die „x-komponente“ in schanghais reformen der sozialen sicherheit

The “X component”in Shanghai’s social

security reformsGloria Davies, Ingrid Nielsen, Chris Nyland,Russell Smyth, Cherrie Zhu and Judith Zhu

Monash University, Australia

Abstract In 2003, the Shanghai Bureau of Labour and SocialSecurity launched the zhenbao (town insurance) programme,now widely known as 25 plus X. This scheme is regarded as animportant experiment in social security reform and has beenlauded for extending social security to areas where previouslyonly segments of the population had mandatory coverage.Using data from 103,000 individuals enrolled in 25 plus X, weexamine the extent to which the scheme represents an extensionin social security coverage. Our analysis suggests that while itdoes represent an extension of benefits for some, for many itrepresents a considerable dilution in benefits.

Keywords social security reform, social insurance, scope ofcoverage, People’s Republic of China, Shanghai

Introduction

Developing country expenditure on social security has failed to keep pace witheconomic growth in recent decades. Motivated by this failing, the InternationalLabour Organisation (ILO) in 2003 launched a Global Campaign on Social Securityand Coverage for All (ILO, 2003). As the title suggests, this campaign aims to extendcoverage to all people without this form of protection. One of the first nations to

Address for correspondence: Russell Smyth (Russell.Smyth@BuseEco.monash.edu.au), Department ofEconomics, Monash University, Caulfield East, Victoria 3145, Australia; Gloria Davies (Gloria.Davies@arts.monash.edu.au), School of Languages, Cultures and Linguistics (Chinese Studies), MonashUniversity, Australia; and Ingrid Nielsen (Ingrid.Nielsen@buseco.monash.edu.au), Chris Nyland(Chris.Nyland@buseco.monash.edu.au), Cherrie Zhu (Cherrie.Zhu@buseco.monash.edu.au) and JudithZhu (Judith.Zhu@buseco.monash.edu.au), Department of Management, Monash University, CaulfieldEast, Victoria 3145, Australia. We thank two referees for helpful suggestions on an earlier version of thisarticle. Any remaining errors are our own.

Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

gain ILO support was the People’s Republic of China (hereafter, China), withassistance including a review of progress achieved in social security reform andidentification of weaknesses in existing programmes. The review analysed socialsecurity provision and administration relating to unemployment, pensions, healthinsurance, industrial injury insurance and the needs of rural/migrant workers,together with a technical document for consideration by donor agencies (see Cook,2002).

Shanghai has been at the forefront of China’s effort to extend social securitycoverage. The zhenbao (town insurance) programme is designed to extend cover-age to geographic areas where previously only a limited part of the populationhad access to mandated benefits. In the media reports and pronouncementsShanghai’s government has generated, the progress achieved with town insuranceemphasizes the increased security being provided to populations previouslypoorly covered or excluded from coverage. Utilizing a unique database providedby the Bureau of Labour and Social Security (BOLSS) in Shanghai that providesinformation on 103,095 individuals covered by 25 plus X in one district of Shang-hai at the end of 2004, we examine how successful the new scheme has been inextending coverage and in maintaining and/or improving benefits. The analysis ofthe dataset is supplemented with interviews conducted in June 2006 with the thenDirector of the BOLSS and senior officials within the BOLSS responsible for theimplementation of the 25 plus X scheme. We contend that while the new schemeis having a positive effect on the lives of some, the results of the reform are moremixed than the municipal government suggests as the result of “churning”. Thisnotion refers to the fact that while the reform has increased the security of somehouseholds, it has rendered others less secure (Kanbur, 2005). Churning is occur-ring because, although the extension of coverage to some who had rural or noinsurance prior to the introduction of 25 plus X has taken place, others in thetowns surrounding Shanghai to which the 25 plus X scheme has been introducedhad previously been able to access the social security benefits available to citizenswith an urban registration. Now these individuals are being excluded from theurban insurance scheme and can only access the lower level of benefits mandatedby 25 plus X.

