Peer reviewed analysis from world leading experts

Chinese pension reform

Reading Time: 5 mins

In Brief

The Chinese government faces some major challenges as the country’s economy enters a transitionary period.

Chinese leaders have realised that as the country moves toward domestically-driven growth, and away from the predominance of heavy industry and exports, its social welfare system will need to be developed significantly.


  • A
  • A
  • A


  • A
  • A
  • A

A comprehensive welfare system as in OECD countries is still a long way off, but there are good reasons to alleviate the disparities between urban- and rural-registered workers. Following the recent increase in labour mobility, traditional family support networks are unable to perform the welfare role they have in the past due to the rising cost of living and the persistence of very low incomes in rural areas that migrant workers have returned to in tough times.

Significant variations in the generosity of welfare schemes for urban-registered workers already exist between provinces and coverage in the private sector remains low in many places. As a result of the national residential registration scheme, migrant workers are treated differently from urban residents and are often largely excluded from even these benefits. In combination with the high level of rural poverty, this suggests that it is the extension of welfare coverage to migrant workers and the rural population that could most improve the effectiveness of the system.

Such reform would significantly improve the standard of living for a large proportion of Chinese society. About half of China’s population continue to live in rural areas. Much of this population is engaged in small-scale agriculture and their ability to participate in existing contributory welfare systems is limited. In addition, according to some estimates there were about 225 million migrant workers in Chinese cities in 2010. Given their lack of access to equivalent welfare these workers effectively provide artificially cheap labour to industry. According to Yiping Huang, ‘if urban employers made social welfare contributions on behalf of their migrant workers, their payrolls could rise by 35–40 per cent, which includes contributions to pensions (20 per cent of payroll), medical insurance (6 per cent), unemployment benefits (2 per cent), work injury insurance (1 per cent), maternity benefits (0.8 per cent), and housing entitlements (5–10 per cent)’.

The implications of such an imbalance for China’s development are significant. By providing cheap labour it extends benefits to heavy industry at the expense of domestic consumption. This in turn affects development objectives such as the central government’s aim to improve the energy efficiency of the Chinese economy. National efficiency targets have forced provincial governments to resort to dramatic state-intervention in the form of factory shut-downs, causing chaos in certain sectors. If Huang is correct then one of the most significant contributions to reducing the energy intensity of China’s economy would be to gradually phase out this artificial ‘subsidy’ that industry receives by foregoing social welfare obligations to their rural migrant workers by 35–40 per cent.

In 2009 the government began phasing in a universal program of pension coverage starting with a small number of rural counties and gradually extending across the country. The 12th Five-Year Plan stated the government’s intention to extend eligibility to all of the rural population by 2015. The scheme attempts to maximise coverage by requiring a low level of contribution from rural workers.

Regardless of how low the contribution level is set, China still has a significant rural population living in poverty, some of whom will find it difficult to maintain contributions for the stipulated 15 years. In the case of those already aged 60 and above the individuals are not obliged to make contributions but their children are required to commit to the program. This requirement will place additional stress on extremely poor families and further reduce coverage.

While the national rural pension scheme is undoubtedly a step forward, a basic change could further improve its effectiveness. Rather than relying solely on co-contributions from both workers and government, a non-contributory pillar could be added. In addition to providing better coverage of the extremely poor, such a system is easier to implement for local government as it does not require the same level of administration as the private account-based contributory system. Analysis by Yinan Yang et al suggests that a modest program of this sort should be affordable for China, especially if initiated in the short-term while the economy continues to grow at a rapid rate.

Simultaneous to the roll-out of the national rural pension scheme, the government has signalled that it will liberalise welfare in small- to medium-sized cities but not in larger cities already struggling with the massive cost of integrating migrant labour. Under this initiative, migrant workers will be allowed to settle in cities and enjoy access to the same services as those registered locally. Rather than relying on the development of the entirely new pension scheme for those registered in rural areas, such an approach instead does away with discrimination based on residential registration. The reform has the support of Premier Wen Jiabao but remains at a very early stage.

The drawback to this piecemeal approach to reform is that local government may struggle to meet the increased cost of welfare payments if not supported by the central government. Given the high proportion of the population that remains in China’s rural areas it is likely that significant rural–urban migration will continue for some time. For governments at the city level this is a daunting prospect. As reform progresses it will be important to share the costs of the scheme nationally rather than relying on local government to pick up the tab.

Huw Slater is an Australian Volunteer for International Development based in Beijing.

Comments are closed.

Support Quality Analysis

The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (

Copyright ©2024 East Asia Forum. All rights reserved.