Streamlining Pension Contributions in the People’s Republic of China

• An inaccurate contribution base has been a long-standing problem in collecting basic pensions in the People’s Republic of China (PRC), where underreporting leads to significant shortfalls. Moreover, pension contribution rates are set by each province and the collected contributions are pooled within provinces, which limits the transferability of pensions nationwide and inhibits labor mobility. Against this background, the current pension contribution system in the PRC faces two main challenges: determining the pension contribution base and setting the pension contribution rates. • Determining the contribution base remains difficult for six reasons: (i) the entrance thresholds of the contribution base vary by region, (ii) the definition of indicators to determine the average employee salary used for calculating the contribution remains unclear, (iii) using the average employee salary as the only indicator to collect and pay pensions leads to a choice dilemma, (iv) obstacles exist in collecting pension contributions, (v) difficulties in verifying the contribution base lead to an inaccurate base, and (vi) inadequate auditing of employers leads to enterprises circumventing regulations.


摘要
• An inaccurate contribution base has been a long-standing problem in collecting basic pensions in the People's Republic of China (PRC), where underreporting leads to significant shortfalls. Moreover, pension contribution rates are set by each province and the collected contributions are pooled within provinces, which limits the transferability of pensions nationwide and inhibits labor mobility. Against this background, the current pension contribution system in the PRC faces two main challenges: determining the pension contribution base and setting the pension contribution rates. 长期以来， 中华人民共和国 (中国)在征缴基本养老金方面存在着缴费基数不清的问题， 而低报则导 致养老金账户出现巨大缺口。此外， 养老金缴费率由各省确定，且缴存的养老金集中在各省，这不仅 限制了养老金在全国范围内的转移， 也抑制了劳动力的流动。 在这一背景下， 中国现行的养老金缴费 制度面临两大挑战： 确定养老金缴费基数和设定养老金缴费率。 • Determining the contribution base remains difficult for six reasons: (i) the entrance thresholds of the contribution base vary by region, (ii) the definition of indicators to determine the average employee salary used for calculating the contribution remains unclear, (iii) using the average employee salary as the only indicator to collect and pay pensions leads to a choice dilemma, (iv) obstacles exist in collecting pension contributions, (v) difficulties in verifying the contribution base lead to an inaccurate base, and (vi) inadequate auditing of employers leads to enterprises circumventing regulations. 目前在确定缴费基数方面仍然存在一定困难， 主要有六个方面的原因： (1)各地的缴费基数下限存 在差异； (2)在确定用于计算缴费的职工平均工资方面所使用的指标定义不清晰； (3)将职工平均工 资作为养老金征缴和发放的唯一指标，导致选择困境； (4)养老金缴费征缴存在困难； (5)在核查缴 费基数时面临诸多困难， 导致缴费基数不准确； 以及 (6)稽核不力导致部分企业违规。 • There are two difficulties in setting pension contributions rates: (i) employer contributions are not pooled at the national level, and (ii) there is competition between local governments to attract foreign investment through lower contribution rates.

