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Matthias Stepan

China has made impressive strides to increase the coverage of social policy programs like health insurance and old age pension plans. Yet slower economic growth and China's demographic challenges might make it difficult to continue the success Story.

A rural Chinese doctor excamines a patient near Honghu in Hubei province.

In the nearly four years of the Xi-Li Administration, China has made impressive headway in the field of social policy. Health insurance and old age pension systems have reached nearly universal coverage, while levels of social transfers and government subsidies have risen continuously.

The administration's most important achievement has been the consolidation of the large number of programs that served different groups defined by their household registration (户口) or occupation. In 2014 almost all localities merged the urban resident pension social insurance program and the new rural pension social insurance program under the label of Urban and Rural Residents’ Basic Pension Insurance. At about the same time, employees in public service units (事业单位), e.g. university staff, were stripped of their privileges. They no longer enjoy higher levels of benefits than regular enterprise employees without paying contributions. Instead they are now insured under the same social insurance programs.

The objective to integrate urban and rural social policy was outlined in the Decision on the deepening of reform (中共中央关于全面深化改革若干重大问题的决定) of the third plenum of the 18th Central Committee in late 2013. The establishment of the Urban and Rural Residents’ Basic Pension Insurance mentioned above marked the start of the integration; the Urban and Rural Residents’ Basic Medical Insurance followed in 2016. An Urban and Rural Residents’ Cooperative Medical Insurance is currently in the stage of experimentation.

I argue that the present policies are a continuation of initiatives started under the Hu-Wen administration though they were backed up with additional fiscal resources from the central government. Their long term success critically depends on whether or not the Chinese leadership can maintain sufficient economic growth rates to sustain these ambitious, and increasingly costly, programs.

Building on achievements of the Hu-Wen administration

Former President Hu Jintao and Premier Wen Jiabao set the foundation for a social security system catering to all Chinese, not just to employees in urban areas. From 2003 to 2013, they established new programs for the rural population and for individuals without a formal employment status in urban areas. Hu and Wen experimented with and rolled out programs to reach these groups. Among the newly introduced programs were the rural cooperative medical insurance (2002), urban residents’ health insurance (2007), rural pensions (2009), urban residents’ pension (2011), to name but a few. Following the principle of “broad coverage and low generosity”, starting out with low benefit levels, the administration achieved quick advances in coverage.

However, the system continues to suffer from two major shortcomings: the inadequacy of benefit levels, and the geographical fragmentation, which puts migrant workers at risk of losing their entitlements. Taking the old age pension programs as an example: benefit levels were inadequate and often lower than the standard of social assistance; hundreds of millions of migrant workers did not know how to enter certain programs or how to transfer their entitlements. Until the present, the pooling of funds at the provincial level remains the exception. For each social insurance program, the respective funds are locally managed, and local administrators are keen to keep them in their locality.

Moving up to the next level of equality

Experiments how to tackle these issues were launched under the Hu-Wen administration. In 2008, the Ministry of Human Resources and Social Security started the work on a procedure to allow migrant workers to participate in basic old-age pension insurance (农民工参加基本养老保险办法) and to transfer their entitlements. The initiative ran into multiple technical problems and political opposition.

The task of transforming initiatives like these into nationwide practice was transferred to the Xi-Li Administration. Many local governments are overwhelmed with financial commitments to provide public goods. Therefore there is good reason to be skeptical if they can live up to the difficult tasks ahead.

In order to expedite the process, the central government incentivized the roll-out of the new measures by injecting central government resources. This is a departure from the past, when local governments were responsible for disbursing payments in a timely fashion and in full. The central government only stepped in in exceptional cases instead of signing up for a rule-based financial commitment. The overall annual expenditure for social insurance increased from 2,333 billion CNY (23331亿元) in 2012 to 3,898 billion CNY (38988亿元) in 2015. The income of the social insurance funds still exceeds their expenditure, however, in order to keep funds afloat, the amount of government transfers rises year on year. According to Ministry of Finance data, 12 per cent of the total income of social insurance funds in 2014 originated from government transfers.

The power of the purse was not the only force at work. Under the Xi-Li Administration, the anti-corruption campaign contributed its share to scaring off local officials from misappropriating the funds, which was one of the major problems during the Hu-Wen era. Back then, the so-called “empty account problem” became the metaphor for the practice of local governments to use social funds for financing prestigious infrastructure projects.

Ambitious goals and looming risks

Looking ahead, the ambitious goals of the current administration can be found in the 13th Five Year Plan and the respective plans of ministries. They include the abolition of poverty in China by 2020, and a major boost in the quality of public services through the use of IT solutions.

Whether or not China can achieve these social policy goals and continue the success story of the Hu-Wen administration critically hinges upon one factor: the growth of the economy and the related status of fiscal income. More than ever before in China’s history, the state has taken on a large financial responsibility for social transfers and services. However, should the economy falter and growth stagnate, the social security system would suffer as well.

Furthermore, China`s population is aging rapidly despite the changes from the one to the two child policy. The latter will have positive effects only in the medium term, in the meantime the old-age dependency ratio might reach a critical, and unsustainable, level of less than three individuals of working age supporting one person in retirement.

To keep the situation in check, China might have to undergo some type of retrenchment - a risky political venture as it might lead to public protests and threaten social stability. Yet, China might still be able to avert a crisis. The administration's openness to innovative, especially IT-based, solutions for providing social services might facilitate a more efficient use of increasingly scarce resources.

This is a slightly modified and shortened version of an article previously published on the blog of the University of Nottingham's China Policy Institute on 14 October 2016.