JANUARY 2016 | FINAL

Social Insurance in China

Research Summary

BSR | Social Insurance in China, Research Summary

1About This Report
This high-level research summary introduces the scope and principal findings of the BSR working paper,
Social Insurance in China. The full report was written by consultants Fengyuan Wang and John Pabon ofBSR. Additional guidance was provided by Jeremy Prepscius and Lin Wang of BSR, and Yun Gao of ETI.
Any errors that remain are those of the authors. Please direct comments or questions to Fengyuan Wangat fwang@bsr.org.

DISCLAIMERBSR and ETI publish occasional papers as a contribution to the understanding of the role of business insociety and trends related to corporate social responsibility and responsible business practices. Bothorganizations maintain a policy of not acting as representatives of their respective members, and they do
not endorse specific policies or standards. The views expressed in this publication are those of its authorsand do not reflect those of BSR and EIT members.
Working papers contain preliminary research, analysis, findings, and recommendations. They arecirculated to stimulate timely discussion and critical feedback and to influence ongoing debate onemerging issues. Most working papers are eventually published in another form, and their content may berevised.

SUGGESTED CITATION
Wang, F.; Pabon, J. 2015. “Social Insurance in China.” BSR Working Paper. BSR, San Francisco.

BSR | Social Insurance in China, Research Summary

2THE EVOLUTION OF SOCIAL INSURANCE IN CHINA
Social insurance in China, a scheme aimed at ensuring protection for all citizens, was a key pillar of theCommunist agenda when the Party came to power in the late 1940s. Since passage of its first law in1951, however, China’s rapid economic growth has necessitated sweeping changes to how theGovernment provides for its people. The workers that helped fuel China’s dynamic growth are now atretirement age and want their payouts. Coupled with a slowing economy, drastic fluctuations in the stock
market and the recent devaluation of the renminbi, tensions are understandably high. Unfortunately, in aworkforce of 770 million, less than one-third have a basic pension and only half are enrolled in an
insurance scheme.
A number of recent high-profile protests have centered on payment of social insurance benefits.
According to the China Labour Bulletin, social unrest in China was up 33% in 2014, with 2,590 separate
incidents so far this year.1 The most notable of these occurred in 2014 at the Yue Yuen shoe factory inthe city of Dongguan, with a two-week strike that saw 40,000 participants protesting the systematic
underpayment of social insurance contributions that left many long-term employees with lower than
expected pension payments.
Meanwhile, trends show a decline in private-sector contributions to the system, and public disillusionment
with social insurance reforms, and confusion as to individual benefits, are leading many workers to forego
enrollment entirely.
BSR and ETI sought to understand these trends, especially given the Government’s recent push for fullcompliance of national social insurance schemes, including the 2011 Social Insurance Law. Our
methodology included primary and secondary research, with surveys and interviews with buyers,
suppliers, workers, regulators, and experts in the field of Chinese social insurance.

CHALLENGES TO AN AGING SYSTEMThe social insurance system in China includes five benefit areas. Although eligibility for social insurance
coverage is meant to be universal for all workers, this is not the case in practice. Each area has its own
particular challenges with implementation.

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Statutory retirement ages are out of line with long-term sustainability of the pension fund.
Current rates were set in the 1950s and do not take into account increased life expectancies ofan aging population. The Government has proposed an increase of retirement age by 5 years,
but faces opposition from older workers.

»Unemployment benefits are required to be lower than local minimum wages and are thus
often well below living wage levels. Currently, there are 170.4 million people enrolled in theunemployment insurance scheme, up 6.3 million since last year. Of this total, 23.9% are migrantworkers.

»Out-of-pocket medical insurance payments are common, especially for lower-paidworkers. All workers contribute 2% of their wages to an individual medical insurance account.
Employers contribute an additional 30%, with the remaining 70% of employer contributions going“Strike Map,” China Labour Bulletin, accessed August 2015, http://strikemap.clb.org.hk/strikes/en.

