So­cial In­sur­ance Re­form: Balanc­ing the Scales

Chi­nese com­pa­nies worry the new so­cial in­sur­ance col­lec­tion sys­tem will add to their bur­den. But the is­sue goes far deeper

NewsChina - - CONTENTS - By Zhao Yi­wei and Xu Ming

Chi­nese com­pa­nies are grow­ing ner­vous about their so­cial in­sur­ance con­tri­bu­tions. Re­cently, a glass­mak­ing com­pany in Jiangsu Prov­ince, one of China's ma­jor eco­nomic pow­er­houses, made head­lines when a lo­cal court de­manded it pay 1.8 mil­lion yuan (US$260,870) for its em­ploy­ees' over­due so­cial se­cu­rity bill dat­ing back to 2007. Tax­a­tion au­thor­i­ties in other places have taken sim­i­lar le­gal ac­tion to col­lect over­due so­cial se­cu­rity con­tri­bu­tions from com­pa­nies. These cases re­newed mar­ket concern that in­creas­ing gov­ern­ment ex­pen­di­ture on so­cial in­sur­ance will come along with the up­com­ing im­ple­men­ta­tion of a tougher so­cial in­sur­ance col­lec­tion pol­icy.

Start­ing on Jan­uary 1, 2019, the ba­sic so­cial in­sur­ance con­tri­bu­tion in China will be uni-

formly col­lected by na­tional tax de­part­ments, which hold more in­for­ma­tion about the in­come of both em­ploy­ers and em­ploy­ees than so­cial in­sur­ance agen­cies. The new reg­u­la­tory frame­work is ex­pected to leave much less room for com­pa­nies to de­lib­er­ately dodge the fees, which has long been com­mon prac­tice.

The high pro­file re­trieval of huge cu­mu­la­tive fees be­fore the new pol­icy comes into ef­fect has fur­ther fu­eled anx­i­ety that if all em­ploy­ers have to do the same, many small com­pa­nies, which are al­ready strug­gling to sur­vive, will go bank­rupt. There are wide­spread con­cerns that the coun­try's whole econ­omy will suf­fer.

In a swift re­sponse to the out­cry, Chi­nese Pre­mier Li Ke­qiang stressed at a State Council meet­ing on Septem­ber 18 that all places must keep their present col­lec­tion poli­cies un­changed un­til the re­form is in place next year, and no de­part­ment is al­lowed to re­trieve over­due so­cial in­sur­ance con­tri­bu­tions at the dis­cre­tion of lo­cal gov­ern­ments. Li also asked rel­e­vant de­part­ments to study how to re­duce the so­cial in­sur­ance rate to avoid bur­den­ing com­pa­nies af­ter the reg­u­la­tions are im­ple­mented.

While this has eased mar­ket jit­ters, the dilemma of re­duc­ing so­cial in­sur­ance con­tri­bu­tion bur­dens while eas­ing the coun­try's so­cial in­sur­ance short­fall is yet to be solved.

Un­der­paid Con­tri­bu­tions

Ac­cord­ing to a re­cent white pa­per on so­cial se­cu­rity re­leased by 51she­bao, an on­line so­cial se­cu­rity ser­vice provider for com­pa­nies, most en­ter­prises now cover all five types of in­sur­ance for their em­ploy­ees – pen­sions, health care, unem­ploy­ment, work in­jury and birth. This is progress, how­ever, only 27 per­cent of the com­pa­nies paid their con­tri­bu­tions in full in 2018. The num­ber was 24.1 per­cent in 2017, the low­est since 2015.

Yang Liangchu, a spe­cial­ist from the Chi­nese Academy of Fis­cal Sciences, re­vealed that it is more com­mon for la­bor in­ten­sive com­pa­nies to pay con­tri­bu­tions based only on their ba­sic salary in­stead of to­tal in­come (which com­prises the ba­sic salary plus bonuses and var­i­ous sub­si­dies for trans­porta­tion, com­mu­ni­ca­tion, food, and more). Em­ploy­ers use this as a way to re­ward hard­work­ing em­ploy­ees and save on so­cial in­sur­ance con­tri­bu­tions to re­duce la­bor costs.

Fang Lian­quan, a spe­cial­ist in so­cial in­sur­ance from the Chi­nese Academy of So­cial Sciences, at­trib­uted the un­der­pay­ment cul­ture to com­pa­nies' poor aware­ness of their obli­ga­tions and loop­holes in the ex­ist­ing reg­u­la­tory frame­work.

