Cuts in Social Security Contributions: Forcing Local SOEs to Reform?

On March 21, the Shanghai government announced the drop of contributions by companies to social security premiums by 2.5 percent. This move makes Shanghai the 7th region in the country to cut employment costs. The city cut its pension contributions by 1 percent, medical insurance by 1 percent, and unemployment benefits by 0.5 percent, while maintaining the same level of social security benefits. The Shanghai government expects the decision to cut corporate contributions by RMB 13.5 billion in the following 12 months.
  
Five provinces, Guangdong, Yunnan, Gansu, Guizhou, and Jiangsu, together with Tianjin municipality, have reduced the company share of social security premiums earlier in the same drive to boost the real economy. Of all these provinces, Guangdong collects the smallest corporate share of pension funds, an average of 14 percent province wide compared to the 20 percent national average, and with medical insurance at 6 percent compared to the national range of 8-10 percent. In 2016, Guangdong’s cut will save corporations RMB 35 billion. All other provinces are expected to shortly follow with their own cuts.

The financial and tax advisory company, S. J. Grand, compiled social security contribution data (See Table 1) and it shows that at a per capita income level of USD 8,000 nominal term or USD 13,500 in PPP term, Chinese companies pay one of the highest social security burdens in the world, adjusted for income level.

Chinese pension funds run on a provincial basis, and 7 provinces are running cash deficits in 2015. The looming demographic retirement wave will pose a serious challenge to the viability of the social security system down the road. The current move to lower corporate contributions without cutting benefits will further add to the potential problem.

Aside from studies underway to push the retirement age higher, China is reviving an earlier plan to assign provincial State Owned Enterprises’ (SOEs) assets to provincial social security funds to augment their asset pools to meet pension payments. At the end of 2015, the funds’ pool balance ranged from a high of 40-50 months’ pension payments for wealthy provinces to 1-2 months for poor provinces. The government is thus aware of the need to solve the potential funding problem.

Shandong province transferred 30 percent of the assets of three provincial SOEs to Shandong provincial social security fund in May 2015 and the province plans to complete the transfer of 30 percent shares of the other 368 provincial SOEs by the end of 2016. The assignment is the first in China and other provinces are expected to eventually follow suit.

Cutting the corporate contribution rate to social security is miniscule within a 2 percent vicinity, and the boost to the economy will be limited. Singapore’s experience in its 1985 recession was to cut the contribution rate by 15 percent in order to provide a meaningful boost to the economy. This measure sent a strong signal of the government’s intention to limit welfare spending and assisted corporations to cut costs. The increasing shortfall in social security fund balances will certainly accelerate the transfer of local SOE assets to local social security funds and the cash needed by the social security system will hopefully accelerate governance reforms of local SOEs.