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to a public medical insurance pool. If an employee has not contributed enough to their account,they must make up the difference themselves.
»Work-related injury insurance is paid entirely by employers, with stop-gap measures for
local governments to pick up costs if an employer refuses to pay. Unfortunately, most local
governments do not have the systems in place to do so. A survey by a legal-aid center in Beijing
found only 10% of cities would “…definitely accept advance applications, and only nine cities hadactually issued implementing regulations.”2»Even with maternal leave, some employers find ways to prevent workers from enrolling.
Some will ask prospective employees about their family plans, create contracts that forbid
pregnancy, or force resignations if someone does become pregnant.

Adding to these specific complications for individual benefit areas are myriad factors influencing coverage
and workers’ willingness to enroll:»One major factor is the workplace’s status as either urban or rural. Urban workplaces haveto contribute higher premiums to the system and are entitled to the entire suite of social insurance
coverage areas. Rural businesses are only entitled to retirement and medical benefit coverage.

»Factories are classified, regardless of location, as urban workplaces. Over the past decade,many factories have moved from their original locations along China’s east coast to more inland,
rural areas. Although they may now operate in poorer provinces, employers and employees arestill required to pay the urban premium for social insurance. This has led many to opt out ofenrollment altogether.

»China’s national identification system, the hukou, creates further problems with equitable
contributions. When employers pay into social insurance schemes, they sometimes pay less for
those workers with non-local hukou. These non-locals will thus receive lower pension and/or
medical benefits when they start to draw on their accounts.

»Workers must typically contribute for 15 years before they can begin to collect. For thoseworking several jobs in many provinces over the course of 15 years, this can create abureaucratic headache in trying to monitor and transfer funds. As of 2014, only 0.3% of workers
actually transferred their pension when moving between provinces. Many others do not envision
working for 15 years, so are hesitant to begin contributing at all.

»Given the highly bureaucratic nature of the system, the transferability of funds is notwidely understood by workers. For many temporary migrant workers, contributing to a pool attheir urban factory – one which may not be honored at banks back home – has limited appeal.

RESPONSIBILITY VERSUS REALITY
Enforcement of social insurance regulations varies considerably from province to province. Even with thevarious challenges inherent to the system, our interviews with suppliers revealed a clear upward trend in
the percentage of insured workers. Over the past 3-5 years, the percentage of insured has risen from
“Local Governments Refuse Financial Aid for Uninsured Workers,” China Labour Bulletin, accessed August 2015,
http://www.clb.org.hk/en/content/local-governments-refuse-financial-aid-uninsured-workers.
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420%-30% to over 80% in many cities. Costs associated with social insurance have also risen during thissame period, averaging 10% year-on-year.
These costs are clearly defined. For employers they include: pension payments to all staff of around 20%of wages, with regional variations; unemployment payments of 2% of the total workforce salary; medical
insurance payments of between 6% and 12% of the total workforce salary; work-related injury paymentsof between 5% and 2% of total payroll; maternity rates determined by local governments; and, ad-hoc
housing fund payments as set by local governments.
Though responsibilities are well defined, social insurance implementation across a geographicallydispersed supply chain becomes quite complicated. Individual provinces have different requirements andexpectations, with regulations sometimes varying within a single province. In addition, some local
governments provide official waivers that allow companies to operate while not in full compliance withnational law.
All buyers interviewed have social insurance requirements embedded in their supplier codes of conduct,
including through third-party audit mechanisms. However, we found that non-compliance remains
common in the electronics and apparel supply chains in China, varying between 80% and 99%. There areseveral factors contributing to this.
»Generally, social insurance costs are not fully reflected in current purchasing prices. In
order for a factory to compete, they will sometimes reduce costs at the expense of worker
benefits. While many buyers have added social insurance costs into pricing equations, they arelargely unable to ensure their suppliers are purchasing appropriate social insurance for theirworkers.

»Even if a factory has achieved full compliance in an audit, that doesn’t necessarily meanthat they consistently maintain compliance year round. Some will hire temporary workers orinterns during peak seasons but do not contribute to their social insurance premiums; some won’t
contribute to a new hire’s social insurance premium until after a probationary period is complete.

»Corrective action for non-compliance is not standardized. Buyer expectations forimprovement vary, with priority often given to work-related injury insurance. Social insurance
violations typically do not lead to supplier termination, which reduces the perceived importance ofimportance of improvement.

