# **2. Social Insurance in China**

# **2.1 A Brief History of Social Insurance and Economic Reform**

Under the centrally planned economy of the early 1980s, China’s government and urban state sector employees received social insurance benefits from employers in what were essentially pay-as-you-go (PAYG) systems operated at the enterprise level. Relatively few urban workers were outside the government and state sectors, but those who were, as well as rural residents, lacked pension coverage.<sup>6</sup> From early in the reform period, the government recognized that the legacy costs associated with supporting health and pension payments for retirees would place a growing burden on state-owned enterprises (SOEs) and put older firms (with more retirees) at a disadvantage relative to new firms (World Bank, 1997b; Sin, 2005). Pilot social insurance programs, first implemented locally in the 1980s, exhibited variation across provinces and industries in individual and enterprise contribution rates; by the early 1990s, evidence from these pilots led to a consensus on desired features of a social insurance program for urban workers.

Covering urban state sector workers, however, would not be sufficient. Economic restructuring associated with China’s economic transition in the late 1990s created a more dynamic labor market and increased efficiency in the allocation of labor (Cai and Wang, 1999; Cai et.al, 2002; Lin et al., 2003; World Bank, 2005; Naughton, 2007). The deepening SOE reform process, however, resulted in the dislocation of millions of urban workers (Cai et al., 2008, Giles et al., 2006a). In order to prevent sharp increases in poverty and to reduce unemployment, re-employment centers were established in the late 1990s as a temporary measure to provide training and job referral services, and basic social insurance through income support for displaced workers. After completion of SOE restructuring in the early 2000s, establishing formal, more permanent social insurance programs became necessary. In addition to the loss of social insurance coverage due to job loss, the lower share of workers in the state sector, where compliance with labor laws mandating social insurance coverage is higher, meant that, by the early 2000s, fewer urban workers received social insurance from employers (Giles et al., 2006b).

In a series of policy directives starting in the late 1990s, the State Council built up a new social insurance scheme targeting all urban workers.<sup>7</sup> To cover health insurance, the Basic Medical Insurance (BMI)

> 6In rural areas, the Cooperative Medical Scheme (CMS) financed health care for members of the agricultural commune and the _wu bao_ program provided insurance against infirmity. Under reform, the household responsibility system eroded the capacity of communes, which became townships, to provide services under the CMS, and this system had collapsed by the mid-1980s (Hsiao, 1984; Liu, 2004).

> 7In 1997, the state council promulgated the _Decision on Establishing a Uniform Basic Pension System for Enterprise Employees_ . The design of individual accounts was piloted in Heilongjiang, Jilin and Liaoning provinces. In 2005,

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