It may be argued that Shanghai’s experience with social security reform is uniquein the context of the Chinese government’s recent emphasis on the need to developa market-oriented social protection system. As the effectiveness of social welfarereform depends on efficient administration (with adequate resources to implementreform), Shanghai is better placed than other Chinese cities to undertake this task.However, the implications of the 25 plus X reforms have broader interest beyondShanghai. Wong and Lee note, even by comparison with relatively wealthy southerncities like Guangzhou, that welfare reform in Shanghai “is likely to be more reflectiveof the ‘typical’ or ‘official’ one endorsed by the central government” (2001, p. 522).

The “X component” in Shanghai’s social security reforms

In this spirit, the national government aims to make Shanghai’s 25 plus X scheme abenchmark for reforming social security schemes in other cities.1 Indeed in 2005 theTianjin government announced its commitment to implementation of a “towninsurance”, modelled on 25 plus X (China Labour Market, 2005).

The global perspective on the extension of socialsecurity coverage

Van Ginneken defines social security as benefits “society provides to individuals andhouseholds — through public and collective measures — to guarantee them aminimum standard of living and to protect them against low or declining livingstandards, arising out of a number of basic risks and needs” (2003, p. 285). The twomain components of social security are social insurance and tax-financed socialbenefits. Building on Sen’s (1999) notion that poverty should be understood ascapability deprivation, the ILO holds that the main function of social insurance is tomake provision for various capacity deprivations, avoid debt, and render householdexpenditures more predictable. Tax-financed social benefits, by contrast, tend tobolster low incomes and support household expenditures on basic items. Coverageis defined both in terms of the number of people included and the scope and levelsof benefits provided. As van Ginneken notes “how successfully a scheme extends itscoverage is determined by the design and choice of benefits, financing structure andthe quality of its administration” (2003, p. 281).

From the 1980s numerous scenarios were advanced that argued the socialsecurity regimes of the OECD were being undermined by the current wave ofglobalization. Scholars who subscribed to such scenarios warned that in a global-izing world, nations with developed, state-funded social protection regimes willinvariably cut taxes and retrench social protection programmes in order to ensuretheir industries are globally competitive. Acceptance of this view has since beendiluted by studies revealing that the OECD nations have sustained the share of GDPthey allocate to social programmes (Castles, 2004; Navarro, Schmitt and Astudillo,2004; Banks et al., 2005). These findings have muted trepidation regarding theviability of OECD welfare regimes, though concerned taxation analysts continue towarn that globalization will continue to challenge social security regimes.

But if recent experience has eased concern in the OECD countries, developingcountry research has produced the opposite effect. The latter has revealed thatduring the last two decades of the twentieth century the share of GDP allocated tosocial security in the developing world declined (Tanzi, 2002; Andersen, 2003;Genschel, 2003). These results have heightened fears that a social security race to thebottom may be occurring across the developing world. Since the 1990s empirical

1. Derived from interviews undertaken with senior BOLSS officials in Shanghai, March 2006.

studies have consistently reported: (i) a negative correlation between the averagerate of growth and a number of measures of inequality, and (ii) a positive correla-tion between market openness and increased inequality (Rudra, 2002, 2004;Kannan, 2004; Cornia, 2004). At the same time, research findings by economistssuggest well-managed social security programmes can increase social stability andassist the pursuit of global competitiveness and that political support for marketopenness is dependent, in part, on the presence of a sound social protection regime(Aghion and Williamson, 1998; Rodrik, 1998; Aghion, Caroli and Garcia-Penalosa,1999; Lindert and Williamson, 2001).

Social insurance reform in “Greater Shanghai”

The background to recent social security reforms

In 1951, China promulgated its first labour insurance regulations (laodongbaoxian tiaoli). This was the basis for the creation of a social security system,termed a labour insurance system, for employees in urban areas (Song and Chu,1997). The system primarily covered employees working in state-owned enter-prises (SOEs) and government departments. These employees enjoyed cradle-to-grave comprehensive social insurance coverage, including benefits for retirement,disability, unemployment, health care and housing. The benefits were financedand provided at the enterprise or working unit (danwei) level, which assumedresponsibility to provide social protection not only to their employees and retireesbut to their families as well (Li, 2000). For the urban collective sector, benefitsvaried between different industries and locations, depending on their financialresources. Most non-state workers in urban areas and most of the population inrural areas were not covered by the system (Song and Chu, 1997). No social secu-rity programmes existed for the then negligible private sector (Chen, 1990; WorldBank, 1990; Niu, 1991; Lee, 1993). Meanwhile, rural residents mainly relied upontheir own resources and those of their extended family and the production team(sheng chan dui) — a basic production unit under a collective system of produc-tive activities of the “people’s commune” (remin gongshe) — for social security(Liang, 1999). They enjoyed collective welfare delivered by the people’s commune,such as food subsidies, education facilities and affordable medical care from 1951to the early 1980s (Hebel, 2003). After China commenced economic reform in thelate 1970s, the collective health and old-age insurance system in rural areas col-lapsed when the household responsibility system replaced the collective system.The rural residents went back to being self — or family — supported in terms ofsecurity (Liang, 1999).

