Does a Universal Non-Contributory Pension Scheme. Make Sense for Rural China?

Transcription

1 Does a Universal Non-Contributory Pension Scheme Make Sense for Rural China? by Ce Shen Graduate School of Social Work Boston College McGuinn Hall Commonwealth Ave. Chestnut Hill, MA Tel: Fax: shenc@bc.edu and John B. Williamson Department of Sociology Boston College McGuinn Hall Commonwealth Ave. Chestnut Hill, MA Tel: Fax: jbw@bc.edu Accepted for publication in Journal of Comparative Social Welfare Key words: Pensions, social security, China, rural, social assistance Please direct all correspondence to Prof. Ce Shen, McGuinn 304, Graduate School of Social Work, Boston College; Chestnut Hill, MA 02467, USA; Telephone: ; Fax: ; shenc@bc.edu

2 2 Abstract Rapid economic growth in China during the past twenty-five years has been accompanied by increasing economic inequality. China s old-age social security system has long been restricted to urban areas, leaving the 70% of the population living in rural areas with little or no coverage. The lack of social security for elderly people in rural areas poses a threat to social stability and raises social justice concerns. This study is based in part on interviews conducted in rural northeastern China. It also draws on evidence from Chinese government documents, newspapers, and reports on relevant programs in other developing countries. For rural China we propose a variant of the universal non-contributory old-age pension model that takes into consideration rural-urban differences in cost of living. The proposed model would reduce the level of poverty in rural areas as well as the degree of income inequality between rural and urban areas while simultaneously promoting social and political stability.

3 3 China has achieved remarkable economic progress since 1979 and large-scale poverty reduction (lifting about 400 million people out of poverty at the $1 a day expenditure level) has been one of China s greatest accomplishments during the post-1979 reform period (World Bank, 2003). However, as China attempts to establish a national social security, it faces a great challenge. The old Chinese pension system an enterprise-based, pay-as-you-go benefit scheme has been running deficits since the early 1980s. A sustainable national social security is currently far from reality (Li, 2004; Huang, 2004). The current coverage has left 70% of the total population--residents in rural China-- with virtually no old-age social security. To paraphrase the government report presented by Premier Jiabao Wen during a recent Congress meeting, the current strategy of the Chinese government concerning social security is to make the expansion of the coverage of the current system in urban areas the priority, followed by encouraging relatively developed rural areas to explore the possibility of establishing a social assistance system for rural residents (Xinhuanet, 2006). Without a major change in policy, it will take many years (possibly decades) to get social security coverage to a majority of the population in rural regions. In this study our goal is to explore the potential efficacy of a model that is not currently being given serious consideration for rural China: a universal non-contributory old-age pension system. Our proposal would be to start small and gradually expand coverage to include the entire rural population of China. Why is such a pension scheme needed in rural China? Rural-urban disparity: Between 1978 and 1985, the ratio of urban to rural income decreased from 2.4 to 1.7. After 1985, the ratio started to increase. If the various types of

4 4 subsidies that urban residents enjoy are included, and if all kinds of extra responsibilities and burdens are deducted from peasant incomes, the ratio increased to roughly 4 to 1, reflecting a sharp increase in the income gap between urban and rural areas (Zhu, 1995). This trend has strengthened increased in recent years. Based on World Bank estimation, out of the 161 million people estimated at or below the $1 a day consumption in 2002, some 99 percent lived in rural areas (World Bank, 2003). Regional disparity: Most of the rural poor reside in the remote mountainous central and western provinces. There are significant differences in poverty rates between these provinces and the more affluent coastal provinces. Over the past few decades the coast-interior income disparities have increased. This disparity has been described using a variety of different statistics (World Bank, 2003). Based on Chinese National Bureau of statistics and official poverty line, in 1999, the national average rate of rural poverty was 3.5 percent. The poverty rate (using the same criterion) in the coastal provinces, including Zhejiang, Jiangsu, Fujian, and Guangdong is under 1 percent. In contrast, Yunnan, Guizhou, Henan, Shanxi, Shaanxi, and Gansu have rural poverty rates above 6 percent. In 1999, the percentage of China s rural poor among three regions is distributed as follows: 46.6% for western provinces, followed by 42.1% for central provinces followed by only 11.3% for coastal provinces. The beneficial effect of economic growth on poverty remains, but it has been weakening (World Bank, 2003; United Nations, 2005a). Population aging: China is aging rapidly. By 2025 there will be approximately 290 million people aged 60 and older 24% of the world s population for that age bracket living in China (U.S. Census Bureau, 2002). Attempting to deal with the main social and economic consequences of rapid population aging will be a major challenge for China. Further contributing