在确定养老金缴费率时，面临两大困难： (1)企业缴费未实现国家统筹；以及(2)各地政府之间存在 竞争，通过降低缴费率来吸引外资。
• Although the government has adopted important reforms, including lowering the employer pension contribution in March 2019, further actions are needed. This policy note suggests the following measures: (i) consolidate the contribution base while stabilizing the level of government subsidies to the basic pension; (ii) reform the method for determining the contribution base and achieve national pooling; and (iii) establish an interagency information exchange network. 为应对上述挑战， 中国政府实施了多项重大改革，并于2019年3月下调企业养老金缴费率， 但这些措 施还远远不够。本政策简报建议采取以下措施： (1)在稳定政府对基本养老金补贴水平的同时， 巩固 养老金缴费基数； (2) 改革养老金缴费基数确定办法， 并实现养老金的全国统筹； 以及 (3)建立跨部 门信息交流网络。 观察与建议 I. BACKGROUND 1. In July 2018, the General Office of the Communist Party of China Central Committee and the General Office of the State Council promulgated the Reform Plan of Collection and Management of National Tax and Local Tax. The plan specified that various social security contributions (SSCs), including for basic pension, basic medical care, unemployment insurance, work-related injury insurance, and maternity insurance, would be uniformly collected by the State Taxation Administration from 1 January 2019. Collection by the State Taxation Administration, instead of the Ministry of Human Resources and Social Security (MOHRSS), will improve the capacity and efficiency of SSC collection and management, and will help close loopholes in previous collection and management practices, thereby promoting social equity.
2. However, the plan has raised concern among some enterprises, which consider the proposed changes burdensome. In response, the relevant government departments have decided to temporarily suspend the implementation of tax collection decisions and collect SSCs using the original collection measures. An inaccurate contribution base has been a long-standing, unresolved problem in collecting SSCs, particularly for basic pensions, where underreporting leads to significant shortfalls. This problem must be solved, and to do that, a systematic analysis of its reasons is needed to offer feasible solutions.
3. In March 2019, the Government of the People's Republic of China (PRC) announced a rate cut for employers' pension contributions, reducing the rate from 19%-20% to a maximum of 16% of the wage bill. Although this cut is a step in the right direction, other issues remain. For example, pension contribution rates are set by each province and the collected contributions are pooled within provinces, which limits the transferability of pensions nationwide and inhibits labor mobility. Addressing the problems of underreporting and nationwide pooling is essential to enhance efficiency and create room to lower nominal contribution rates, which would help employers actually make the set contributions without having to bear a significant additional financial burden. Based on international experiences, this policy note offers recommendations to that effect.

A. Determining the Pension Contribution Base
5. Because of complex verification procedures, the accounting standards of some indicators used for determining the pension contribution base are not standardized. Meanwhile, a degree of autonomy in setting the contribution base leads to a great difference in the actual implementation of the contribution base among different regions. To reduce their contributions, companies often underreport employee salaries to the MOHRSS, which is not able to check the reports because it has no access to tax data. According to a 2018 white paper on social security, only 27% of the surveyed enterprises paid full SSCs according to their employees' actual salaries. 1 Determining the contribution base remains difficult for six reasons (paras. 6-11).
6. First, the entrance thresholds of the employee contribution base vary by region. According to a 2018 report by China Labor Watch, in 31 major cities-14 of which are provincial capitals-the ceiling of the contribution base was 300% of the average of local employee salaries in the previous year. 2 However, the determination of the entrance threshold of the contribution base in these cities differed as follows: (i) In 19 cities, 60% of the average of the local employee salary in the previous year was used as the entrance threshold, strictly implementing government policies and regulations.
(ii) In seven cities, about 50% of the average local employee salary in the previous year was used as the entrance threshold.
(iii) In three cities, about 40% of the average local employee salary in the previous year was used.
(iv) In two cities, a specific value was stipulated as the entrance threshold of the contribution base using the average local employee salary in the previous year.
7. Second, the contribution base is determined by the average employee salary, but this average is confusingly defined. In central government documents, different terms are used, such as "the average local employee salary" and "the average local on-the-job employee salary." At the local government level, multiple indicators are used, such as "the average on-the-job employee salary in non-private sectors in urban areas," "the average employee salary in the urban non-private sector," "the average salary of legal entities in a city," and "the average salary in a city." The multiple definitions lead to different ways of calculating the average employee salary across locations. 观察与建议 8. Third, using the average employee salary as the only indicator to collect pension contributions and pay pensions leads to a choice dilemma. The average employee salary is not only an important referential index for determining the employee contribution base, but also the basis for determining pensions. Contributors want to pay in as little as possible, while retirees hope that the average pay of employees is as high as possible to receive higher pensions. Therefore, in some areas, the smaller "average employee salary citywide" is used to determine the contribution base, but the larger "average on-the-job employee salary citywide" is adopted for pensions.
9. Fourth, there are two common challenges with employees' pension contributions: (i) actual pension contributions are often close to the lowest possible amount, and (ii) low-income earners have to pay high contributions. In the first case, a large number of employees only contribute at the entrance threshold of the local contribution base. In the second case, low-income earners whose salaries are below the entrance threshold of the local contribution base have to make SSCs based on the threshold of the local contribution base.
10. Fifth, the complex content and difficult task of verifying the contribution base lead to an inaccurate base. Because of different regulations promulgated by the National Bureau of Statistics and the accounting regulations and standards adopted by different enterprises, it is difficult to classify some fringe benefits strictly by the wage composition, resulting in underreporting and concealment. Furthermore, the Regulations on the Composition of Gross Wages, 1990 specify the wage composition in great detail, while the National Bureau of Statistics regularly modifies related provisions on total salary. It is therefore challenging for the MOHRSS to approve contribution wages every year.
11. Sixth, inadequate auditing often leads to enterprises circumventing regulations. When the MOHRSS collects pension contributions, the accuracy of the contribution base is determined by auditing. However, because of asymmetric information and an insufficient number of auditors, the ministry has curtailed auditing measures, relying instead on employee complaints to become active. In case a false contribution base is found, the MOHRSS would resolve it by negotiating with the employer.