The labour insurance scheme was an enterprise — or organization-based —insurance system in nature. Under this system, the retirement age for urban employ-

ees was set at age 60 (men) or age 55 (women). Researchers have noted that asenterprises assumed sole responsibility for providing retirees with pension benefitsand other welfare services, there were several key problems with the scheme (Songand Chu, 1997; Li, 2000; Liu and MacKellar, 2001).

First, organizations shouldered too much of the administrative and economicburden. With a growth in the proportion of retirees, some organizations with a longhistory had more retirees than they had active workers. As a consequence, even thosefirms performing well struggled to provide sufficient funds to pay the benefits oftheir current and former employees. Furthermore, organizations had to perform allrelated administrative work to maintain the system, which made the organizationresemble a mini-society, which itself was cumbersome.

Second, the unit-based social security system prevented employees fromtransferring their old-age insurance to other firms if they changed organizations.This discouraged workers from moving across enterprises, industries, orsectors and thus indirectly hindered the development of collective and privateenterprises.

Third, there was no risk-sharing mechanism among organizations because of alack of a social pooling fund system, and thus the social security rights of employeeswere not always protected if the organization had financial problems. When anenterprise was burdened with a large population of pensioners or when it sufferedfrom poor business performance, it might not be able to pay its workers ongoingmarket wages and also might struggle to finance future pension obligations. Thegovernment was invariably forced to prop up the organization if such eventsoccurred, because the budgets of enterprises were not separated from the govern-ment budget under the planned economic system.

These problems made the labour insurance system an obstacle to China’s eco-nomic reform. To pave the way for this, the government decided to launch socialsecurity system reforms in the middle of the 1980s, with experiments in some citiesintroducing the concept of insurance into the social security system and shiftingemphasis from organization-based social security funds towards a social poolingfund. The social insurance reforms aimed to reduce the financial burden of SOEs, toenable them to compete in the market without worrying about the risk of the socialsecurity of their staff, to spread fund risk-sharing and increase the mobility ofemployees.

Whereas the old system of worker protection was firm based, the market-oriented regime involves a range of “social insurances” funded by a combination ofstate, employee, and employer contributions. The risks currently covered by socialinsurance in Shanghai relate to age, unemployment, sickness, occupational injury,and maternity leave. However, not all residents can access a full range of entitle-ments and there are differing levels of coverage. There are three distinct models thatare summarized in Table 1 and discussed in more detail below.

Urban insurance scheme — The 48-model

The urban insurance scheme now involves a full range of social insurance benefits.Those eligible include all employees working in a firm registered in Shanghai properand employees with a non-agricultural household registration (hukou) working instate or public bodies registered in rural areas surrounding Shanghai proper. Priorto the introduction of the 25 plus X scheme, many non-state employers in the ruralareas surrounding Shanghai voluntarily offered their employees urban coverage inorder to attract and retain good staff. The urban insurance scheme is known as the48-model because employers are required to contribute 37 per cent of payroll whileemployees contribute 11 per cent of their salary. Three per cent of the employer’scontribution and 8 per cent of the employee’s contribution is deposited in anindividual pension account, while the rest is placed in a state-managed socialpooling fund. The BOLSS specifies that if average wages in the firm are belowthe average wage in Shanghai, the firm’s social insurance obligations are equal to

Table 1. Comparison of alternative social insurance schemes operating in GreaterShanghai

Scheme Employer contributions Employee contributions Range of possible benefits

Urban socialinsurance

37 per cent of monthlypayroll, of which 3 per centgoes to the employee’sindividual pension account,the rest going to the socialpooling fund. Tax incentivesto top up contributions.

