Social Welfare Reform

1
Social Welfare Reform China
2
Trends and Tensions
Urban Demand
Entitlement (??)
Rural Demand
New welfare Trends
Long-term Viability
Policy Reform
3
in China
Principles of social security pension design
Potential Chinese gain from an investment-based
system
The current social security pension system in
China
Alternative options for the Chinese
defined-benefit plan
The transition path
4
Entitlement
There have been signs of growing discontent at
the prospect of losing privileged insurance
benefits and services
The village with only minimal local government
welfare provisioning suggests three-staged
village response

• The most people believe that either the central
  or the local state should be responsible for
  providing the security provisioning to which they
  believe they are entitled.
• The village The city
• The dual challenge for Chinas government during
  the 1990s
• 1???????????
• 2??????

5
Urban Demand
It is estimated that as many as 70 percent of the
urban population are not covered by any form of
social insurance and are employed outside
state-owned enterprises.

• ????1980s, provide all kinds of welfare service.
  During the 1990s, two socio-economic trends
• Non-public sectors
• State-owned enterprises
• To reduce the proportion of public sector work
  force eligible for benefits in the future,
  employees are increasingly placed on short-term
  contracts which carry fewer benefits.

In an increasingly competitive market,
state-owned enterprises have been hampered in
their development by their responsibilities for
social welfare payments. At the same time, the
state has attempted to reduce or withdraw
subsidies and place enterprises on a
profit-loss basis.
6
Rural Demand

• During the past 20 years coastal township and
  village governments with profitable enterprises
  have emulated city state-owned enterprises
• Inland township and villages without enterprises
  seldom have local revenues to add to minimal
  levels of state welfare assistance.
• Throughout Chinas townships and villages,
  whether or not they have enterprises, rural
  demand for social welfare has risen as both ole
  and new sources of social welfare are
  increasingly at risk.

7
Policy Reform

• From the mid-1990s new pension reforms have had
  three key objectives
• To establish a society-wide system of
  pension-fund mobilization and management which
  takes over from the enterprises
• To share the costs of pension insurance between
  individuals as well as enterprises and the state
• To move from a pay as you go system to some
  form of partial accumulation

8
Policy Reform

• A three-tiered system
• Compulsory pensions organized by the state which
  are both basic and earnings-related.
• 2. Supplementary occupational pensions which may
  be optional or semi-compulsory
• 3. Individual pension schemes which are entirely
  voluntary.

9
New welfare Trends

• The five trends of the reform programs of the
  1990s
• the growing separation of social welfare from its
  pervious enterprise base
• The decentralization of social welfare
  provisioning
• A diversification in delivery systems, shifting
  responsibilities to markets and to non-government
  organization
• The establishment of non-profit organization is a
  recent innovation.
• The strengthening of informal community and
  family self-provisioning.

10
Long-term Viability

• Unsolved tensions
• Market competition and fiscal constrain
• Government and non-government organizations
• Individual and government
• Economy and welfare provision

11
What about in China?
12
Principles of social security pension design

• A unfunded pay-as-you-go (PAYGO) PENSION system.
• The rate of growth of aggregate real wages, is
  the sum of the growth rate of the population and
  the growth rate of productivity.
• V???V??V?????
• Actual economies do have capital stocks, and the
  marginal product of capital is greater than the
  growth rate of aggregate wages.

13
Principles of social security pension design

• The choice between a defined-benefit and a
  defined-contribution system.
• Defined-benefit based on a formula that
  typically involves the number of years of work
  and the past history of wages.
• Defined-contribution employees, or their
  employer or both, make contribution to individual
  accounts during working years.
• Conditional defined benefit system Individuals
  have defined contribution accounts but annuity
  provided but are also guaranteed a minimum amount
  (a defined benefit).

14
Potential Chinese gain from an investment-based
system

• ???????????????????????????????60????,??????20??
  ???
• ????????????,???????????????
• ???? V???V??V???
• (1.07)307.6
• In a funded system the revenue are
  used to increase the nations capital stock. If
  that additional capital earns a 12 rate of
  return, each dollar saved at age 45 grows to 30
  at age 75.
• (1.12)3030

15
Potential Chinese gain from an investment-based
system

• The transition from a PAYGO system to a funded
  system.
• ????during the transition to a funded system
  the combination of the tax required to finance
  existing benefits and the savings required to
  fund future benefits would be double.
• ????
• 1. The maximum additional cost to current
  employees would be the 5 required to fund their
  future retirement annuities.
• 2. The tax rate 20 would gradually decline over
  time during a transition as new retirees draw on
  their funded individual accounts as a source of
  retirement income.

16
The current social security pension system in
China

• The real returns on government bonds and bank
  deposits have been very low and in some recent
  years have actually been negative.
• So the government would then have to raise future
  taxes to pay interest on these additional
  government bonds.
• As restrictions on investments are relaxed in the
  future, these defined contribution accounts will
  invest in non-government securities. Then, with a
  higher rate of return, the same benefits can be
  financed with a lower contribution rate, or the
  same 10contribution rate can be used to obtain a
  higher level of benefits.

17
Alternative options for the Chinese
defined-benefit plan

• Modify this part of the pension system in either
  of two
• 1. Substituting a funded plan---base on
  investments in existing government bonds or
  non-government enterprise securities
• 2. Conditional defined benefitfilling the gap
  between the defined-contribution annuity and the
  level of retirement income that is regarded as
  acceptable.
• The combined effect of both of these options
  would be to reduce the required tax from the
  projected 9 to less than 2 of earnings.

18
The transition path

• PASTa PAYGO system of defined benefits linked to
  the final wage and administered by the retirees
  lifetime workplace. The retirement benefits were
  paid by the workers enterprise without any
  explicit pension fund or accounting reserves.
• NOWState-owned enterprises must face a more
  rigorous market test and are not supposed to
  incur losses. Shift assets to entities
  responsible for pension benefits, such a shift is
  economically efficient only if it leads to the
  best use of those resources among all the
  politically feasible options.

19
Gordon Whites conclusion

• Welfare reform has proven not only technically
  complex and economically constrained but also
  institutionally tangled, socially sensitive and
  politically charged.

THANKS