China & Social Insurance

A] Prelude

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B] The Issue

Increased scrutiny of businesses in China that evade their social insurance obligations looks set to further boost the employment of retirees, prompting widespread concerns as a record number of university graduates tries to find work.

It all came to a head recently when recruitment notices put out by the McDonald’s fast food chain, which has been employing retirees for years, sparked an emotional response on Chinese social media platforms. “The logic behind it is simple – hiring retirees means companies don’t have to pay social insurance contributions,” one user wrote on the Weibo microblogging platform.

Another complained: “If this becomes widespread, elderly people can have double pay, but opportunities for younger people will shrink.” One does not see these type of issues often (in other countries).

C] The Details & Actions

A Supreme People’s Court judicial interpretation released recently will invalidate any agreements between employers and employees to forgo social insurance contributions. It will come into effect at the start of next month, and businesses that fail to comply could face legal penalties and demands for retroactive payment.

Strict collection of social security contributions, which go into funds covering areas including the provision of pensions, housing loans and medical, maternity and unemployment insurance, could prove vital in tackling the country’s pension crisis.

D] High SME Costs

In 2019, a report released by the Chinese Academy of Social Sciences warned that the surplus of the national urban employee basic pension fund could be depleted by 2035 as the number of elderly people increases and the working population dwindles.

While government subsidies to the social insurance fund reached 2.6 trillion yuan (US$362.3 billion) last year, the burden faced by businesses remains substantial. They have to contribute a sum equivalent to around 27% of each worker’s salary to the fund each month, as well as up to 12% to a housing provident fund that offers homebuyers low-interest loans.

“The impact will be huge on China’s most vulnerable economic groups, such as small, low-profit businesses, family-run shops and gig workers,” warned Liang Lu, an adviser to the Dongguan Disabled Entrepreneurs Association in Guangdong province and a long-time observer of labour issues. “Many micro-sized and small businesses may fold.

“In many cities, social insurance costs can reach nearly 20,000 yuan per employee per year – wiping out profit margins. Many will have no choice but to close.”

E] Lax Collection

For decades, the actual collection of contributions has often been lax, with many small businesses making cost-saving deals with employees that dodged their social insurance obligations. Meanwhile, some gig workers and migrant workers have accepted higher cash wages in lieu of social insurance benefits, as local authorities cut deals to keep factories humming and workers employed.

F] Hiring Retired Persons

As the loopholes are plugged, hiring back retired people is one of the few remaining ways to avoid such mandatory contributions.

The urban jobless rate for those aged 16 to 24, excluding students, dipped to 14.5% according to data released by the National Bureau of Statistics last month. But a sharp rise is expected in the figures for July and August, when a majority of the record 12.2 million university graduates this year began looking for work.

G] Level Of Non Payment

Liu Kaiming, a sociologist and founder of the Shenzhen-based Institute of Contemporary Observation, estimated that at least 30 to 40% of small businesses and flexible employment positions have never paid into pension or work-injury insurance. “In industries such as stone processing and decoration, most workers have almost no social insurance at all,” he said.

Against the backdrop of an economic slowdown and weak consumption, Liu said that adding tens of thousands of yuan in annual social insurance expenses would push many small businesses to lay off workers or close down.

H] Funding…

Finding more revenue to fund pensions and social welfare benefits while trying to lower business costs to support smaller employers has been a dilemma long faced by Beijing – but it has become particularly acute this year.

China’s social insurance system for urban workers primarily includes pension insurance, medical insurance, unemployment insurance, work-related injury insurance and maternity insurance, and the housing provident fund, with contribution bases varying across regions.

In Beijing, for instance, a business’ monthly expenses include a pension fund contribution equivalent to 16% of each worker’s salary, 5 to 12% for the housing provident fund, 9.8% for medical and maternity insurance, 0.5% for unemployment insurance and 0.45% for work-related injury insurance.

Employees should also contribute 8% of their salary for the pension, 5 to 12% for the housing fund, 2% for medical and maternity insurance and 0.5% for unemployment insurance.

The government also sets the minimum base – usually 60% of the city’s average salary level, which is the same as its minimum salary – for combined business and worker contributions.

I] SME Example

Ella Chen, who runs a milk tea shop in Guangzhou, Guangdong’s provincial capital, said that paying social insurance for her two assistants would almost halve her monthly profit. “Business has already been poor this year, with profits of just 4,000 or 3,000 yuan left a month,” she said. “Covering this cost would force me to close.” “I’ll probably have to shut down before the regulators come to fine me.”

Many delivery workers also prefer cash to social insurance. “Every penny I earn goes to my family,” said Wang Hu, a delivery rider in Guangzhou who hails from Jiangxi province. “The policy requires 20 years of contributions to get a pension. I’ll never meet the requirement, so I won’t get a pension. I don’t want to pay.”