11 per cent of monthlysalary, of which 8 per centis paid into an individualpension account. Taxincentives to top upcontributions.

Basic monthly pensionconsisting of at least 20per cent of the insured’saverage monthly income ofthe previous year plus theindividual account dividedby 120.

Rural socialinsurance

15 per cent of averageincome in the townmultiplied by the number ofemployees.

5 per cent of averageincome in the town.

Basic monthly pension andmean individual savingsplus up to 15 yearscontributions.

25 plus X 25 per cent of monthlypayroll, plusX1: supplementary pension(optional).X2: 3 per cent for medicalinsurance (mostlymandated).X3: job search allowance(for those dispossessed ofland-use rights).

Nothing, unless a minimumcontribution is required bythe local town council.

Basic monthly pensionconsisting of at least 20per cent of the insured’saverage monthly income ofthe previous year, plus anextra 0.5 per cent of theinsured’s average monthlyincome of the previous yearfor each year beyond the15-year contributionthreshold.Benefits contingent oncontributions to Xcomponents.

Source: Based on interviews at the BOLSS, June 2006.

60 per cent of average wages in the city. If average wages in the firm are greater thanthree times the average city wage, social insurance obligations are capped at threetimes the average. The Chinese newspaper, Jiefang Ribao (2005), reported that, as ofJune 2005, the number of individuals enrolled in Shanghai’s urban social insurancescheme approached 7.2 million.

Rural social insurance scheme

Shanghai began reforming rural social security in 1987 and introduced relevantregulations in 1996. According to The Rules on Rural Social Security in ShanghaiMunicipality (Shanghai: Ministry of Labour and Social Security, 2004), the paymentof social security contributions is compulsory for firms but not for “sole farmerfamilies” (chun nong hu). The firm contributes an amount equal to 15 per cent of theaverage income per capita in the town multiplied by the number of employees,while employees contribute 5 per cent of average income. The rural insurancescheme provides a benefit at age 60 (men) or age 55 (women), which consists of abasic monthly old-age pension and mean savings from an individual account. Theformer part varies among towns, depending on the state of each town’s ruralinsurance fund and the number of pensioners. As the result of differences in eco-nomic development between towns, the minimum monthly pension paymentvaries from CNY 75 in the least industrialized area to CNY 600 in the most devel-oped area.2 According to the government, in 2004 the rural insurance schemecovered more than 98 per cent of farmers and 80 per cent of employees working inrural collectives in Greater Shanghai.3 According to Jiefang Ribao (2005), 1.3 millionwere enrolled in the rural insurance scheme as of June 2005.

The 25 plus X scheme

The 25 plus X scheme was initiated in late-2003 to provide basic social security toland-deprived peasants and to promote sustainable suburban growth.4 The basicdifferences between this scheme and the urban insurance scheme involve the baseamount, contribution rates and contributor. The minimum monthly earnings forcontribution purposes is equal to 60 per cent of the average monthly wage in thecity. The employer’s contribution on behalf of each employee is equal to 25 per centof covered earnings (split as follows: 17 per cent for pension benefits, 2 per cent for

2. In 2008, CNY 100 = ! 10.09 approx.; or US$ 11.03 approx.3. See http://www.shanghai.gov.cn (accessed on 01.02.2006).4. When launched in 2003, it was actually known as the 24 plus X scheme, as employers were onlyrequired to contribute 24 per cent of the base (17 per cent for pensions, 2 per cent for unemployment and5 per cent for medical treatment). However, it was quickly increased to 25 per cent with an additional 0.5per cent each for maternity and industrial injury insurance.

unemployment benefits, 5 per cent for medical treatment and 0.5 per cent each formaternity and industrial injury benefits), plus the X component. The X normallyconsists of X1 for commercial pensions, X2 for medical insurance and X3, which isa two-year allowance for farmers who traded their land-use rights. Firms arerequired to pay the 25 per cent base amount while employees are not compelled topay anything, unless a minimum contribution is required by the local council formedical treatment. All employers and employees are encouraged to top up the 25per cent contribution by the use of tax incentives (such as adding the X componentto the 25 per cent contribution before tax), with the magnitude of the X componentto be negotiated between the employer and employee. X3 is mandated for compa-nies that have appropriated land and is used to compensate those who tradedland-use rights. In the district considered in this study, the minimum level of X2 wasmandated at 3 per cent of payroll.

