Ge Yanfeng

Improving the social security system is of decisive significance to restructuring the national economy and the smooth progress of the reform of the state-owned enterprises (SOE). However, the establishment of a new social security system which started in 1995 progressed quite slowly, seriously hampering the SOE reform. Now it is necessary to speed up the establishment of a new social security system.

I. The failure to compensate the concealed payment of old employees represents the major obstacle to the establishment of the new system

In the past, the Chinese government provided social security on the cash basis through the enterprises and public undertakings by paying social security expenses with current revenues. In the cash basis system, SOEs deducted in advance social security fund from the wages before the employees received them. As the wages were lower than the actual wage cost, the surpluses were paid to the state finance and the state invested with the surpluses in the expectation that the investment yields could pay for the employees’ social security expenses like pension and healthcare in the future. But such a system increasingly exposed its defects in the decades of its implementation. In 1993, the 3rd Plenary Session of the 14th National Congress of the party decided to replace the old pension insurance system with a fund accumulation system through opening personal accounts for employees. The idea envisages that employees pay part of their wages to a social security fund. Their payment, together with the sum paid to the fund by their enterprises, will go to their personal accounts to be used to bill their social security expenses in the future.

The fund accumulation system will create no problem for young employees who have just started to work as they will continue to work long enough to amass sufficient fund in their personal accounts. But the case is different for the retired employees and the on-the-job employees who began to work long before the adoption of the personal account. In the past when they worked, the old employees did not directly gather fund to pay for their pension, healthcare and house, instead of that, their security fund was deducted in advance to become part of the government revenue and solidified in the state assets. When the new system is practiced, old employees have little fund in their personal accounts while the accounts of the retired workers are actually blank. Therefore, in the process of replacing the cash basis system with the fund accumulation system, the government should transfer some social security fund into the personal accounts of the old employees to compensate for their past contributions. Otherwise, they will be unable to bill their social security expenses, such as pension, and their personal accounts will always remain blank.

After the pension insurance system came into being in 1995, the problem of compensation has not been solved. Instead, the government has been trying to make up for its hidden arrears to the employees by means of the unified pension payment contributed by the enterprises. As the aging of the population in China is going on quickly, the ratio between the retired employees and the on-the-job employees is quite high. The enterprises, while paying for the personal accounts of the on-the-job employees, are impossible to pay enough unified fund to support the retired employees. They have to divert fund from the personal accounts of the on-the-job employees, often leaving in turn their accounts to become blank. Once the present on-the-job employees reach the age of retirement, enterprises will have to divert fund from the personal accounts of the next generation of employees, causing the accounts to run without any fund in them. In essence, the current operation of such a system at the expense of the future hardly differs from the cash basis system.

Moreover, the blank account operation can barely hold its own in the circumstances that the old employees are not compensated. Despite the fund-raising activities and intensified collection of pension fund in 1998, the national revenue for pension (including the unified fund collection and the fund in the personal account) still fell short of the pension payment to the retired workers with a deficit of 7 billion RMB yuan in that year. The problem is even worse this year. Preliminary estimates indicate that in spite of the greater effort for the collection of pension fund by various means, a shortfall of over 10 billion RMB yuan is expected. In addition, historical arrears totaling 8 billion yuan need to be back paid. The speedier aging of the population will aggravate the situation to bring about outstanding impact to the reform and stability. On the one hand, enterprises, the SOEs in particular, are unable to relieve their burden as their payment to pension insurance (including unified payment and payment to employees’ personal accounts) has already accounted for nearly 30 percent of their gross payroll. On the other hand, the difficulty in collecting pension insurance and the issuing of pension has created inability to guarantee the old-age security of the employees, which will further threaten social stability. In the past period, the default in paying pension has led to social conflict in many areas.

II. Stick to the correct direction of the social security system reform and achieve the shift toward the fund accumulation system

The prevailing idea to cope with the existing situation involves the increase in the pension fee payment while maintaining the blank account operation. Concrete measures include: (1). Intensify pension fee collection by replacing the fee with tax or entrusting tax departments to collect it. (2). Expand the coverage of the pension insurance system by increasing the number of people paying the insurance to raise revenue. The two steps may improve the collection of pension insurance fund, but will be unable to avert the crisis engendered from the blank account operation.

It is entirely necessary to intensify the collection of the pension insurance fund. But the underpayment by many enterprises does not mean purposeful evasion, but their inability to pay the fees which are too high. Compulsory fee collection under such circumstances would produce negative consequences, such as bigger enterprise losses, restraining enterprise development and more difficulties to government tax collection.

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