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«D I R E C T I O N S I N D E V E LO P M E N T Human Development Public Disclosure Authorized The Elderly and Old Age Support in Rural China Challenges ...»

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A key policy tool for improving welfare of the rural elderly, with which the Chinese authorities have experimented on and off over the past two decades, is a widespread rural pension system. In recent years, this system has received renewed impetus with the commitment of the 16th plenary meeting of the Communist Party of China (CPC) in 2006 to establish a comprehensive social security system that will cover all urban and rural residents by 2020. This commitment is reflected in the Law on Social Insurance of 2010, which provides the legal framework for a pension scheme for rural residents. State Council Document 1 of 2009 endorsed accelerated efforts for “establishing a new rural pension system, which is to be financed from individual contributions, collective subsidy and government subsidy” (State Council 2009a). These commitments are reflected in the introduction of a national rural pension pilot in the second half of 2009 that covered 23 percent of counties by the end of 2010 and is expected to achieve full geographic coverage by the end of 2012. A scheme for urban residents with a similar design became national policy in June 2011, adding to the significance of considering the rural pension scheme design. This chapter outlines the evolution of the Chinese rural pension system over the past two decades, with a particular focus on provincial pilots during the 2000s and the national pilot.

The evolution of the rural pension system in China can be divided into four main phases: (a) an initiation and expansion phase from 1986 to 1998, (b) a contraction and stagnation phase from 1999 to 2002, (c) a renewal phase of piloting toward development of a national rural pension system (2003 to 2009), and (d) the national rural pension pilot from 2009 onward. Each phase is discussed in turn below.

Initiation and Expansion of Rural Pensions: 1986–98 The initial exploration of rural pensions was set out in the Seventh FiveYear Plan (1986–90), which noted that “efforts should be made to study how to establish a rural pension system, launch and gradually expand pilot schemes in line with economic development” (State Council 1986, 193–94). This endeavor was built on through county-level pilots led by Evolution of the Rural Pension System in China 87 the Ministry of Civil Affairs (MOCA) in Beijing and in Shanxi Province, which emphasized mixed financing responsibility among government, collectives, and individuals, with most of the responsibility falling on individuals. The pilots were followed in 1991 by (a) the State Council’s issuing Document 33, “Decision on Establishing a Unified Basic Old Age Insurance for Enterprise Employees,” which designated MOCA to take the lead on rural pensions and (b) MOCA’s launching pilots in five counties of Shandong Province.

A clear policy push occurred in the early 1990s to expand rural pension schemes. The various pilots contributed to a major policy document in 1992 from MOCA: “Basic Scheme for Rural Pension at County Level” (referred to hereafter as the Basic Scheme). The Basic Scheme was elaborated on in a subsequent policy document in 1995,1 which outlined a set of basic principles for rural pension schemes while allowing for variations

in specifics by localities:

• Schemes were to be voluntary, mainly financed from individual contributions, supported by contributions from collectives at the village and township levels, and supported by preferential government policies (for example, tax relief for collectives on contributions). The Basic Scheme set the retirement age at 60 for both men and women, although in the practices that emerged, the retirement age for women was not uncommonly set at 55.

• Following the lead of the urban pension system reform, schemes were to be based on funded individual accounts.

• Individual contributions were to range from 2 to 20 yuan monthly with a matching 2 yuan contributed by the collective.

• Elderly farmers were entitled to receive a pension until death. In cases in which they lived fewer than 10 years after retiring, any balances in their individual accounts could be inherited.2

• Investments of accumulated contributions were to be made in bank deposits and national bonds; no direct investments were otherwise allowed. Although portfolio rules mandated low-return investments, in practice the system committed to a guaranteed rate of return.

• The local Bureau of Civil Affairs would administer the scheme, and administrative costs would be covered from contributions (with a cap of 3 percent set subsequently).

• Oversight and regulation of the scheme were to sit largely with the implementing agency (that is, MOCA at the county level), subject to the internal controls of the Ministry of Finance and internal auditing.

88 The Elderly and Old Age Support in Rural China As a result of this policy initiative, coverage of rural pensions expanded significantly during the 1990s, with programs established by the end of 1998 in 31 provinces and 2,123 counties (just under three-quarters of all rural counties). This period was also the high point of coverage, with

80.25 million rural worker participants and more than 600,000 pension beneficiaries. However, concerns soon began to emerge about the operation of local schemes and the lack of a sound governance framework; the Asian financial crisis in 1997 underscored the need to rethink the program.3 Responsibility for rural pensions was subsequently switched from MOCA to the Ministry of Labor and Social Security (MOLSS; now the Ministry of Human Resources and Social Security) in the 1998 administrative restructuring.

Contraction and Stagnation: 1999–2002 Because of concerns about the effectiveness and sustainability of rural pension schemes, a sharp policy shift occurred in the late 1990s to limit their expansion. The change in the official position on rural pensions was reflected in the 1999 State Council declaration that China was not yet ready for universal rural pensions, which directed counties to (a) cease expanding schemes; (b) rectify the operations of existing schemes; and (c) when possible, transfer schemes to the management of commercial insurers. By 2001, the shift in policy contributed to a sharp decline in coverage to just under 60 million participants, with the number stabilizing between 50 million and 55 million through 2007 in roughly 1,900 counties.

Despite this contraction, new participants continued to enter the system and accumulated funds from existing schemes continued to increase, more than doubling from 2000 to over 41 billion yuan in 2007. The number of pension beneficiaries approached 4 million by 2007 as existing schemes matured (see table 5.1). The variability of indicators over time is noteworthy, especially during the 1990s.