The main group of individuals affected by the introduction of the programmeare those who have lost their land-use rights as part of Shanghai’s urban expansion.Such persons have been compensated with i) an entitlement to the basic 25 per centinsurance in the form of a lump-sum amount equivalent to 15 years of contribu-tions that is placed in an account managed by the BOLSS,5 ii) a non-agriculturalhukou and iii) an allowance of CNY 290 a month for 24 months (X3) intended toassist in finding a new job. Those who have had their land-use rights removedreceive this allowance irrespective of whether they are employed. Thus, the allow-ance is a form of compensation and a job-seeking incentive. According to JiefangRibao (2005), by June 2005, 880,000 were enrolled in 25 plus X.

In Article 3 of the regulations establishing the 25 plus X scheme, it states that“employees who have already established labour relations with work units that havejoined the urban insurance model and employees already under the urban schemewho consent to remain in the urban scheme after consultation are not covered by 25plus X” (Shanghai: Ministry of Labour and Social Security, 2003). Article 3 suggestsemployees covered by the urban insurance scheme can remain in this scheme.However, as of the end of 2004, when the data used in this study were collected, thisregulation was regularly being violated. Many employers who voluntarily providedcoverage under the urban insurance scheme prior to the introduction of the 25 plusX scheme had withdrawn that offer and instead were providing the lower level ofcoverage under 25 plus X.

The 25 plus X scheme: An extension or dilutionof social insurance benefits?

The 25 plus X scheme does not discriminate between urban and rural residents. Asa result, it is often promoted in the Chinese media as an example of socially

5. The lump-sum contribution is made by organizations that took over the land.

responsible governance. In 2004, the Mayor of Shanghai, Han Zheng, emphasizedthe need to “accelerate the establishment of its social protection system” through theimplementation of the 25 plus X policy, noting that this new scheme (then inoperation for only two months) would gradually replace “rural insurance” (nongbao) that had provided a relatively low standard of social protection (quoted in YuLiqi, Undated). In the broadest terms, the 25 plus X policy accords with Hu Jintao’snotion of a “harmonious society” (hexie shehui). In the media, peasants who havelost land-use rights have been singled out for special mention. For example, a newsreport of 14 December 2004 appeared in Xinmin Wanbao with the headline, “Aproject to win the hearts and minds of citizens in the city and suburbs of Shanghai:Caring for displaced farmers through town insurance,” in which the followingstatement appears:

For hundreds and thousands of years, farmers have regarded the land to be of the utmost

importance as they have had to depend on it for their livelihood; to raise their children

and to provide for their old age. Their right to exist and develop as well as their right to

protection are thus concentrated in the land itself. But in the short space of a year, some

537,000 peasants . . . have left the land to enrol [in the 25 plus X scheme].This report also noted that between February and October of 2003, some 94 meetingswere held by Shanghai’s municipal government, with the participation of the BOLSS.Various individuals, including a peasant who now receives insurance as part of the 25plus X scheme, a city official, and a district official in charge of a neighbourhoodsocial protection centre, were sought for comment to highlight both the benefits ofthe scheme and the care with which Shanghai officials had carried out this work onbehalf of land-deprived peasants (shidi nongmin). Chinese media reports of the 25plus X scheme are strikingly similar in style and composition, emphasizing theextension of social insurance to the previously uncovered. Typically, the benefits thatland-deprived peasants would receive under this scheme are highlighted togetherwith a summary of the scheme’s positive features as follows: a basic minimal platform(di pingtai), flexibility (you tanxing) and extensive coverage (guang fugai). Moreover,there is often an attempt to project an ambience of accord between “the people” andgovernment officials in regard to the benefits of the scheme.6

But what is missing from these accounts is the undesirable impact that the 25plus X scheme can have on those workers who previously received coverage underthe urban insurance scheme and whose employers are now providing coverageunder the 25 plus X scheme. For some of these individuals there has been a con-comitant dilution in social insurance protection. As discussed above, under theexisting urban insurance scheme, mandated contributions equating to 48 per centof the employee’s monthly wage are paid into a social insurance fund, with 37

6. The form and content of these media reports on the 25 plus X scheme is striking. See for instance,Jiefang Ribao (2004).

per cent paid by the employer and 11 per cent by the employee. Moreover, both theemployer and employees are offered tax incentives to induce them to top up themandated rate. Conversely, under the 25 plus X scheme, a significantly lower level ofemployer contribution (25 per cent) is mandated. Employees are not required tocontribute anything unless stipulated by the local town council. Thus,“flexibility” (amuch-recommended feature of the scheme) rests on the X component as deter-mined by negotiation between the employer and employee, with both being offeredtax incentives to induce them to lift the total contribution.

