Social insurance changes from 1 May: has your pension shrunk?
From 1 May 2019 provinces may reduce the employer's contribution to the basic pension for urban employees to 16 per cent, and the contribution base is to be set on average urban wages calculated across both private and non-private employers, which will lower it for many. Only the employer's share falls, so take-home pay is untouched, while lower-paid workers pay less. The central adjustment ratio rises to 3.5 per cent, so that pensions continue to be paid in full and on time.
What has changed
(1) A lower employer contribution rate for the basic pension
"From 1 May 2019 the employer's contribution rate for the basic old-age insurance of urban employees will be reduced. Provinces whose employer rate is currently above 16 per cent may reduce it to 16 per cent; those currently below 16 per cent must study and propose transitional arrangements."
It is well known that old-age insurance is funded by employer and employee together, and that in most provinces the employer's rate is 20 or 19 per cent, which is on the high side and accounts for the greater part of the employer's social insurance contributions. This reduction therefore affects enterprises most directly. Paying social insurance for employees is a significant expense, so cutting the rate directly reduces the burden: with lower operating costs a company has more money for day-to-day operations and investment. The reduction will also noticeably narrow the differences between provinces. Contribution rates have never been uniform, running as high as 20 per cent in some provinces and as low as 14 per cent in others, so that enterprises in economically active provinces with plentiful labor have carried a lighter pension burden and lower rates, while enterprises in provinces with severe ageing and slower growth have carried a heavy burden and have been unable to bring their rates down, making it harder for them to invest and expand, in a vicious circle. This reduction evens out the burden between enterprises and helps to create a fairer competitive environment. For individuals, because only the employer's pension rate is reduced and the employee's rate is unchanged, pay is unaffected.
(2) A lower social insurance contribution base
"Each province shall determine the upper and lower limits of the individual contribution base by reference to the average wage of urban unit employees calculated across all urban units, being the weighted average of the average wage of employees in urban non-private units and that of employees in urban private units, and shall reasonably reduce the contribution base of some insured persons and enterprises. Self-employed persons and persons in flexible employment who join the basic old-age insurance for enterprise employees may choose an appropriate contribution base of between 60 and 300 per cent of the average wage of urban unit employees in the province, calculated across all urban units."
Under the previous arrangements the upper and lower limits of the contribution base were artificially high, because they rested only on the average wage of employees in urban non-private units and left out the average wage in private units. Including private units in the statistical basis means that low earners are no longer averaged upwards; the base falls, the social insurance burden on enterprises is eased, and individual take-home pay and future pensions are affected. Research and expert study have found that low earners were formerly required to contribute on a base equal to 60 per cent of the previous year's local average wage, although many in fact earned less than 60 per cent of that average. Once the base is adjusted, the base for low earners falls and their take-home income rises, which reduces the cost of employment for enterprises and encourages them to hire.
(3) A higher central adjustment ratio for the pension fund
"The central adjustment of the basic old-age insurance fund for enterprise employees will be strengthened. In 2019 the central adjustment ratio will rise to 3.5 per cent, further evening out the pension fund burden between provinces and ensuring that the basic pensions of retired enterprise employees are paid in full and on time."
Reducing the contribution rate genuinely eases the social insurance burden on enterprises, and it will indeed reduce the income of the pension fund and increase the pressure on its revenue and expenditure, but it will not affect the payment of pensions. Structurally, in the great majority of provinces the fund's revenue and expenditure remain sound after the reduction and its capacity to support payments is good, so that there is no question of the fund running dry. Financial departments at every level will also continue to increase subsidies to the basic old-age insurance fund, and central adjustment will be further strengthened. With the ratio raised to 3.5 per cent, the central adjustment fund is forecast to reach about 600 billion yuan in 2019, with about 160 billion yuan flowing to the provinces that benefit, which will further ease the pressure on pension payments in the central and western provinces and the old industrial bases, where the fund gap is larger.
Overall, with effort at both central and local level, this reduction in social insurance rates will genuinely ease the social insurance burden on enterprises while ensuring that the social insurance benefits of retired workers are unaffected and that pensions grow reasonably and are paid in full and on time.