The development of the rural pension system during this phase was characterized by several deficiencies that undermined the achievement of

policy objectives:

• Coverage was highly imbalanced geographically, with four coastal provinces (Jiangsu, Shandong, Shanghai, and Zhejiang) accounting for about 45 percent of total participation and 64 percent of total accumulations. Poorer regions, in contrast, generally failed to attain significant penetration.

Evolution of the Rural Pension System in China 89

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• Although the policy indicated that participation was voluntary, local authorities in many cases mandated participation in the face of disinterest from farmers.

• Matching contributions from collectives were seldom made, and their incidence was highly skewed toward a small number of richer provinces. The privatization of township and village enterprises in the 1990s contributed to the lack of matching contributions from employers. As a result, 98.5 percent of matching contributions were concentrated in only five provinces (the four coastal provinces noted above plus Beijing).

• At the local level, concerns arose about the concentration of matching funds for cadre members rather than for all scheme members.4

• Compared with the urban scheme, in which administrative costs are borne by the government, the 3 percent administrative fee on rural schemes was deducted from farmer contributions, which was considered inequitable.

• Many schemes were unable to pay benefits in full, with at least 200 counties cancelling schemes and contributors being unable to recoup 90 The Elderly and Old Age Support in Rural China their contributions. Even when benefits continued to be paid, they were frequently significantly less than expected because of low returns on accumulations. Low returns stemmed partly from a preponderance of investments in bank deposits with very low interest rates. The reluctance to invest in higher-return government securities was exacerbated by localized problems with fund management. As examples, Beijing and Hebei lost significant amounts of invested accumulations through the bankruptcy of fund management companies entrusted to invest in government securities.

• Supervision of schemes was weak. MOLSS figures for the end of 2000 indicate that about 20 percent of accumulations had been invested in unauthorized assets, including real estate, stocks, enterprise bonds, and nonbank financial agencies. Although local implementers may have intended to increase returns and meet guaranteed return directives, their failure to abide by investment guidelines indicates significant regulatory issues. This failure was in part a structural problem because local implementers were under the direct authority of local governments, but the scheme, in principle, was under the bureau at a higher level.

• The ratio of guaranteed rates of return, interest rates on investments, and inflation showed significant volatility, which contributed to significant negative real returns on accumulations in some periods and the reverse in others (see table 5.2).

• Pension benefits were very low, with the average pension at about 85 yuan per month in 2007. Moreover, benefits were highly variable across provinces and individuals. A general lack of confidence in schemes also

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resulted in very small contributions in excess of the minimum by farmers. For example, if farmers chose to contribute 2 yuan per month, their estimated pension after 15 years, in nominal terms, would have amounted to about 10 yuan per month (G. Wang 2000). Taking into account inflation and administrative costs, their real benefits would have been even less.

• The planned transfer of administration to labor bureaus was not undertaken in a timely manner (or at all in some areas), with 350 counties not having transferred management by 2007.

Renewal: 2003–09 Renewed impetus toward a new rural pension system emerged in late 2002 with the CPC Congress, which resulted in new guidelines from MOLSS (2003). This push was followed by (a) opinions of the Central Party Committee and the State Council at the end of 2005, which were part of the wider commitment to “building a new socialist countryside,” and (b) the 2006 plenary meeting of the 16th CPC, which committed the government to universal social insurance coverage by 2020. Between 2003 and 2009, additional rural pension schemes developed, with more than 300 counties in 25 provinces establishing new schemes by the end of 2008.

The new rural pension schemes established during this period fall broadly into three types: (a) social pooling plus individual accounts, (b) flat universal pensions combined with individual accounts, and (c) individual accounts only. In addition, the schemes differed in the financing role of government at the accumulation and payout stages.

As a result, five variants existed by 2009 when the new national pilot was announced (and into which such schemes should eventually be


• Flat pensions plus individual accounts with government financing at the payout stage only. Under this variant, individual contributions went to individual accounts, whereas the government financed flat pensions from general revenues. The most notable example of this model has been Beijing since 2005 (Beijing Municipal Government 2005). This variant was taken a step further in 2009 with further revision of the scheme to expand coverage of the rural pension to urban residents not covered by work-related urban schemes (Beijing Municipal Government 2007, 2009).

92 The Elderly and Old Age Support in Rural China

• Flat pensions plus individual accounts with government financing (a) by matching contributions to individual accounts and (b) at the payout stage through the financing of flat pensions from general revenues. This model has been observed, for example, in Baoji in Shaanxi Province since 2007 (a city in which 74 percent of the population is farmers) and in Qian’an in Hebei Province. In large measure, this model is the precursor to the new national pilot structure.

• Individual accounts with social pooling with government financing at the accumulation phase. This model is similar to the urban employee pension system but with lower contributions and fewer benefits. This model has typically been implemented in regions with high urbanization rates and good fiscal positions, such as Suzhou in Jiangsu Province since 2003 (in which 60 percent of the population is rural and a large proportion is migrant) (Suzhou Municipal Government 2003) and in Qingdao in Shandong Province.

• Individual accounts combined with social pooling with government financing (a) by matching contributions to individual accounts and (b) at the payout stage. This model has been implemented in Zhongshan and Dongguan.

• Individual accounts only with government matching for contributions to individual accounts. This model is the simplest design, although it lacks risk pooling of any form. It has been implemented in Yantai in Shandong Province since 2005 (a city in which 58 percent of the population is farmers) (Yantai Municipal Government 2007) and in Hangshou in Zhejiang Province.

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