It is clear that 25 plus X is a scheme that renders land-deprived peasants whopreviously had lesser insurance coverage eligible for increased protection. However,it is equally clear that the scheme may represent a notable reduction of the high levelof social insurance coverage provided to some under the urban insurance scheme ifthe X component is small or negligible. The discrepancy between the rates ofemployer contributions required for the 25 plus X scheme and for the urbaninsurance scheme is an issue of concern to those previously covered by urbaninsurance. There is, however, little public discussion and scant media reporting ofsuch concerns. Since 2004, discussions of the 25 plus X scheme have appeared onofficial and non-official internet sites,7 but tend to take the form of providing briefand ambiguous answers to specific questions about the operation of 25 plus X,such as:

Question: Can a firm transfer acquired pension rights [sijin] in an employee’s city insur-

ance account to a town insurance account without the employee’s knowledge (it’s been

said that there is a huge difference between city and town insurance)? Is this legal?

Employees in this firm are not willing for such a transfer to take place.

Answer: Depends on how the firm was registered.8

An article in The Bund (2004) drew attention to the concern of workers previouslyable to access coverage under the urban scheme but who are now compelled totransfer from the urban insurance scheme to the 25 plus X scheme. Based largely onan interview with an employee of the Shanghai-based Haoyouduo ManagementConsulting Service Co. Ltd, who was given the pseudonym Wang Ming, the articledescribes how employees of this firm were faced with an invidious choice when theyreturned to work after Chinese New Year in 2004. They were presented with twodocuments: a standard letter of resignation that only required their signature; aletter of agreement stating that the employee would register for 25 plus X, thusrelinquishing enrolment in the urban insurance scheme.

7. See for instance websites such as goodlawyer falü zixun luntan [good lawyer legal advice forum],<http://goodlawyer.cn/fbbs/index.asp> (accessed on 13.11.2008). See also discussions of “towninsurance” at the officially sponsored Songjiang district forum, <http://forum.songjiang.gov.cn/posting.php?mode=topicreview&t=8821> (accessed on 13.11.2008).8. Archived chat between Liang Xuejun, a lawyer, and internet interlocutors, first posted 8.11p.m,13 January 2005 <http://goodlawyer.cn/fbbs/index.asp> (accessed on 13.11.2008).

Those in the firm who refused to register for the 25 plus X scheme were forced toresign. The report in The Bund also noted that “whereas Wang Ming’s work unit hadpreviously paid the equivalent of 43.5 per cent of his gross monthly income in socialinsurance [contributions], amounting to some CNY 802 a month, now that he wasregistered for town insurance,9 his work unit was only required to pay CNY 233towards the social pooling fund, with an added CNY 68 (or 7 per cent) towards anaccumulation fund for housing” (2004). It was clear that Wang Ming and hiscolleagues were unhappy about the reduction in the social insurance coveragecompared to that received before. Wang was quoted as saying that some 30 to 40employees decided to resign because of the reduced benefits coverage providedunder the 25 plus X scheme. Since this Shanghai-based joint-investment companywas ranked thirteenth in the Hong Kong Trade Development Council’s list of theTop 30 Commercial Chain Enterprises in China in 2004 and is noted as having“completed its restructuring in 2004,” it indicates the appeal that 25 plus X mighthold for employers keen to reduce social insurance expenditure.10

When asked about the Haoyouduo case, the BOLSS noted that the company’sactions were illegal because they were inconsistent with the regulations establishing25 plus X.11 The BOLSS emphasized that the Haoyouduo case highlighted thedifficulties associated with enforcing the regulations and the need to increaseemployees’ awareness of the regulations. In an attempt to address violations ofemployees’ rights, in 2005 the BOLSS introduced a new set of procedures code-named “Final Reckoning” (qiuhou suanzhang), designed to assist employees torealize their rights. “Final Reckoning” encourages employees to use a telephonehotline to report employer violations of their social security rights. It is claimed thatsevere penalties will be imposed where imputed violations by employers are proventrue.12