B. Setting Pension Contributions Rates
12. The level of social security contribution pooling is low. Although the central government incorporated the goal of national pooling for the urban basic pension into the Thirteenth Five-Year Plan, 2016-2020, it is unlikely to be achieved by the end of 2020. At present, only provincial pooling (i.e., the provincial governments are responsible for the collection, payment, and management of their basic pensions) has been achieved, and in some provinces only nominal pooling or an intra-provincial adjustment has been set. Although the central government has promulgated clear policies on the 理顺中国的养老金缴费体系 basic pension insurance system, enforcement remains weak. As a result, once an imbalance occurs and local governments face financial constraints in paying the social security fund, they have to turn to the central government for support. In the opposite case, if revenues exceed expenditures at the local level, local governments tend to lower the contribution rate, thereby breaching the rules.
13. Another challenge stems from attempts of local governments to attract foreign investment through lower contribution rates. This is possible when the local security fund receives more than it disburses. This results in well-developed regions having adequate social security funds while poorer regions do not. By reducing SSCs, more foreign investment can be attracted, creating more jobs. This in turn attracts a younger labor force and increases the collection of social security funds. By contrast, regions with insufficient social security funds are normally less developed economically and are not able to reduce the contribution rate. A higher contribution rate hampers their efforts to attract foreign investment and drives out existing enterprises, capital, and labor, further reducing social security funds. This causes large differences among provinces. For instance, before May 2019, the employers' contribution rate was 14% in Guangdong and 20% in Heilongjiang.

III. POLICY RECOMMENDATIONS
14. While reducing employer pension contribution rates was a first step in reforming the SSC system, the contribution base remains small and rates remain high. Other issues in the current system include low efficiency in SSC collection and the underreporting of employee salaries by employers. To further reform the system, steps are needed in three directions: (i) further reducing the burden on enterprises, while keeping government subsidies manageable; (ii) enhancing collection efficiency and pooling; and (iii) improving information exchange to minimize misreporting.

