a lower benefit. The other approach is to keep the same schedule of contribution and benefit but raise the government contribution to offset any financial shortfall caused by the inclusion of the rural population. This fits in with the spirit of an integrated social security system. But it is premised on the continued improvement in the public finances as seen over the last few years.

The greater variation in income per head in rural localities compared to urban localities suggests a fundamental incompatibility between an integrated social security system and the financial and operational decentralization that characterises the present system. The obverse of decentralization is variation in the levels of provision and facilities. Extending the current system to cover rural localities would further widen the variation and may make the integrated system non-viable. The implication is that the construction of an integrated social security system has to go together with raising the budgetary unit to the provincial level.

Turning to the land plot as a substitute for social security, the average area of land plot per household varies across villages even in close vicinity; as do the climate and location. The cultivated area per rural inhabitant is low: slightly less than a fifth of hectare (0.19)(3) and falling because of the diversion of land for non-agricultural uses. The implication is that land plots do not provide full protection against a fall into poverty. Further, not all rural households have a land plot each and the number of landless households has in recent years risen sharply. A rough estimate puts their number at 40 million which is around 10% of the total rural households. The argument is that treating household land plots as a justification for providing the rural population with reduced social security cover was weak to begin with and has been rendered even weaker by recent developments.

Migrants represent a huge blind spot in the current social security coverage. This is due to two factors. First, they are not recognised as residents of the localities where they may have been living and working for a long time. Second, the current social security schemes are financed and operated on a highly decentralised basis and there is as yet no national framework for the portability of contributions and benefits.

A vast majority of migrant workers are from rural localities and their inclusion in the social security system would seem to be a first step towards the construction of an integrated system. There are two aspects to the participation of immigrants in Social Insurance schemes:

• collection of contributions;
• disbursement of benefits.

The problems raised by the first are, in principle, the same for immigrants and residents. The only difference is that, compared to the latter, the former are more likely to be in jobs with low rates of Social Insurance coverage, such as casual or informal employment. Concerning the second, one needs to distinguish between schemes where contributions and benefits run concurrently and where they are separated in time. The former include disability and injury compensation and medical care insurance, which can be extended to immigrant workers without any problem. Some cities already do so. The latter group includes old-age pension that raises a particular problem because of the long time gap between the payment of contributions and the receipt of benefits and the absence of a national framework for the accumulation of contributions paid in various localities and the portability of pensions. An interim solution to the problem is to set up a special scheme for migrant workers that is managed by the central government.

What are the prospects for the establishment of an integrated social security system by 2020? Two of the principal pre-conditions for the development of such a system are now present. First, the last few years have seen a dramatic improvement in the public finances and this trend looks likely to continue. The implication is that the government would be increasingly capable of covering the extra cost of setting up an integrated social security system. Second, the leadership is strongly committed to establishing such a system.

Athar Hussain is Professor and Director of the Asia Research Centre at the London School of Economics. He is currently a consultant on the project ‘European Union-China Cooperation on Social Security’.

Endnotes

1.For an account see the “White Paper on Social Security”, Ministry of Labour and Social Security, Sept 2004.
2.Chinese cities divide into a five -level hierarchy: provincial, sub-provincial, prefecture- and County-level. All included there are 662 cities and towns. The above figure of 269 excludes 393 county-level cities.
3.The actual figure depends on the definition of the land area (numerator) and of the denominator. Here, the land area is taken to be the sown area in 2000 and the total rural population as the denominator. The area of the land per person will be higher if the labour force employed in farming were taken instead of the rural population.

References
Hussain, A and Stern, N (2007) Public Finances in Transition, mimeo, 42 pp.

Ministry of Civil Affairs (2008) China Civil Affairs Yearbook 2008: Beijing: China Statistics Press.

Ministry of Labour & Social Security (2004) White Paper on Social Security,

NBS (State Statistical Bureau) (1982) The 1982 Population Census of China (Results of Computer Tabulation: Beijing.

NBS (State Statistical Bureau) (2008a) Statistical Yearbook of China 2008, Beijing.

NBS (State Statistical Bureau) (2008b) China Labour Statistical Yearbook 2008, Beijing.