Far more striking is the very low budgetary expenditure on health, which accounts for just 2.8–3.0 percent of expenditure (0.5–0.7 percent of GDP). This level of spending is exceptionally low by international standards. The problem of low expenditure on health is compounded by its highly skewed distribution.
According to the Ministry of Health, about 80 percent of medical facilities are in urban areas, where 40 percent of China’s population lives. Rural areas, where 60 percent of China’s population lives, have just 20 percent of medical facilities (Peoples Daily Online, January 11, 2005).
Similar discrepancies exist in social insurance, which by design targets urban residents in regular employment and relatively well-paid jobs. A growing percentage of the urban labor force is employed in small establishments in the services sector, generally without any labor contract or social insurance cover.
To deal with these problems, the government needs to take several steps:
• Reduce out-of-pocket expenses on medical care, by extending urban medical insurance and rural cooperative medical insurance and providing direct govern- ment subsidies.
• Raise expenditure on education, especially in rural areas and on the schooling of children from migrant households in urban areas.
• Reduce the glaring discrepancy between social security coverage in urban and rural areas. High on the list of priorities should be the institution of comprehen- sive social assistance for the rural population, similar to Minimum Living Standard Assistance (MLSA) for the urban population.
dramatic reduction in rural poverty, but they have undermined the inherited social security schemes and created new issues for social security, including a sharp increase in the number of retirees, the emergence of urban poverty and open unemployment, and the appearance of a large numbers of migrants.
Until the mid-1990s, social security reforms were aimed at propping up the existing schemes, particularly the old-age pension scheme. Reforms since then have been concerned with establishing a new social security regime, beginning with schemes for urban residents. The development of social security schemes for people in rural areas, previously neglected, has risen higher on the government agenda in recent years.
China has been undergoing three major changes over the past 20 or so years:
a demographic transition to a constant or shrinking population; economic development that has transformed an agrarian economy into an urbanized one dominated by industry and services; and the transition from a planned to a socialist market economy. The demographic transition has been accompanied by a rising share of elderly (65 and older) people in the population and a falling percentage of children, in particular school-age children (ages 5–14).
The rising share of the elderly implies an increasing share of GDP devoted to their support. How this increased cost is distributed across the economy depends on the sources of support of the elderly. These are, first and foremost, the family, followed by social security schemes (including old-age pension and social assistance to the indigent elderly) and personal savings.
Most of the cost arising out of the rising ratio of the elderly will continue to fall on families, which also bear much of the cost of children. The heavy reliance on the family to meet the needs of the elderly fits poorly with demographic trends and socioeconomic changes in China. With rising life expectancy, especially at old age, each succeeding cohort of the elderly will need support for a longer period.
Added to this, because of China’s one-child policy, future cohorts of the elderly will have fewer offspring on whom to depend. A medium-term goal should be the establishment of a pension scheme covering the entire population. The pension scheme under social insurance, which excludes the rural labor force, currently covers less than half of the urban labor force.
As elsewhere, economic development in China has involved a shift of labor out of farming in tandem with population migration to urban areas. Internal migration creates a particular problem in China, because “migrants” continue to be excluded from social insurance and means-tested social assistance until they are formally accepted as residents of the locality in which they have been living and working.6 In 2000 the number of migrants totaled more than 134 million—11 percent of the population (National Bureau of Statistics 2002).
Like other transition economies, China has also witnessed a sharp rise in income inequality and unemployment. In just 11 years (1994–2005), the state and urban collective sector, which previously employed almost all of the urban labor force, lost 71.8 million jobs (50.3 percent of the 1994 total) (National Bureau of Statistics 2006). Open unemployment, previously regarded as a temporary aber- ration, has come to be accepted as an endemic feature. The shift of employment
to the nonstate sector raises important issues for social protection, because, in general, jobs in the sector tend be less secure than those in the state sector and often do not provide social insurance cover.
China’s Social Security Schemes
The Chinese social security schemes divide into the familiar categories of con- tributory “social insurance” and means-tested “social assistance” (social safety net).
Each is characterized by two salient features: segmentation and highly decentralized financing and management.
The population is divided along two dimensions: rural/urban and permanent residents/immigrants in urban areas. These divisions are fading in some provinces and cities because of local initiatives to extend schemes generally restricted to the urban population to immigrants and the rural population at large.
In principle, urban residents who are not immigrants benefit from compre- hensive social insurance, comprising old-age pensions, work injury compensation, maternity benefits, health care, and unemployment insurance. These schemes are contributory and, by design, exclude those outside the labor force. In addition to social insurance, the urban population has since 1997 also benefited from MLSA.
In stark contrast, social security provision in rural areas is sparse. With the exception of two limited contributory schemes, all rural schemes are social assistance schemes aimed at relieving severe poverty only. Social insurance does not apply to the rural labor force, not even to wage employees of town and village enterprises (TVEs), who number 143 million (more than twice the 65 million employees in the state sector).