A. Reducing the Burden on Companies While Keeping Government Subsidies Manageable
15. Consolidate the contribution base and further reduce the contribution rate. For any given amount of contribution, there is a trade-off between the contribution base and rate. Once the current contribution base is consolidated, the contribution rate can be reduced further. The current employer rate of contribution is still high because the contribution base is not accurate. To consolidate the contribution base, the authority for SSC collection should be transferred from the MOHRSS to the State Taxation Administration, to which salaries are reported for tax purposes. This would make systematic underreporting more difficult.
16. Stabilize the level of government subsidies to the basic pension insurance. Without government subsidies, the PRC's national pension fund for urban employees should have been in deficit since 2015. Moreover, the Chinese Academy of Social Sciences estimated that local 观察与建议 pension funds in 16 provinces would be in deficit in 2019, even with fiscal transfers from the central government. Under the current pension system, government subsidies should be increased to compensate for the inadequate collection of pension contributions. However, rapidly increasing government subsidies to the basic pension will add pressure on public finances. For example, the Government of Japan increased the ratio of government subsidies to the basic pension from onethird to one-half in 2009, causing an increase in subsidies paid from 1.5% of gross domestic product (GDP) in 2008 to 2.0% of GDP in 2009. Since then, it has remained broadly unchanged and stood at 2.1% of GDP in 2018. Considering that in the PRC the government subsidy to the basic pension for urban employees reached 1.0% of GDP in 2018, the level should be kept under 1.5% of GDP in the next 5 years.

B. Enhancing Collection Efficiency and Pooling
17. Reform the method for determining the contribution base in two steps. The first step is to determine the scope of wages used for calculating SSCs. The scope of wages used for SSC calculations should differ by type of organization. For enterprises, as their employees' salary often consists of different components, the focus should be on the main part of the remuneration as the basis for the verification of the wages. Since the pay structure for government agencies and institutions is relatively clear, it is possible to use all the items incorporated in the salary for calculating the SSC. For freelancers, it is advisable to set the local minimum contribution as a common standard when integrating them into the basic pension contributions for urban employees.
18. The second step is to set the minimum wage standard as the minimum contribution base and to use the current month's salary as the regular contribution base for SSC calculations. The minimum wage standard, which is published in various regions, constitutes the minimum pay. Therefore, the minimum wage standard should be adopted as the local minimum contribution base. Employees contribute to the pension insurance in line with their own monthly wage. By separating the contribution base from the local average wage, employees will contribute based on their actual wage, thereby solving the problem of low income but high contribution. Meanwhile, it is necessary to retain 300% of the local average wage as a ceiling on the contribution base. This figure is reasonably close to the average of the ceilings (224%) for 20 countries within the Organisation for Economic Cooperation and Development (OECD) in 2016. 3 19. Achieve national pooling for the basic pension system for urban employees. To move to national polling of the basic pension system, two measures are recommended: (i) clarify the financing and payment responsibilities between the central and local governments, delineating their rights and obligations clearly; and (ii) establish a unified information platform and a national actuary system to consolidate provincial data and to develop a realistic implementation plan for the pooling.

C. Improving Information Exchange to Minimize Misreporting
20. Establish an interagency information exchange network to avoid fraud or misreporting. By establishing a three-party information exchange platform-including government agencies in charge of social security, taxation, and the banking system-the effectiveness and efficiency of supervision of pension collection and management can be improved. Sweden is a good example in setting a fully integrated network for collecting and managing SSCs, including pension contributions. In the mid-1980s, the Swedish Tax Agency was assigned responsibility for collecting SSCs using a national computer system. Today, personal identity numbers are used in this system so that information can be easily shared with the Swedish Social Insurance Agency. SSCs are collected from employers, who make payments into the Swedish Tax Agency's bank account.

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Streamlining Pension Contributions in the People's Republic of China

分两步改革缴费基数确定办法。第一步， 确定用于计算社保的工资范围。 在确定这一范围时，应 考虑到不同的组织类型。对于企业来说，职工薪酬往往形式多样， 因此应重点关注薪酬的主体部分，
The current pension contribution system in the People's Republic of China faces two main challenges: determining the pension contribution base and setting the pension contribution rates. Although the government has adopted important reforms, including lowering the employer pension contribution in March 2019, further actions are needed.
This policy note suggests the following measures: (i) consolidate the contribution base while stabilizing the level of government subsidies to the basic pension; (ii) reform the method for determining the contribution base and achieve national pooling; and (iii) establish an interagency information exchange network.