The pros and cons of 25 plus X:Empirical evidence from one district

In this section we examine who has joined the 25 plus X scheme, the characteristicsof employees who have received an X component above the mandated 25 per cent

9. This high rate suggests that the company previously paid an additional 6.5 per cent above themandated 37 per cent towards social pooling within the urban scheme.10. The rankings are available <http://www.tdctrade.com/alert/cba-e0503h-2.htm> (accessed on13.11.2008). The Haoyouduo Group was established as a joint investment between the Taiwan-basedWanda Group and mainland Chinese investors11. The contents of the remainder of this paragraph are based on interviews with the then Director ofthe BOLSS and senior BOLSS officials in Shanghai, June 2006.12. The BOLSS named the organizations that underpaid social insurance contributions or violatedsocial insurance regulations in the local newspapers. See, for instance, Jiefang Ribao (2006), Laodong Bao(2006) and Qingnian Bao (2006).

as part of individual bargaining, and present estimates of the percentage of peoplewho have had their social insurance coverage extended or diluted as a result of theintroduction of 25 plus X. To perform this analysis we draw on a unique datasetsupplied by the BOLSS containing data on 103,095 individuals, which represents allthose who had joined the 25 plus X scheme in one district of Shanghai by the endof 2004. For each person, and in addition to demographic characteristics, data isheld on their insurance status prior to joining the new scheme, whether the persontraded their land-use rights, and whether the person was receiving the X componentover the 25 per cent basic contribution level. In this regard, we underline that we arereferring specifically to X1 (the commercial pension), since all recipients are eligiblefor X2 (medical insurance). Similarly, we do not include X3, which is exclusively fordisplaced peasants.

Overview of the district

The district used in the study is situated 40 kilometres from downtown Shanghaiand covers about 600 square kilometres. At the end of June 2005, the area had apopulation close to one million; of which 36 per cent had an urban hukou, 16.5 percent had a rural hukou and 47.5 per cent were migrants. By the end of 2004, the“local workforce” (excluding migrants) was about 350,000 with 73 per cent workingin the manufacturing sector, 19 per cent in the service sector and 8 per cent inagriculture. The average per capita annual income in the district was CNY 24,189for urban registered employees and CNY 7,495 for rural employees. The educationlevel in the district is slightly lower than that for Shanghai as a whole (see Table 2).In 2000 there were 267,000 employees with a local hukou; of which 51 per cent werecovered by the urban insurance scheme and 49 per cent were covered by ruralinsurance or had no coverage. By the end of 2004, 90 per cent of the then approxi-mately 350,000 employees held a local hukou registration. Of these, 35 per cent hadurban insurance coverage, 30 per cent had rural insurance or no coverage and 30 percent had joined the 25 plus X scheme. The remaining 5 per cent of employees werein a transition phase between the rural insurance scheme and the 25 plus X scheme.

Basic characteristics of those in the 25 plus X scheme

The average age of the 103,095 individuals covered under the 25 plus X scheme inthe district was 39 years, with the youngest person aged 16 and the oldest aged 64.Fifty-three percent of those covered by the 25 plus X scheme were male. The genderprofile closely mirrors that of the district and, to a lesser extent, Shanghai as a whole.At the end of 2004, 56.5 per cent of the district’s working-age population were male,while the corresponding figure for Shanghai as a whole was 61.2 per cent (ShanghaiMunicipal Government, 2005). The age profile also reflects that of Shanghai. In

2003 the average age of the working population in Shanghai was 39.7 years (Shang-hai Municipal Statistics Bureau, 2003). Table 3 shows the education and majoremployer profiles of the individuals covered under the 25 plus X scheme. Abouttwo-thirds (67.8 per cent) of the individuals had a junior middle-school leveleducation. If we compare the education profiles in Tables 2 and 3, those in the 25plus X scheme have lower levels of education than people living in the district as awhole. This is because most participants in the 25 plus X scheme are formerpeasants with low levels of education relative to those in urban areas. The educationprofile of those participating in the 25 plus X scheme mirrors that of people residingin the rural area of the district. The largest employment category was in a townshipor village enterprise (TVE). Given that our research location is on the outskirts ofShanghai, a concentration of employment within the TVE sector is to be expected.

