Will the State‐owned Capital Transfer Policy Enhance the Sustainability of the Urban Employee Basic Pension Insurance Fund in China?

• Published date: 01 May 2024
• Author: Jia Wang,Huan Liu,Mei Li,Han Li
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/cwe.12533

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 98–129, Vol. 32, No. 3, 2024

98

Will the State-owned Capital Transfer Policy Enhance

the Sustainability of the Urban Employee Basic

Pension Insurance Fund in China?

Jia Wang, Huan Liu, Mei Li, Han Li*

Abstract

To analyze the effect of the state-owned capital transfer policy on the sustainability

of China’s urban employee basic pension insurance fund (CUEBPIF), this study

develops an actuarial model for pension insurance. The results reveal the following:

(i) Without policy intervention, the CUEBPIF would face a deficit in 2027 and a

cumulative shortfall of RMB207.44 trillion by 2050, and the proportion of fiscal subsidies

for the CUEBPIF in the total fiscal expenditure would increase to 12.86 percent in 2050.

(ii) Based on a delayed retirement policy, the transfer of 10 percent of state-owned

capital can delay the onset of the fund deficit by 6 years, and the accumulated shortfall

in 2050 would fall to RMB39.42 trillion, and the proportion of fiscal subsidies would

decrease by 11.77 percentage points. (iii) The state-owned capital transfer policy can

improve the sustainability of the CUEBPIF and reduce the burden of enterprise social

security contributions when the transfer ratio increases to 20 percent.

Keywords: burden of enterprise social security contributions, delayed retirement policy,

state-owned capital transfer policy, sustainability of basic pension insurance fund

JEL codes: C51, H55, J18

I. Introduction

The pension insurance system is the foundation of social stability. China has

established the world’s largest basic pension insurance system, with 999 million people

covered by basic pension insurance and a coverage rate of 95.6 percent as of the end

*Jia Wang, Post-doctoral Resea rcher, School of Economics , Xiamen Universit y, China. Email:

wangjedu0215@163.com; Huan Liu, Lecturer, School of Economics and Management, Nanjing Agricultural

University, China. Email: lhnenu0922@163.com; Mei Li (corresponding author), PhD Candidate, School

of Economics and Management, Wuhan University, China. Email: 13327839060@163.com; Han Li, PhD

Candidate, School of Economics, Xiamen University, China. Email: lih232@nenu.edu.cn. Jia Wang and Huan

Liu contributed equally to this work and should be considered co-first authors. This research was supported

financially by the National Social Science Fund of China (No. 21CZZ028).

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

State-owned Capital Transfer and Urban Pension Insurance Fund 99

of 2020.1 According to the 2018 China Health and Retirement Longitudinal Study

(CHARLS), urban employees’ income from their basic pension insurance amounted to

79.0 percent of retired employees’ income in 2017, which means that the government-

run urban employee basic pension insurance is the primary source of seniors’ income.

However, with demographic aging, issues regarding the sustainability of China’s

pension insurance system, particularly the urban employees’ basic pension insurance

fund (CUEBPIF), have emerged as a critical and urgent challenge (Kaganovich and

Zilcha, 2012; Liu, 2014; Tian and Zhao, 2016).2

China’s state-owned capital transfer policy (SOCTP) is currently undergoing

continuous adjustments and optimization. The policy has completed the equity transfer

phase and is poised to enter the income transfer phase. Based on an actuarial model

from a financial perspective, this study examines the utility of the SOCTP in addressing

the sustainability issues of the CUEBPIF. It also evaluates the role of the SOCTP in

easing fiscal pressure on subsidies for basic pension insurance and explores how it can

be coordinated with the implementation of a delayed retirement policy and tax reduction

measures. This research has significant value as a resource for the optimization of

China’s current basic pension insurance system and lays a foundation for the future

comprehensive implementation of the SOCTP to establish a highly systematic,

comprehensive, and sustainable operational governance mechanism and system.