5 5 to the problem will be the decrease in the ratio of working-age people available to support each elderly person from about 5 to 1 today to 3 to 1 in 2025 (United Nations, 2005b). No public social security for rural China: As mentioned earlier, China s old-age social security system has long left the elderly in rural areas with virtually no publicly financed social protection. Traditionally the elderly in China were supported by their adult children or relatives if need be. But today family-based support networks have been weakened, especially in rural China, and can no longer be depended upon to the same extent. One contribution to this new trend is the large number of young adults migrating from rural to urban areas in search of jobs, leaving elderly parents behind. The current scale of rural to urban migration may be unprecedented in human history. It is estimated that by the end of 1990s, Chinese cities had attracted about 100 million rural migrants, most being young male (Ping & Pieke 2003). Another important factor is China s one child policy implemented in the late 1970s; more and more often, a young married couple has four elderly parents to support. Limited social assistance to rural residents: In recent years, the government has increased financial assistance to the poor. However, assistance for the rural population is far from adequate. The number of urban residents receiving social assistance is 22.4 million, compared with only 7.7 million for rural residents (Ministry of Civil Affairs, P.R. China, 2006). Increasing unemployment rate: Accurate estimates of unemployment rates in China are hard to come by for a variety of reasons: one being the politically sensitive nature of the issue. According to one analyst, the overall unemployment rate has been as high as 23% in recent years (Wolf, 2004). Most of China s unemployed live in rural areas. For people of working age in China, lack of work opportunities is a major problem, and the nation s rapid rate of economic development has put older workers, particularly less educated older workers, at a serious

6 6 disadvantage in the labor market (Xiao, 2004). Older female workers are particularly disadvantaged as they often have the added burden of caring for grandchildren. Collapsed public medical care systems in rural China: Before the economic reforms of the1980s, there was a co-op medical system in rural China. This system of free clinics has disintegrated. The collapse of socialized medicine and the staggering increase of treatment costs have actually created two nations within China in terms of health care: one urban and increasingly comfortable, the other rural and increasingly miserable (French, 2006). According to China Health Statistical Digest (2000) the infant mortality rate for rural areas is 37%, contrasting with 12% for urban areas (World Bank, 2003). A typical response from interviewees to the question, What if you or one of your parents developed cancer or needed a major surgery? was, Probably the best choice would be to wait for death because the cost for treatment would be far beyond what one can afford. It is probably a wiser decision to wait for death than to extend one s life for a few more years and subsequently leave heavy debt for surviving spouses, children, and relatives. In summary, even though the economic reforms implemented in the 1980s have led to improvements in living standards for most Chinese citizens, millions of elderly people in rural areas are still living in severe poverty. They are the most vulnerable segment of the population; many lack adequate income, basic necessities, and basic health care services. Many work long hours in the field often while juggling such responsibilities as caring for grandchildren. They cannot afford to participate in a social security system that requires them to contribute on a monthly basis. Lessons for China from other countries

