Easing the pain of social security reform

China is preparing to reform the system for collecting social insurance contributions, a move that some fear could result in an increased burden on local businesses. Beijing News comments:

Under the existing system, employers pay a certain share of their employees' social security contributions together with the employees' own contributions, which are deducted directly from their wages, to the social security bureau.

However, a recent report revealed that only 24.1 percent of Chinese companies fully comply with their payment obligations to the social security fund. Up to 75.9 percent of companies do not make these payments based on the actual wages they pay, and some only make such contributions based on minimum wages.

Although the contributions required vary from city to city, the reform means companies will shoulder a heavier burden, and the money individuals can take home will also decrease following the reform.

Under the new system, the power to collect the funds will be consolidated in the taxation department to close loopholes enabling evasion and make collections more efficient. The new measure will come into effect on Sept 1 next year.

The move has caused some employees to worry about losing their jobs, because the enterprises might choose to downsize their payroll to offset any increase in social security payments, as it will become more difficult for companies to lower or evade making social security payments when the tax bureau collects it.

And employers, mostly from private enterprises, fear that they will soon bid farewell to the 20 percent or even lower tax rate they have enjoyed for long because of local government's supportive tax policies after the merging of the two taxation systems.

Such concerns are understandable.

Thus it is good to hear a response from the higher authorities, as the State Council, China's Cabinet, has declared that before the social security fee collection reform is carried out, the enterprises' tax rate will remain unchanged, and it has urged local governments to lower the social security fee rate to ensure the enterprises' overall tax and fee burden will remain unchanged after the new collection system takes effect.

Hopefully, the State Council's reassuring response can mark a good beginning to establish a constructive consultative mechanism on taxation policy and reform.