In Depth: Why Individuals May Need to Shoulder More of China’s Social Insurance Burden

[para. 1] In China, local governments have prioritized subsidizing various social insurance programs, including basic pensions and medical insurance. However, this initiative has put a significant strain on already financially burdened local budgets, prompting predictions that individuals may have to assume more responsibility for funding these programs.

[para. 2][para. 3] This potential shift raises concerns about compatibility with China's broader policy goals, particularly in enhancing consumption to stimulate economic recovery. Social insurance funds, which have been established for decades, offer benefits like pensions and medical insurance. They are financed mainly by premiums from individuals and government fiscal subsidies, along with income from interest and investments. Recently, these funds have become more reliant on government subsidies.

[para. 4][para. 5] Over the past decade, government fiscal subsidies have consistently contributed at least 20% of annual revenues for social insurance funds, peaking at 28% in 2020 and decreasing to 23% in 2022. Despite this reduced percentage, the absolute size of subsidies has grown due to increased spending. From 2015 to 2024, the annual subsidies doubled to almost 2.7 trillion yuan ($379.1 billion), reflecting local governments' efforts to improve people's livelihoods.

[para. 6] In response to an aging population and resulting financial pressures on social insurance funds, the government has pledged to increase basic pension payments and fiscal subsidy standards for medical insurance this year. Analysts from Zhongtai Securities Co. Ltd predict a rapid rise in the need for fiscal support.

[para. 7] Concerns regarding the sustainability of the current system are prevalent among analysts and researchers, given the financial constraints of local governments. Economic challenges such as sluggish fiscal revenue growth, caused by weak consumer spending and an ailing property market, exacerbate the situation. Some local governments anticipate these difficulties persisting into 2025.

[para. 8] To alleviate some provinces' financial burden, the central government established a national pool in 2022 to coordinate enterprise employees' basic pension funds, allowing for fund transfers from regions with surpluses to those experiencing shortfalls.

[para. 9][para. 10][para. 11] Given the unsustainability of dependence on fiscal subsidies, some experts suggest that individuals should shoulder greater responsibility. China has moved towards this approach over recent years. The country operates a three-pillar pension system: state-run pensions, employer-sponsored annuities, and personal pensions. The third pillar, which was piloted in 2022 and implemented nationwide last year, enables voluntary individual contributions of up to 12,000 yuan annually. Nevertheless, it has experienced low public interest due to suboptimal investment options.

[para. 12][para. 13] Urban and rural residents' basic pensions, the smallest first pillar component, include a government-funded basic pension and a personal account pension reliant on individual payments. Increased minimum contribution thresholds have partly contributed to the decline in fiscal subsidy shares. Urban and rural medical insurance also follows a similar funding structure where fiscal subsidies accounted for 62% in 2023, a drop from 78% in 2015; however, in regions like Beijing and Shanghai, it exceeded 80%.

[para. 14][para. 15] Increasing personal contributions is challenging due to income levels, especially for rural residents who often must choose between pension and medical insurance contributions due to financial constraints. Local authorities are actively seeking ways to encourage higher individual contributions.