The Decreasing Space of China’s Basic Pension Insurance for Urban Employees and the Effect on Public Expenditures

Abstract

The year of 2016 and before, Chinese enterprises needed to pay social insurance premiums at least 30% of the total wages of their employees.Based on the above background, can the contribution rate of China’s social insurance system for urban employees be further reduced? If so, what level can the contribution rate be reduced to? Considering that the basic pension insurance for urban employees occupies a pivotal position in the social insurance system for urban employees, this paper takes the basic pension insurance for urban employees as an example, and analyzes whether the contribution rate can be further decreased in the shortterm （2018−2025） and the mediumterm （2018−2050） by using actuarial models, in order to provide a more scientific quantitative basis for the government to introduce policies to reduce the contribution burden for enterprises. In the paper, there are two basic hypotheses: one is that the basic pension fund for urban employees should be balanced; the other is that the replacement rate of pension should be unchanged. Based on the actuarial models and the hypothesis of related parameters, the paper finishes a series of simulations, and the results are shown as follows: （1） If there is no policy intervention, the cumulative deficit of basic pension fund for urban employees will appear in 2028, and the contribution rate can be decreased in the short term not in the medium term. （2） When implementing universal two-child policy, although the contribution rate can be reduced in the short term, the contribution rate should be increased by 0.36% to 0.51% every 2 years, or increased by 0.83% to 1.19% every 5 years. （3） If further introducing the policy of delaying retirement age and investing the basic pension fund into the stock market, the contribution rate can be decreased by 0.3% to 0.43% every 2 years, or decreased by 0.71% to 0.99% every 5 years in the mediumterm. （4） If the government wants to reduce the contribution burden of employers in the shortterm, it needs to invest a total of 13.31 to 145.23 trillion Yuan into the pension fund; when the government focuses on the mediumterm, it should not invest any money into the pension fund. （5） If reducing the contribution rate every 5 years, compared with the situation of reducing the contribution rate every 2 years, the fiscal investment can be decreased by 2.21% to 36.96%. The above results have passed the sensitivity test. Therefore, in order to further ease the contribution burden of employers, the government can encourage fertility, delay retirement age, invest pension fund into the stock market and so on as soon as possible. In addition, taking into account of the future fiscal burden, the government should also focus on the medium and long term when reducing the contribution rate, and minimize the contribution rate reduction frequency.