7 7 China is not the only country to have little or no social security coverage for the elderly living in rural areas. A recent study by the ILO (International Labor Organization ) reports that in many of the least developed nations less than 10% of the working age population is covered by a formal social security scheme (Mainali, 2006). As in China, many developing countries have large rural populations that rely on the next generation for care and support in old age. Dramatic social changes including urbanization, industrialization, migration, and economic and familial shifts have weakened the role of multi-generational social security provision for families (Gorman, 2004; Kakwani & Subbarao, 2005; Overbye, 2005). What are the most appropriate strategies for providing social protection for the rural elderly? When discussing various strategies for extending social security coverage in developing nations, Overbye (2004) lists three available options: extending social insurance coverage, relying on mutual or micro-insurance, or bringing in some form of social assistance. Overbye argues that the first two strategies are difficult to apply to high-risk groups and that social assistance schemes have more promise for rural populations than do the other two alternatives. The need for at least a basic level of social assistance is emphasized by the ILO (Reynaud, 2002) and the World Bank. The World Bank argues that social assistance should be the first pillar of social protection in all countries (World Bank, 1994). It is the best approach for providing social protection to the poorest, including the rural poor, because it is not contribution-based and/or does not depend on long employment records (Reynaud, 2002; Overbye, 2004). Even though social assistance has a long history in most OECD countries, for most developing countries social assistance remains underdeveloped (Ginneken, 2003: 56). Social assistance programs fall into two distinct categories: universal non-contributory pensions and means-tested pensions. Universal pensions are unconditionally available to all,

8 8 while means-tested pensions explicitly target the poor, and call for some sort of means-testing of earnings, income, or assets. The following are examples of developing countries that provide some form of non-contributory social pensions: Africa: The schemes in South Africa and Senegal are means-tested while those in Botswana, Mauritius, and Namibia are universal. Mozambique operates a cash transfer system which targets households headed by chronically ill or disabled elders (Gorman, 2004; Gillion et al., 2000). Latin America and the Caribbean: Argentina, Brazil, Chile, Costa Rica, Dominica, Mexico, and Uruguay all have means-tested programs that provide pensions for their poorest elderly citizens. Antigua and Bolivia offer a universal pension (Gorman, 2004; Barrientos & Lloyd-Sherlock, 2003). Asia: The Bangladesh government currently pays 150 Taka (US$2.58) per month to extremely poor people aged 57 and above living in rural areas. The coverage has been very limited, but the government plans to expand the scheme to cover up to 1 million (14%) older people nationwide. Thailand has a similar scheme. India operates two means-tested old age assistance systems for their poorest elderly citizens, currently reaching about 6 million residents above age 65 (Ginneken, 2003: 61). An old-age pension of 75 Rupees a month (US$1.50) is paid to women and men aged 65 and over who otherwise be destitute. Nepal introduced universal old-age assistance in 1995 (Willmore, 2003: 23; Gorman, 2004). Means-tested pension schemes limit benefits to those who fall below a specified income (or assets) limit. Means-tests tend to discourage working and savings by increasing the effective marginal tax rate; simultaneously, they encourage working in the informal sector, and reduce the

9 9 tax base and size of the formal-sector of the economy (Ginneken, 2003; Overbye, 2005). In addition, this type of social assistance can degenerate into a patronage scheme, opening the door for corruption. A very influential World Bank report (1994:240) argues in favor of universal noncontributory old-age pension, because the administrative costs are so low relative to those for means-tested schemes. This report also points to the advantage that universal schemes do not undercut incentives to work and save. Based on our analysis of economic conditions in rural China and the clear need to assure at least a subsistence income for this population, we have concluded that some form of social pension is needed; at this point in time, the universal pension seems most appropriate. Can China afford a universal social pension for the rural population? Many analysts and policymakers think that it is not feasible to provide publicly financed pension coverage to the large rural population of China. A common view is that China currently does not have the economic resources for a universal old-age pension. However it is relevant to note that policy makers in a number of the poorest countries in the world have chosen to allocate substantial resources to older people. The experience of existing schemes in these countries suggests that the universal provision of social pensions to older people is administratively simpler and less expensive than means-tested provision. Evidence also shows that the overall cost of these schemes (expressed as a fraction of GDP) is relatively low. In Namibia, the social pension program costs les than 2% of GDP and for Mozambique, it costs only 1.4% of the government budget (Gorman, 2004).