The sustainability of pension insurance is a challenge faced by countries worldwide.

Potential solutions to this issue include parameter reform, structural reform, and

the introduction of external funding. Parameter reform has been adopted widely by

Organisation for Economic Cooperation and Development (OECD) countries for three

reasons (OECD, 2012). First, such reform can increase the labor force and decrease

the number of pension recipients by implementing delayed retirement, introducing

immigration, and increasing birth rates (Bazzana, 2020). Second, parameter reform

can reduce pension expenditures by indexing pension growth to social inflation or the

1Coverage rate = number of insured individuals/(total population – population under 16 years old – number of

university students – number of high-school students), where the number of university students is calculated

as the sum of graduate students, regular undergraduate and associate degree students, as well as adult

undergraduate and associate degree students. The total population and the number of people under the age of

16 years are from the seventh national population census, and the number of college and high school students

is from the National Bureau of Statistics (available from: https://data.stats.gov.cn/easyquery.htm?cn=C01

[online; cited January 2024]).

2The division of the Chinese basic pension insurance is contingent on the status of its participants and

encompasses the basic pension insurance available for urban and rural residents, urban employees, and public

institutions and organizations. Notably, the primary focus of the urban employee basic pension insurance is

enterprise employees, individual business owners, and those who are flexibly employed.

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©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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consumer price index rather than to the faster growing average social wage (Jensen et al.,

2018). Third, it can introduce market mechanisms into public and private pension plans

and entrust private financial companies with investing and operating to enhance pension

investment returns (Ebbinghaus, 2011; Hassel et al., 2019). Meanwhile, structural reform

is a means of alleviating the pressure of basic pension insurance payments by constructing

a multilevel pension insurance system, with basic social pension insurance, enterprise

annuities, and commercial pension insurance as the main components (Wang et al., 2016).

The introduction of external funding is a strategy in which the government uses taxes and

public debts to support the basic pension insurance (Wang and Huang, 2023).

The CUEBPIF must pay accrued transition costs while dealing with the effects of

demographic aging (Wang et al., 2014). In the transition process from a pay-as-you-go

(PAYG) basic pension system to a hybrid model combining social pooling and individual

accumulation, transition costs refer to the basic pension received by the current retirees

and the transitional pension obtained by middle-aged individuals (Sun and Maxwell,

2002).3 The reform of China’s basic pension insurance system for urban employees has

resulted in transition costs. In the early 1950s, China introduced the basic PAYG pension

insurance system for urban employees. Under this system, enterprises collected and paid

labor union fees based on total salaries, and employees were exempt from paying the

relevant pension insurance fees. The eligibility requirements for labor insurance benefits

were the length of service documented in an employee’s file and their labor relations. After

more than a decade of exploration, experimentation, and development following reform

and opening up, China introduced the Decision of the State Council on Establishing a

Unified Basic Pension Insurance System for Enterprise Employees in 1997 (hereinafter

referred to as State Council document 1997 No. 26) and the Decision of the State Council

on Improving the Basic Pension Insurance System for Enterprise Employees in 2005

(hereinafter referred to as State Council document 2005 No. 38), which clearly defined

the need to establish a hybrid pension system that combined social pooling and individual

accounts. During the transition from the PAYG system to that of partial accumulation,

“current retirees” had no individual account fund accumulation, and their company made

no contributions to the social pooling fund on their behalf. Consequently, their pension

was derived from the social pooling fund, financial subsidies, or the misappropriation of

other participants’ individual account funds. The pension of current retirees accounts for

a portion of the transition costs. The number of years used to calculate the basic pension

3The “current retirees” in urban employee basic pension insurance are those who retired before the

implementation of the Decision of the State Council on Establishing a Unified Basic Pension Insurance

System for Enterprise Employees issued by State Council in 1997, and the “middle-aged individuals” refers to

those who started working before 1998 and retired after 2005 (Qi and Tao, 2011).