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Social Welfare Reform

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Title: 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.

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