10 10 China s neighbor, Nepal one of the poorest nations in the world, with nearly four out of every ten people living under the poverty line introduced a universal social pension scheme called the Old Age Allowance Program in 1995 for people aged 75 and older (World Bank, 2005). The pension was 150 Rupees (US$2.12) per month in 1999 (Gorman, 2004). Currently this program, along with the means-tested Widows Assistance Program, covers more than 400,000 elderly people living in Nepal. The cost of providing universal social pensions will depend on the number of beneficiaries which will be determined by the age at which people become eligible, the projected number of older people, and the size of the monthly pension benefit. Raising age of entry will focus on the most vulnerable and keep the cost low. It has been estimated that the cost of a pension set at 40% of the nation s GDP per capita, but restricted to those over age 75 would currently be in the range of.05 percent of GDP for many African nations (Gorman, 2004). Brazil has social security schemes, covering 5.3 million of the elderly poor at a cost of 1 percent of GDP. A Brazilian scheme introduced in 1991 has many features of a universal social pension and can be claimed by men at the age of 60 and women at the age of 55. Furthermore, China has a GDP per capita higher than that of many of the countries that have implemented non-contributory pension systems, particularly countries in Asia and Africa. Experience from countries that are already implementing large-scale social pension schemes suggests that it is best to start by offering a minimal pension to very old people. China could afford to start such a program, if very modest pension benefits were coupled with a relatively high eligibility age.

11 11 A universal non-contributory pension proposal for rural China As mentioned earlier, the experiences of other countries suggest that means-tested pension schemes require a substantial amount of administrative capacity as well as relatively reliable and accurate records of individual income (Ginneken, 2003; Overbye, 2005). Although some central government bureaucratic structures successfully penetrate the local level, in China the government does not have reliable data with respect to individual or family income. When means-tested benefit levels are decided at the local level, this often introduce incentives for patronage and corruption. In China, corruption levels are already very high (Transparency International, 2004). Our proposal is that China adopt a province- specific, flat-rate non-contributory pension scheme (we will call it a social pension), with age and place of residence as the sole qualification criteria. At least at the outset, the pension would be limited to those living in rural areas. It is possible that eventually the scheme would be extended to cover the urban population as well, but other alternatives may prove more appropriate in such areas. These pensions would be very small at the outset, but structured in such a way as to increase as province income levels and national income levels increase over the years. The pension would be available to all residents over the specified eligibility age which might vary from one province to another and could be gradually increased (or decreased) over the year. For example, in the poorer western provinces the pension might start at age 55, while in the more affluent costal provinces it might not start until age 75. Considering the vast gap in income levels and cost of living between coastal developed regions and western poor regions, and historical evidence suggesting that financing would most likely come from the provincial level governments, it would make sense to implement pensions that are based on the average income levels of the specified provinces. If

12 12 the goal is to increase the level of aid for residents of poor provinces, the level of the pension should be based in part on contributions from the central government and that part should reflect changes over time in average income levels for the nation as a whole. The result is likely to be flat social pensions, beginning at an older age, that replace a smaller fraction of pre-retirement income for those living in coastal provinces, and flat social pensions, beginning at an earlier age, that replace a larger share of pre-retirement income for those living in the poor western provinces. In addition to the commonly used definition of US$1 a day, as mentioned earlier, the Chinese government has its own definition of the poverty line; it varies substantially from province to province. The social pension for rural old people that we propose could be set at a specified percentage of the provincial poverty line. Disagreeing with the government s current strategy of starting social assistance in developed regions then expanding to poor regions, we instead suggest that social pension first be introduced in the poorest regions and provinces. This would help reverse the dramatic income gap between the rural western regions and the developed coastal regions. Potential Benefits of Social Pensions for Rural China Based on the experiences of a number of other developing countries (Johnson & Williamson, 2006), there is reason to believe that small, regular payments to elderly citizens living in poor rural areas in China could have a number of positive benefits for recipients as well as for the nation as a whole. Poverty alleviation: In South Africa, the social pension reduces the number of people living below the poverty line by about 5% (2.24 million), and having a pensioner in the family reduces a Brazilian household s probability of becoming poor by 11 percent (Gorman, 2004;

