A More Flexible Pension Scheme for Migrant Workers

By Weng Shiyou
Published: 2008-12-24

From Cover, issue no. 399, December 22, 2008
Translated by Li Jing
Original article
: [Chinese]

A draft to reform the social security scheme in allowing Chinese migrant workers to transfer their pension accounts and contributions nationwide has been finalized, sources revealed to the Economic Observer.

China has some 200 million rural farmers turned migrant workers, who move from city to city or province to province in search of jobs; but the current social security scheme forbids cross-province transfers of accounts.

As a result, migrant workers have to close their old accounts, withdraw their contributions and open new ones whenever they moved bases. In the process, they would lose part of their savings, as the higher contributions made by their previous employers would remain with respective local governments.

The EO learned that the reform draft, which aimed to resolve the above problem and better protect the workers' right, would be made public early next year.

The proposed Formula

As of the end of 2007, less than 10%, or 18 million, of the total population of migrant workers nationwide had joined the basic pension insurance scheme. But these rural-origin participants in the scheme failed to enjoy the same social security benefits as compared to their fellow urban citizens.

Besides forbidding transfer of social security account to new location, limiting withdrawal to individual contributions during closure of account; the present law and regulations also stated that migrant workers must have remained, worked and paid contributions in one place for at least 15 years to be eligible for drawing local retirement benefits.

These restrictions had led to a wave of migrant workers quitting the scheme. 

At present, the scheme's ratio of contributions by individual and employer differed among cities. The EO learned that this ratio would be standardized - 4% of the incomes from individual and 8% from employer - nationwide under the newly drafted scheme.

Of the 8% chipped in by the employer, 6% would be deposited into individual account. In other words, if a worker transferred his or her pension account to a new location in future, only the old employer's 2% contributions would remain with the local government of previous work place.

Standardizing the ratio of contributions would thus resolve the technical problems that long prevented migrant workers from transferring and resuming payments for their pension accounts nationwide.

In 2002, the fifth year after China launched the pension insurance scheme, the first wave of migrant workers quitting the scheme en mass took place in the Pearl River Delta region due to its inflexibility; by 2006, the number of withdrawals peaked. In Guangdong province alone, some 10 million migrant workers quit the scheme between 2002 and 2007.

The scenario had attracted the attention of China's State Council, who in early 2006 proposed to "step up efforts in formulating new ways to enhance the existing pension insurance scheme, aiming for lower insurance fees, more comprehensive coverage and transferable pension system for migrant workers."

Between November and December 2008, the team drafting the new scheme had sought a wide range of opinions from local governments and business community, as well as advices from related experts.

A Fragmented System
The EO learned that the new scheme prescribed two options for participating migrant workers to draw their pensions in the future - from the urban pension insurance system if they remained in the cities; or from the rural pension insurance system if they returned to the countryside.

"Every year, over ten million migrant workers transfer their rural household registration account into an urban one; but their amount of contributions to the pension scheme is about half that of the urban residents. Their future pension will be so small that how could they possibly survive?" commented Zheng Bingwen, scholar from the Chinese Academy of Social Science and director of Institute of Latin American Studies.

As for those opted to go back to their home towns in the countryside, Zheng said their future pension would be much higher than the local living standards.

He added to design a pension scheme solely for migrant workers would only further disintegrating China's already fragmented social security system.

He believed the ideal approach was to develop one pension scheme that covered all of China's citizens. "For the long run, that is in the interest of the society; yet for the short run, many hindrances exist," he added.

Some Chinese officials justified the various schemes for different social groups by saying that economic gaps existed among these groups and a one-for-all system would not be sensitive to their different needs.

In addition, they said China's dualistic urban-rural structure - which divided urban and rural production and resource mobility - also posed challenges for a unified system, and that changes could only evolve gradually.