Mar 07, 2017 05:06 PM

Editorial: Smarter Management of Welfare Programs Is Key to Diffusing China’s Aging-Population Time Bomb

China’s “great gray wall” — its rapidly aging population — is straining the state-backed health insurance system. The central government’s latest efforts to prop up its welfare net came in late February, when three ministries jointly issued guidelines to tighten budget management rules and expenditure controls that govern the medical insurance fund.

There are many ways to improve the management of the welfare funds, but a fundamental principal is to assiduously maintain an “actuarial balance.” An actuarial deficit occurs at any point in time when the anticipated rate at which money flows out to cover social security obligations exceeds the rate at which money is coming in. These estimates can be calculated for a short 10-year period or for a long-term projection window of about 75 years. A deficit at any point means the government will not be able to deliver all the legislated benefits, and if not effectively reformed, the social security system may be pushed to the breaking point.

Chinese policymakers officially proposed that pension funds should maintain a state of actuarial balance for a long-term projection window only in 2013. That same year, the government decided to apply the principal to health insurance and other social welfare programs. The fresh guidelines in February are an attempt to make actuarial reports a regular part of the decision-making process at the central- and local-government level. This could help fine-tune the amount contributed by individuals and companies and the structure of state insurance program based on changing economic and demographic conditions, making it more affordable while giving better returns.

Two aspects are essential to ensuring an actuarial balance: the accurate calculation of insurance premiums, and having adequate provisions as a buffer along with smarter risk controls. The state-backed medical insurance program must be carefully developed and adjusted in a timely manner based on demographic and economic growth trends and other social factors to achieve a long-term actuarial balance. It also requires modifying the system to ensure that there is a close link between what individuals contribute to the fund and the benefits they get. The February guidelines — issued by the Ministry of Finance, Ministry of Human Resources and Social Security, and the National Health and Family Planning Commission — require local authorities to conduct annual actuarial valuations on their basic medical insurance accounts and report the results by end of June each year. This would pave the way to making timely adjustments to provincial-level policies to ensure balance in the long run.

In China, the benefits from the state-backed insurance program differ depending on where one’s hukou, or household registration, is based: There is one package of benefits for city workers; another for unemployed urban dwellers; and a third, sparse one for rural residents. The number of people covered by these national programs has soared over the past 15 years, and by the end of 2014, over 1.3 billion people, or 95% of China’s population, were enrolled in one of the three plans. But as the country ages quickly amid an economic slowdown, the medical insurance fund is struggling to match revenue to escalating expenses. Rising medical costs and a growing middle class demanding better care is putting extra pressure on the strained system.

Between 2011 and 2015, the two medical insurance programs for urban dwellers saw expenses grow at a much higher pace than revenue. The fund covering city workers had a gap of 2.5 percentage points, and the one for urban unemployed saw costs outpace income by 5 percentage points. Meanwhile, it is estimated that China’s total health care spending will rise from 3.5 trillion yuan ($508 billion) in 2015 to 15.8 trillion by 2035, or about 9% of the national gross domestic product (GDP). This alarming rise threatens to push the medical insurance fund, which is already heavily subsidizes by the central government (77% in 2014), to the breaking point.

All aspects of the social security net must adhere to sound actuarial methods when designing policies and managing funds. But China’s social welfare system is still taking its first baby steps when it comes to beefing up institutions and harnessing the right talent and technology needed for smart actuarial work. At present, the program can hardly detect flaws and make quick adjustments.

The complexity of China’s social welfare system is partly to blame for the difficulties in achieving an actuarial balance. Currently, workers and employers jointly pay 66% of an employee’s social security dues, which cover retirement, medical, unemployment and other benefits. This contribution ratio has long been criticized as being too high. In practice, many workers and employers have sought to pay as little as possible, as many believe the value of future benefits are inadequate compared to the current premiums.

It is essential to better monitor the streams of money flowing into and out of different social security funds using actuarial valuation techniques. It will offer the necessary insights for policymakers to adjust premium contribution rates and reform the structure of national welfare programs, making it affordable to individuals and companies.

Introducing legislation, making it mandatory to adopt the actuarial balance principal, will lay the foundation for an overhaul of the social security system and the way it’s managed. An actuarial reporting system should be set up to allow national legislators to review provincial-level information before making any policy changes. The actuarial report should also be released to the public.

But adopting this technical approach of precise measurements and reporting is not enough. Reforming the overall welfare system is essential to achieve an actuarial balance. For example, reducing the actuarial deficit in the medical insurance fund requires broadening coverage, consolidating the segmented medical insurance system and encouraging private insurers to play a greater supporting role.

There is a clear consensus that China’s medical insurance system is fast reaching its breaking point, but opinions on a remedy vary. Any solution that ignores the market’s role isn’t a good choice. The country’s health care system is in urgent need of reform, and any delay will only worsen the situation. As China strives to set up a robust social security net over the next five years, developing a system that minimizes an actuarial deficit will be the top priority.

Hu Shuli is the chief editor of Caixin Media.

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