13 13 Overbye, 2005). There is evidence that in many developing countries such as Indonesia, Namibia, South Africa and Nepal, the pension of older family members is the main source of income for many poor households (Gorman, 2004). Improving health status: A social pension would undoubtedly improve the health status of the elderly population of China. In South Africa, self-reported health statuses of women improve dramatically after the age of 60, the age at which women become eligible for the social pension (Case & Wilson, 2000). The Chinese government currently is pushing for new co-op medical program experiments in some rural areas. Once a social pension scheme is in place, the additional income would make participation in the local co-op medical program affordable to just about everyone, guaranteeing at least some improvement in the health status of the elderly and of their families. Improving living standards for the whole family: International examples demonstrate that social pensions are able to support entire families. Research shows that older people consistently invest the little money they have in income-generating activities as well as in the health and education of other family members (Case, 2001). In Africa, social pension payments are a lifeline to the millions of elderly-headed households with children orphaned by HIV/AIDS or conflict. Increasing the status of older people within the family and household coping mechanisms: The literature on other developing countries suggests that elderly populations traditionally are considered at high-risk for poverty and that the elderly in many of these countries tend to live in extended families. Giving elderly citizens some income of their own tends to enhance their status within the household. They shift from being a burden to a resource (Gorman, 2004).

14 14 Increasing children s educational benefits: In rural China, some school-aged children drop out of school due to their family s inability to afford the fees and the need for another income. The small, regular income provided by a social pension program would most likely reduce this drop-out rate. Targeting old women: Old women living in rural China as is the case in other developing countries are the nation s poorest and most vulnerable citizens. They would be the major beneficiaries of the social pension. Promoting political stability: Benefits for the elderly will trickle down not only to their family members, but to the community as well. Reducing the poverty in rural areas and closing the gap between rich urban and poor rural areas should promote political stability and harmony. Conclusion In this article we argue that China, particularly its rural population, stands to benefit from pension reforms that would gradually extend at least some minimal pension coverage to the 70 percent of the population living in rural areas. It is our view that the most promising alternative would be to introduce a universal non-contributory old-age pension (often referred to as a social pension) to cover those living in rural areas. The pension would be very small at the outset, but the size could be increased over the years as increases in the Chinese national produce increase. For many rural residents, a very small pension could make a significant difference. In most cases, it would not be the only source of income; when combined with other very modest sources of income, the result could be a substantial reduction in the fraction of the rural population currently attempting to survive on less than a minimally adequate subsistence income.

15 15 Our goal has been to lay out the broad parameters of such a program, not all of the details that would have to be worked out prior to implementation. We make the case that such a program is needed and feasible. It is our hope that others will build on this effort and attempt to work towards a mechanism to deal with the severe poverty that many elderly citizens of rural China currently confront. Our proposal alone would not solve all of the health and social welfare problems of the rural population. For example, it does not attempt to take into consideration the health status of a beneficiary s family. Our proposal would offer some help, but more work is needed to find ways to provide even minimally adequate health care to China s rural population. References Barrientos, A., & Lloyd-Sherlock, P. (2003). Non-contributory pension schemes: a new model for social security in the south? Paper presented at 4 th International Research Conference on Social Security, ISSA Antwerp 5-7 May. Case, A., & Wilson, F. (2000). Health and wellbeing in South Africa: Evidence from the Largeberg survey. Unpublished report, Princeton University, Case, A. (2001). Does money protect health status? Evidence from South African pensioners. Cambridge, MA, National Bureau of Economic Research, NBER Working Paper French, H. W. (2006, January 14). Wealth grows, but health care withers in China. New York Times, pp. A1 & A7. Gillion, C., Turner, J., Bailey, C., & Latulippe, D. (2000). Social Security Pensions: Development and Reform. Geneva, International Labour Office. Ginneken, W. (2003). Extending social security: policies for developing countries. ESS Paper No. 13, Geneva, International Labour Office.