As he ex­plained to Newschina, China's so­cial in­sur­ance col­lec­tion sys­tem is frag­mented, with tax bu­reaus do­ing the work of col­lect­ing and so­cial in­sur­ance agen­cies de­cid­ing the min­i­mum and max­i­mum salaries sub­ject to con­tri­bu­tion in most places. The com­plex­ity leaves room for many com­pa­nies to dodge their dues and causes tax pol­icy vari­a­tions across dif­fer­ent re­gions. Fur­ther­more, some lo­cal gov­ern­ments pro­vided fa­vor­able so­cial in­sur­ance poli­cies to at­tract in­vest­ment.

Jin Lei, CEO of a biotech com­pany in Bei­jing, told Newschina that very few com­pa­nies will pay so­cial in­sur­ance in full like his com­pany, which has a plan to go pub­lic. Most of the com­pa­nies dodge full pay­ment by em­ploy­ing part-time work­ers, thus em­ploy­ers are not obliged to pay so­cial in­sur­ance con­tri­bu­tions, or could pay them based on a fake wage level to de­crease ex­pen­di­ture.

Mean­while, con­ceal­ing the ac­tual wage level of em­ploy­ees is some­times a tacit agree­ment be­tween em­ploy­ers and em­ploy­ees. Ac­cord­ing to Jin, em­ploy­ees some­times don't want to pay ei­ther, feel­ing in­se­cure about the ben­e­fits they ex­pect to get in the fu­ture and pre­fer­ring to take the money now – per­haps to in­vest it or buy com­mer­cial in­sur­ance that can give them higher and quicker re­turns.

Feel­ing the Pinch

Once the means for com­pa­nies to shirk their so­cial in­sur­ance re­spon­si­bil­i­ties are blocked, many com­pa­nies worry their op­er­a­tional costs will sky­rocket, mak­ing it dif­fi­cult for some to sur­vive.

Chi­nese com­pa­nies' tax rate ac­counted for 67.3 per­cent of their prof­its in 2017, rank­ing 12th in the world, much higher than the global av­er­age of 40.5 per­cent, ac­cord­ing to a re­port from the World Bank that sur­veyed 190 coun­tries and re­gions. And its so­cial se­cu­rity in­sur­ance con­tri­bu­tions, which ac­count for more than 40 per­cent of an em­ployee's to­tal pay bill, are the sec­ond-high­est in the world. In so­cial se­cu­rity con­tri­bu­tions, about 30 per­cent of the pay bill is paid by em­ploy­ers and 10 per­cent by em­ploy­ees.

Sokon In­dus­try Group, a com­pany in Chongqing ded­i­cated to au­to­mo­bile re­search and de­vel­op­ment, has set its own stan­dards for so­cial se­cu­rity con­tri­bu­tions based on its em­ploy­ees' salaries and po­si­tions, not their full salaries. There, so­cial in­sur­ance con­tri­bu­tions ac­count for 19 per­cent of la­bor costs. If they didn't do things that way, the cost of la­bor would in­crease by 12 per­cent, ac­cord­ing to the hu­man re­sources de­part­ment of the com­pany.

Liang Hong, an econ­o­mist from China In­ter­na­tional Cap­i­tal Cor­po­ra­tion Lim­ited (CICC), a joint ven­ture in­vest­ment bank, pointed out that if all com­pa­nies pay their re­quired so­cial se­cu­rity in­sur­ance con­tri­bu­tions, their over­all ex­pen­di­ture on so­cial in­sur­ance will in­crease by 14 per­cent, leav­ing 70 per­cent of Chi­nese com­pa­nies feel­ing the im­pact. Ac­cord­ing to re­cent CICC re­search, that means the na­tional so­cial in­sur­ance fund would in­crease by about 700 bil­lion yuan (US$101.7B) each year. Re­search by Shen­wan Hongyuan Se­cu­ri­ties sug­gests pay­ing the so­cial in­sur­ance con­tri­bu­tion in full would cause a de­cline in prof­its of 5.5 per­cent among firms listed at China's A-share mar­ket, with the net profit for listed pri­vate com­pa­nies ex­pected to slide by 12.7 per­cent.

Jin Lei's com­pany has al­ready aban­doned a tal­ent plan af­ter learn­ing of the new pol­icy. A for­mer em­ployee with a pri­vate eq­uity com­pany in Bei­jing who asked not to be named told Newschina the com­pany had just fired five of its se­nior ex­ec­u­tives, him­self in­cluded, to re­duce la­bor costs.

