China Enforces Social Security Mandate, Workers Face New Challenges

China is set to implement significant changes to its social security system on September 1, 2023, as the Supreme People’s Court prohibits informal agreements that allow workers to opt out of mandatory social insurance contributions. This decision aims to address long-standing loopholes that have allowed many of the country’s lowest-paid workers to prioritize immediate wages over future benefits. However, experts warn that these reforms may inadvertently lead to increased insecurity for some employees.

New Regulations Aim to Strengthen Welfare System

For years, many workers in China have accepted higher wages in exchange for waiving their rights to social insurance. According to a briefing on August 1 by the Supreme People’s Court, employers offering cash incentives instead of contributions to social insurance are acting unlawfully. Judge Zhang Yan noted that some workers have requested employers to pay them directly, leading to a culture where higher take-home pay is valued over long-term security.

The aim of these regulations is to bolster the long-term sustainability of China’s extensive welfare system, which serves over one billion people and is crucial for an aging population. Yet, the new mandate could place a heavier financial burden on lower-income workers and small businesses, potentially exacerbating existing inequalities.

Impact on Low-Income Workers and Small Enterprises

A notable example is Ao Xiang, a tailor in Nanchang, Jiangxi Province, who employs three full-time workers, each earning approximately 8,000 yuan (SG$1,437) per month. Ao contributes 976 yuan per employee toward social insurance, adhering to the mandated rate of 24.4 percent of the minimum contribution base of 4,000 yuan. Despite fulfilling his obligations, Ao has witnessed a preference among workers for immediate cash over social insurance benefits.

“If social insurance is paid, a worker’s take-home salary might be 2,500 yuan. Without it, it could be 3,500 yuan,” Ao explained. “The choice was theirs, and employees often chose the latter.” Under the new law, that option will be eliminated, resulting in a larger portion of workers’ disposable incomes directed towards mandatory contributions.

According to Han Jian, a management professor at the China Europe International Business School (CEIBS), “Workers with already modest salaries will see a greater share of their earnings diverted to contributions.” This is particularly concerning in regions like Suzhou, where social insurance contributions are calculated based on a minimum salary of 4,879 yuan, regardless of actual earnings. For a worker earning 2,000 yuan, this could mean contributing nearly 60 percent of their salary towards pension insurance.

The disparity is stark; urban employees enjoy more comprehensive benefits compared to rural residents and informal sector workers. At the end of 2023, the average monthly pension for urban retirees was 3,700 yuan, while rural residents received just 223 yuan.

“Bridging this disparity must be a central focus of China’s current social policy reforms,” Han stated. The increase in mandatory contributions may also deter small businesses already struggling with tight profit margins, as they face higher labor costs. “Many small businesses are already operating on thin margins. These mandatory contributions could push some out of business,” Han added.

Additionally, some low-income workers may be forced into informal employment as businesses look to minimize costs. “Some may respond by hiring fewer staff, turning to informal employment arrangements, or cutting back on expansion,” Han noted.

Potential Benefits and Future Outlook

Despite the challenges, there are potential benefits to mandating social insurance payments for small enterprises. According to Liu, “Providing social insurance may improve employee morale and retention, leading to a more stable workforce and lower turnover.”

Experts generally agree that tightening loopholes in the social insurance system is a step in the right direction. “The system is clearly advancing, yet further reforms and subsidies are needed to enhance its fairness and accessibility,” Han emphasized. Without a broadened contributor base, many could reach retirement without the necessary financial support, risking elderly poverty and social instability.

China’s elderly population, projected to exceed 500 million by 2050, will place unprecedented pressure on pension and healthcare systems. Expanding social insurance contributions among informal workers and private-sector employers is seen as crucial for the long-term viability of the welfare system.

In the long term, a robust social security system could facilitate China’s transition from an investment-driven economy to one focused on consumption. “With a healthy system, households feel secure to spend, reducing the need to save for unexpected financial shocks,” Liu remarked.

As awareness of workers’ rights increases, employees are becoming more vigilant about their entitlements. Ao shared that many are now aware that if employers fail to contribute to social insurance, they can face serious legal repercussions.

For business owners like Ao, the shift presents a complex decision. “I don’t pay social insurance because I can work until I’m 90. I’d rather save the money for myself,” he said, reflecting a sentiment that may resonate with many in the current economic climate.