# **1. Introduction**

As countries develop and urbanize, larger shares of their populations spend their working lives in formal employment relationships. At the same time, with declining fertility and increasing population mobility, traditional support from family members becomes less reliable. Moreover, rising average incomes and improvements in administrative capacity enable governments to introduce social insurance systems capable of helping their citizens face a range of uncertainties. Among developing countries, China is unique not only in its rapid growth over the last 30 years, but also in its simultaneous gradual transition from a planned economy. Early after economic reforms began, it became evident to policy-makers that the provision of social insurance by government and state-owned work units under the planned economy would need to be reformed into a broader system more compatible with a functioning labor market and mobile workforce (World Bank, 1997a; Zhang, 2002). The Chinese government has developed a framework for a social security system covering both rural and urban areas, and embraced the goal of full coverage by 2020. However, survey-based research suggests that less than 50 percent of the urban population has comprehensive social insurance coverage that incudes pension, unemployment, health and disability insurance.<sup>1</sup> Expanding coverage could promote more equitable access to protection from a range of risks, including the risk of poverty in old age, the risk of unexpected medical expenses, disability risk, and financial risk associated with unemployment.

Concentrating only on increasing the participation of workers in registered enterprises and organizations, however, is not sufficient for reaching full coverage in urban China. Several important groups of the urban population would still not be covered, including the self-employed, workers in unregistered private enterprises or those with fewer than eight employees, and urban residents who are not in the work force.<sup>2</sup> Members of these groups lack formal employment relationships and often also lack an employer to cofinance social insurance contributions. Current initiatives to expand coverage to this group of urban residents have thus concentrated on expanding public co-financing of social insurance programs. A basic medical insurance program for urban residents was established in 2007 after which participation grew

> 1 We use the expression “urban population” to refer to everyone living in urban areas. In the context of social insurance policy in China, the term “residents” has a specific meaning based for both employment and _hukou_ (residential registration) status. In this paper the term “residents” refers to all workers living in the urban area, and the non-working population, self-employed and informally employed populations regardless of _hukou_ status. 2The share of urban employees outside of formal sector enterprises  increased from 13.6 percent in 1990 to a peak of 38.9 percent in 2002 and then dropped down to 28.9 percent in 2009. When one includes the self-employed as well, the percentage outside the formal sector remained 42.6 percent in 2009. International experience suggests that coverage tends to increase with growth in per capita income, but in economies in which many workers are selfemployed or are employed informally in small scale enterprises, it is unlikely that full coverage can be achieved through employer-based social insurance programs. (Holzmann and Cuesta, 2001; Holzmann et. al, 2009; Hu and Stewart, 2009; Mackellar, 2009; Jeong, 2010).

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