BSR also conducted interviews with 62 workers through a series of focus group discussions. Overall,there were four main issues found during the worker interviews.
»Knowledge of the social insurance system is generally low. The four main sources of
information on social insurance were factory human resources personnel, onboarding orientation
sessions, the Internet, and family or friends. Most interviewees said they bought social insurance
simply because it is a benefit provided by the employer. Few felt any incentive to learn more
about the system they are paying into.

»Workers had varying levels of understanding about benefits. Generally, focus group
participants thought medical insurance and pension payments were most useful, with tangible
benefits such as access to health care and medicine. Perceptions of pension scheme

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understanding varied with age. Workers approaching retirement were more aware of and likely toparticipate in pension schemes. Those in their 40s or 50s mentioned recent enrollment in theprogram and were concerned about the 15-year minimum contribution period. Younger workers
generally felt they were too young to need the benefits a pension scheme could provide.
»Policy limitations impact migrant workers differently in different places. For example, rural
migrant workers in Shanghai are not entitled to unemployment or maternity benefits. In Chengdu,
migrant workers from outside Sichuan Province cannot claim outpatient fees as part of themedical insurance scheme.

»There is a general reluctance to transfer or withdraw the money in social insurance
account. It is highly unlikely that a migrant worker would manage to merge 15 years of separate
provincial pension accounts into one before retirement. The process is burdensome and costly,with in-person certification required in each city of employment. Participants in the working groups
also reported difficulties in claiming pension funds in rural areas. A retiree may need to makeperiodic withdrawal claims at their local social security administrative office but then withdraw theactual funds at a local bank branch, both of which may be far from their home.

A MULTIFACETED APPROACH TO IMPLEMENTATION
Labor costs in China, especially those associated with social insurance schemes, are continuing toevolve. While we were able to glean several findings from our interviews across China’s supply chain,several questions still remain.
»How can companies achieve social insurance compliance while maintaining market
competitiveness? One approach is to improve efficiency while reducing waste. The International
Labour Organization (ILO), however, has warned against lean manufacturing as a one-stop
solution to address changes in labor issues.

»Will consumers pay the cost of social insurance? Our research found that even if all
increased costs associated with social insurance were passed to consumers, this would only
result in a nominal increase in retail prices. Many retailers claim, however, that consumers arehighly sensitive to price fluctuations, making it a difficult business decision to increase prices
unless absolutely necessary.

»What factors can influence social insurance compliance among factory workers
themselves? Through our research, the key factor is education. Current education efforts do notalways reach the level of workers. Although all factories interviewed provide new staff orientation,
including on social insurance, often the trainers do not fully understand the material. This partially
illustrates why workers may lack the knowledge necessary on the topic.

Given these questions, as well as varying supplier understanding of the social insurance system, BSR
recommends a tailored approach when discussing the subject of implementation.
»For factories taking a proactive approach to social insurance implementation: Develop casestudies and quantitative data on the positive impacts of compliance. Additionally, work withemployees on advanced subjects such as financial planning.

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For factories that mostly respond to audit findings: Acknowledge their work, reinforce the valueof continuing to invest in social insurance education, and provide them with incentives to do so.

»For lagging factories, including those blatantly ignoring social insurance regulations: Try tobetter understand their needs and concerns. In particular, do they see the positive business casefor social insurance compliance, understand the system, or need more training than they are
currently receiving?

The goal with each of these approaches is to maintain open dialogue between buyers and suppliers andmove steadily towards compliance. Both sides should work collaboratively to understand, adapt, andcomply with changing labor laws and social insurance mandates. China remains an important part of theglobal supply chain, and a key market for meeting sourcing needs. As such, keeping sourcing
economically viable – through maintaining productivity and competitiveness, improving buyer/supplier andemployer/employee relations, education, and communication – is in the best interest of all.

BSR | Social Insurance in China, Research Summary

About BSR
BSR is a global nonprofit organization that works with its network of more than
250 member companies to build a just and sustainable world. From its officesin Asia, Europe, and North America, BSR develops sustainable businessstrategies and solutions through consulting, research, and cross-sector
collaboration. Visit www.bsr.org for more information about BSR’s more than
20 years of leadership in sustainability.

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