Many other com­pa­nies in­ter­viewed told Newschina that they would be more pru­dent in adding em­ploy­ees and in­creas­ing salaries, and con­sider cut­ting staff.

Some small com­pa­nies where the new pol­icy will have lim­ited in­flu­ence are sup­port­ive of the pol­icy change. “If a com­pany could go broke sim­ply from in­creased so­cial in­sur­ance ex­pen­di­ture, then the com­pany is ap­par­ently not mak­ing suf­fi­cient prof­its. So­cial in­sur­ance is not to blame,” Wang Ou, who works at a me­dia com­pany in Bei­jing, told Newschina.

The ma­jor­ity of em­ploy­ees at her com­pany were born in the 1980s and most of them care about pay­ing so­cial in­sur­ance, so the com­pany has been pay­ing the con­tri­bu­tion in full.

Shi Zheng­wen, di­rec­tor of the Cen­ter for Re­search in Fis­cal and Tax Law at the China Uni­ver­sity of Po­lit­i­cal Sci­ence and Law, said wor­ries over the new pol­icy mainly come from com­pa­nies that have not paid their due so­cial in­sur­ance pre­mi­ums, which con­sti­tutes the ma­jor­ity in the mar­ket. The more a com­pany has dodged the fees, the big­ger the im­pact it will feel when the new pol­icy is in place.

Re­duc­ing the Rate

At the State Council meet­ing, Pre­mier Li also asked rel­e­vant de­part­ments to has­ten the process of fig­ur­ing out how to re­duce the so­cial se­cu­rity costs af­ter the new col­lec­tion sys­tem is in place. He noted that the re­duc­tion could come out si­mul­ta­ne­ously along­side the im­ple­men­ta­tion of a new col­lec­tion pol­icy to avoid in­creas­ing the bur­den to en­ter­prises.

Ac­cord­ing to a Shen­wan Hongyuan Se­cu­ri­ties anal­y­sis, to com­pletely bal­ance out the im­pact on listed A-share pri­vate firms, so­cial in­sur­ance con­tri­bu­tion rates need to be re­duced by nearly 14 per­cent.

That's not an easy de­ci­sion. The gap in the so­cial se­cu­rity fund is be­com­ing in­creas­ingly pro­nounced. Even though there is a sur­plus in the fund every year, that's only a re­sult of in­creas­ing the fis­cal sub­si­dies from the cen­tral gov­ern­ment. With­out the sub­si­dies, the gap be­tween the in­come and ex­pen­di­ture of so­cial in­sur­ance could reach 458.1 bil­lion yuan (US$66.7B) in 2016, ac­cord­ing to the CICC.

As the tax de­part­ment knows well, the real full in­come and salaries of com­pa­nies and their em­ploy­ees and the cost of so­cial in­sur­ance con­tri­bu­tions for en­ter­prises will be clear once the na­tional tax de­part­ment takes charge of con­tri­bu­tion col­lec­tion. An­a­lysts be­lieve this will pave the way for de­cid­ing the most rea­son­able rates.

In ad­di­tion, Fang stressed that uni­fied na­tional stan­dards for con­tri­bu­tions, in­clud­ing the pro­por­tion of full salaries and the base­line salaries sub­ject to con­tri­bu­tions, must be set to en­sure fair com­pe­ti­tion among en­ter­prises.

The eco­nomic gap be­tween de­vel­oped and de­vel­op­ing re­gions within the coun­try has to be con­sid­ered when set­ting the stan­dards. Fang ex­plained that the for­mer, with a sur­plus in so­cial se­cu­rity funds, was less mo­ti­vated to im­ple­ment the stricter col­lec­tion sys­tem.

Be­sides, while there is no doubt about the ne­ces­sity of re­quir­ing em­ploy­ers to pay so­cial se­cu­rity con­tri­bu­tions in full, an­a­lysts have called for a grace pe­riod for strug­gling com­pa­nies.

The com­pet­i­tive­ness of Chi­nese com­pa­nies, the con­sump­tion power of Chi­nese em­ploy­ees and the re­tire­ment years of China's fu­ture re­tirees are all at stake. There is a del­i­cate line to tread.

The ba­sic so­cial in­sur­ance con­tri­bu­tion in China will be uni­formly col­lected by tax de­part­ments start­ing from Jan­uary 1, 2019

Peo­ple line up for in­for­ma­tion on how to get their pen­sions

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