16 16 Gorman, M. (2004). Age and Security: How Social Pensions Can Deliver Effective Aid to Poor Older People and Their Families. London: Help Age International. Huang, F.Z. (2004, July 8). China should pay close attention to designing a reasonable social security comments on Assar Lindbeck s view on China s strategies of economic and social development. China Economic Times. Retrieved from: Johnson, J. K. M., & Williamson, J.B. (2006). Do universal non-contributory old-age pensions make sense for rural areas in low-income nations? Paper to be presented at the ISA World Congress, Durban South Africa, July Kakwani, N., & Kalanidhi, S. (2005). Ageing and poverty in Africa and the role of social pensions. Working Paper No. 8, United Nations Development Programme (UNDP). Brazil: International Poverty Center. Li, H.S. (2004). An analysis of integrating urban and rural social security systems from the perspective of the semantic definition of social security. China Social Security, 1, Liaoning Province Government, (2004). Retrieved: January 16, 2006, from: Mainali, A. (2006). Social security: Key to balanced economic development. The Rising Nepal (2006. Retrieved: January 17, 2006, from: Ministry of Civil Affairs of P.R. China. (2002). Retrieved: January 16, 2006, from: Ministry of Civil Affairs of P.R. China. (2006). Retrieved: February 27, 2006, from:

17 17 Overbye, E. (2005). Extending social security in developing countries: A review of three main strategies. International Journal of Social Welfare, 14, Ping, H. & Pieke, F. N. (2003). China migration country study. Institute of Sociology, Chinese Academy of Social Science (CASS). Retrieved: May 18, 2006, from: Reynaud, E. (2002). The extension of social security coverage: The approach of the International Labour Office. ESS Paper No. 3, Geneva, ILO Social Policy and Development Branch. Transparency International. (2004). Global corruption report Corruption Perceptions Index. Retrieved: November 8, 2004, from: United Nations. (2005a). About China: poverty. UN Organizations in China (2005). Retrieved: March 31, 2006, from: United Nations. (2005b). About China: China's population: The increasing proportion of elderly people. UN Organizations in China (2006). Retrieved: January 16, 2006, from: U.S. Census Bureau. (2002). International Data Base [Electronic Data Base]. Date updated: Retrieved:March 31, 2006,from: Willmore, L. (2003). Universal pensions in Mauritius: lessons for the rest of us. Paper presented at 4 th International Research Conference on Social Security, ISSA Antwerp 5-7 May. Wolf, C., Jr. (2004, July 7). China's rising unemployment challenge. Asian Wall Street Journal. Retrieved: January 16, 2006, from: World Bank. (1994). Averting the Old Age Crisis. Oxford, Oxford University Press.

18 18 World Bank. (2003). China promoting growth with equity: Country economic memorandum. Poverty Reduction and Economic Management Unit, East Asia and Pacific Region. Retrieved: March 17, 2006, from: /Rendered/PDF/241690CHA.pdf World Bank. (2005). World development indicators Washington, DC: The World Bank. Xiao, M. (2004). Employment expansion needs to be a priority. China Daily, (2004, April 30), pp. 6. Retrieved: March 10, 2006, from: Xinhuanet. (2006, March 10). Retrieved: March 10, 2006, from: Zhu, Q. (1995). The urban-rural gap and social problems in the countryside. Chinese Law and Government, 28 (1),