People in rural areas can participate in two contributory programs, the rural cooperative health care and the rural pension scheme. Both consist of a large number of independent local schemes covering only a small percentage of the rural population and providing limited protection.
The highly restricted social security cover has been justified on the grounds that each rural household has a plot of agricultural land, which serves as a floor to household income. Protection provided by land plots is highly variable, however, and is no substitute for that provided by a social security scheme.
To date, there is no clear policy toward developing rural pension schemes.
Following the outbreak of SARS (severe acute respiratory syndrome) in 2003, however, policy makers have sought to raise the percentage of the rural popula- tion with access to basic health care by vigorously promoting rural cooperative health schemes.
An urban bias in social security provision is common in developing economies.
The bias is to a degree unavoidable, given problems in designing contributory social security (social insurance) schemes for the self-employed or the informally employed even in developed economies. A particular problem in China lies with the anachronistic administrative distinction between the urban and rural popula- tions, which implicitly regards the rural labor force as self-employed and engaged
in farming. This distinction has been rendered obsolete with the rapid growth of wage employment in TVEs and the massive influx of rural migrants in urban areas.
Urban and particularly rural social security systems are highly decentralized. For both social insurance and MLSA, the budgetary units are 269 cities (excluding county-level cities and towns);7cities are generally expected to cover any deficit from their own budgets. Decentralization in rural areas runs deeper than in urban areas. Apart from a few schemes run by national and provincial governments, most of the social security schemes are organized at the grassroots level of villages. Such schemes include assistance to poor households, rural pensions, and cooperative medical insurance. The initiation, operation, and financing of rural schemes rest largely with lower-tier governments; higher-tier governments (provinces and the center) confine themselves to supervising and setting up pilot schemes.
The central and provincial governments transfer funds to lower government tiers to ensure that they meet their social security obligations. An overhaul of the system of intergovernmental finances has been high on the reform agenda for a number of years but still remains to be realized. A pooling of social insurance contributions and expenditures at the provincial level is the policy aim. This could take a number of forms, ranging from full integration to compensatory transfers within a decentral- ized system. A national pooling of social security contributions and expenditures, as recommended by the China Economic Research and Advisory Programme 1, does not seem to be immediately feasible (Asher and others 2004). A stepwise approach with provincial pooling as an interim stage may be more practical.
Social Security Reform
Given the urban/rural segmentation in social security provision, the immediate priorities are different in rural and urban areas. Over the past two decades, urban schemes have been the primary concern of most reform measures. This has begun to change, with the promotion of rural cooperative medical insurance. A combined social security system for urban and rural areas, although desirable, is infeasible in the immediate future for financial and administrative reasons. The tax system that such a system would require will take some time to develop. The current official position—that urban and the rural systems have to be reformed separately—is therefore realistic.
THEURBANSYSTEM
Thanks to a series of reforms, a new urban social security system has replaced the inherited system. The combination of social insurance and social assistance provides fairly comprehensive coverage. The five schemes that make up social insurance (old-age pensions, occupational injury compensation, unemployment benefits, medical insurance, and maternity benefits) follow well-tested principles and do not appear to suffer from major design faults. Some fine-tuning could improve these schemes, however.
Specifically, the age of retirement (50–60, depending on occupation and gender) is too low given rising life expectancy. A medium-term plan that raises the retirement age over time is needed. The scheme as it stands is still not finan- cially sustainable. The budgeting for old-age pensions needs to be moved up to the provincial level in order to reduce the risk of insolvency. In addition, pen- sion liabilities left behind by the old system, which lacked any forward financial planning, need to be resolved. The problem has been partly transformed into the problem of empty individual accounts by using contributions to individual accounts to pay current pensions. Payroll contributions are insufficient to both meet current pension liabilities and contribute to individual accounts, as initially planned. (For a discussion of this problem, see chapter 14 of this volume.)
Any solution to this problem must meet two requirements. First, sources of funding other than payroll contributions must be found. Second, reserves must be accumulated to at least partially meet future pension liabilities. The crucial issue concerns the extent of funding, which depends on whether individual accounts are treated as nominal or substantive. As suggested by the China Economic Research and Advisory Programme 1, there are strong arguments in favor of treating indi- vidual accounts as nominal but backed by a credible guarantee to meet all future pension liability.
TH E RU R A L SY S T E M
The immediate priorities in rural areas are to develop a means-tested social assistance scheme that covers the whole country and is underpinned by a national framework, modeled on the urban MLSA, and to create a system that finances and delivers medical care in order to widen access to basic health care. Development of a rural MLSA would help eliminate the gaps created by existing schemes. Such a scheme would eventually allow China to establish a single social assistance scheme that covers both rural and urban areas. A unified scheme would not only be equitable, it would also avoid the anomalies created by the migration of labor under the current social security regime.