The Social Protection System in Ageing China

• Published date: 01 July 2015
• DOI: http://doi.org/10.1111/aepr.12103
• Date: 01 July 2015
• Author: Yang Du,Fang Cai

The Social Protection System in

Ageing China

Fang CAI and Yang DU†

Chinese Academy of Social Sciences

China has made great progress in weaving its social safety net in the new century. By constructing

the three pillars of its social protection system – the pension system, the medical care system, and

social assistance – China is trying to cover all its people under the system. Regardless of these great

achievements in coverage, China has been facing challenges in the era of population ageing. In

addition, the system per se needs to be integrated among various groups of people. Sustaining and

strengthening the three pillars will rely on labor productivity improvement, adequate choices of

welfare, and efficiency improvements.

Key words: ageing, pension system, social assistance, social protection, social security

JEL codes: J26, H53, H55

1. Introduction

China has made great progress in weaving its social safety net in the new century. For the

first time, social insurance programs for old age pensions and medical care have been

introduced to the rural areas in the past decades. Aiming to increase the coverage of its

social programs, the Chinese government has successfully provided most Chinese citi-

zens with a basic social protection in a very short period.

The evolution of the social protection system in China has been featured by the eco-

nomic transition. Prior to the reform in the early 1980s, China did not have any specific

social program to secure the livelihood of the Chinese people. Instead, a strict socioeco-

nomic segmentation between rural and urban areas was applied. In urban areas where

the state or collective-owned economies were dominant, employees’ employment was

fully protected and various benefits were associated with this employment. In contrast,

the social protection in rural areas was negligible, while all the protection for rural resi-

dents relied on limited output from the land. Although the planning economic system

has been abandoned, as we see later on in this paper, it still has an effect on the social

protection system in contemporary China.

China started the construction of a social protection system that is compatible with

the market economy in the 1990s. The radical reform of state-owned enterprises (SOEs)

brought about labor market dislocations in urban areas, as evidenced by the appearance

of massive unemployment and layoffs (Cai et al., 2005; Giles et al., 2006). In addition to

†Correspondence: Yang Du, Institute of Population and Labor Economics, Chinese Academy of

Social Sciences, 28 Shuguang Xili, Chaoyang District, Beijing 100028, China. Email: duyang@

cass.org.cn

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doi: 10.1111/aepr.12103 Asian Economic Policy Review (2015) 10, 250–270

© 2015 Japan Center for Economic Research250

active labor market programs, the Chinese government has devoted itself to establishing

a social protection system in order to support employees who become disconnected from

their employers.

The evolution of the social protection system enlarges the gap of social welfare

between urban and rural areas, which is a de facto barrier of labor mobility. In the new

century, some social protection programs have been extended to the rural areas, includ-

ing the medical care system and pension system. However, both the designs of the

urban and the rural social protection systems are based on hukou, a household regis-

tration system. Identified by the locality of hukou, the social programs vary across

regions with segmentation between rural and urban areas. The hukou system signifi-

cantly affects the design and implementation of social programs in China. Although

the central government has made up its mind to comprehensively reform the hukou

system, the attachment of the hukou system to social protection and the huge

variations in social programs have become the most serious barriers to the reform

agenda.

Among the challenges facing the social protection system, the rapid population

ageing dwarfs all the others. In 2013, 202.4 million people are 60 years old or above,

accounting for 14.9% of the total population in China. The degree of ageing in China is

more serious than in many other countries with a similar level of economic develop-

ment. When China kicked off the main social programs in urban areas, there was no

saving in individual or social accounts. In this case, China actually implements a pay-as-

you-go pension system, the affordability of which relies on secular labor productivity.

The government has to bear the overlapped fiscal burdens. One of them is to pay the his-

torical deficit in social insurance, and the other is to deal with the additional burden of

quickly ageing population.

The rest of the paper is organized as follows. Section 2 introduces the current social

protection framework in China, which focuses on the three pillars of the system. Section

3 describes several dimensions of the segmentation of social protection system. The next

section analyzes the challenges of population ageing and the fiscal burden for the central

and local governments. Section 5 concludes the paper.

2. The Structure of Social Protection System in China

In the past decades, China has made great effort to establish its social protection

network. Although the social protection system is not perfect so far, China has made

great progress in trying to cover as many people in the system as possible.

2.1 The framework of social protection system in China

The current social protection system consists of two types of social programs. One of

them is contributory social insurance, for example pension programs or medical care

system. The other one is non-contributory programs, that is the social assistance pro-

grams. The social protection system mainly consists of both social insurance programs

and social assistance programs. According to their importance, however, there are three

Fang Cai and Yang Du Social Protection System in Ageing China

© 2015 Japan Center for Economic Research 251