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China Briefings

Reports on China issued by Samsung Economic Research Institute

How to Improve China's Social Security Insurance

How to Improve China's Social Security Insurance

Samsung Economic Research Institute Beijing Office

June 28, 2007

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China has 90 million people who are 65 years old and older, a population that is growing faster than any country in the world. That is just the vanguard of a tidal wave of retirees who threaten to overwhelm China's social security system. The system includes social insurance, social welfare, the special care and placement system, social relief and housing services. Social insurance is at the core, encompassing the social security system, social insurance includes old-age insurance, unemployment insurance, medical insurance, work-related injury insurance and maternity insurance

Simply put, unless major repairs are implemented, the social security system risks a flood of red ink. The system is underfunded and mismanaged. For example, social security payments remitted by workers and retirees who registered before 1997 have not been properly reserved. Furthermore, it does not adequately cover rural areas, where much of China's 1.3 million people live.

Even if procedures and management are tightened, simple demographics spell trouble. As a result of China's one-child population control policy implemented in the early 1980s, the working population is expected to be 3:1 in 2010 compared to 10:1 in 1990. This trend will put an increasingly severe strain on the system's "pay-as-you-go" distribution scheme in which retirement contributions by current workers support retirees.

Currently, the cumulative deficit in China's current social security system amounts to a total of 2.5 trillion yuan, according to Labor Ministry estimates. This amounts to one-eighth of the nation's gross domestic product. The yearly difference between payments remitted and benefits paid has amounted to 50 billion to 60 billion yuan since 2002.

The percentage of households who have basic social security funds constitute 15 percent of the entire workforce who are between the ages of 15 and 60. This is lower than the lowest international standard designated by the International Labor Organization (20 percent) not to mention the global average level (33 percent).

Without major reforms, the crisis in funding is expected to hit retirees by 2016. Thereafter, deficits in the social security system will likely mount to 100 billion yuan every year between 2035 and 2040. They will then rise to 800 billion to one trillion yuan, only beginning to decrease to 400 billion yuan in 2050.

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