Table 2. Education level of the working-age population in Shanghai (2004)

Education Percentage of totalworking population

Percentage ofwhich are female

Shanghai as a Whole

Three-year college and aboveAmong which:

25 —

Postgraduate and above 1.8 39.8

Four-year university 9.7 36.7

Three-year college 13.6 40.7

Senior secondary school and belowAmong which:

75 —

Senior secondary school 29.9 38.9

Junior secondary and below 45.1 38.6

District

Three-year college and aboveAmong which:

17.46 —

Postgraduate and above 0.61 30.89

Four-year university 5.85 33.81

Three-year college 11 37.65

Senior secondary school and belowAmong which:

82.54 —

Senior secondary school 32.52 43.69

Junior secondary and below 50.02 44.14

Source: Shanghai Municipal Government (2005).

Previous social insurance coverage of peoplecovered under the 25 plus X scheme

Prior to being transferred into 25 plus X, individuals had either i) urban insurancescheme coverage, ii) rural insurance scheme coverage or iii) no insurance coverageat all. In our data, the latter two categories were grouped into a single “ruralinsurance or no insurance” category. Within the group originally covered under theurban insurance scheme there were two sub-groups: one group consisting of thosewho traded their land-use rights and one group consisting of those who had neverhad land-use rights. All members of the group that previously had either ruralcoverage or no coverage traded their land-use rights. Figure 1 depicts each group interms of their land-use rights status and nature of social insurance coverage prior tojoining the 25 plus X scheme.

Amongst the 103,095 individuals, 42,840 (41.55 per cent) had previously beencovered under the urban insurance scheme and 60,255 (58.45 per cent) had eitherbeen insured under the rural scheme or had no insurance coverage. Of the totalnumber of people covered under the 25 plus X scheme in the district, 98,103 (95.16per cent) had enjoyed land-use rights that had been reacquired. Of these 98,103individuals, 60,255 had previously had land-use rights with either rural insurance orno insurance coverage at all. While some of this group of 98,103 had possibly derivedincome both from their land and an enterprise, among them are certainly a subset ofpeople whose entire income would have been derived from their land. This lattersub-group thus represents a group of “displaced farmers” and it is possible that thesewere the people constituting the majority of those with no insurance coverage at all.

Table 3. Education and major employer profiles of participants in the 25 plus Xscheme in the district analysed in the study (2004) (in per cent)

Education Primary 15.3

Junior middle 67.8

Senior middle 10.3

Polytechnic 5.5

Three-year degree 0.7

Four-year degree 0.5

Employer Agriculture 2.0

Township or village enterprise 14.8

Organized exported labour 0.5

Public sector 0.4

Small business owner (< 8 employees) 2.5

Self-employed person 1.9

Source: Unpublished data provided by the BOLSS.

The remaining 37,848 of those 98,103 people dispossessed of their land-userights had been insured under the urban scheme. This group of 37,848, while havingrights to use land, did not derive all (or perhaps in some cases any) of their incomesfrom their land. Rather, their land may either have lain fallow or been farmed as aminor sideline, while they derived a substantial part (or all) of their income workingfor a firm that paid their insurance contributions under the urban scheme. It seemspossible to argue that those with land-use rights who were insured under the urbanmodel possessed superior human capital (renli ziben) to those insured under therural scheme, as the relatively more attractive urban insurance was a potentiallysignificant incentive that an enterprise could use to attract or retain high qualitystaff. Using education level as a proxy for human capital, an independent samplest-test confirmed this prediction (t = 62.58, p < 0.001).13

13. We need to be cautious here as the year of employment can be a determinant of the choice of theinsurance model offered by the firm to its workforce. Some firms used 2004 as the cut-off point for newrecruits to be covered by the 25 plus X model. This issue makes it important to examine the use of theX component to ascertain the relevance to human capital, which is a point to which we return to later inthe article.

Figure 1. Previous land rights and social insurance entitlements of the current 25plus X population in the district analysed in the study

60,255previously under rural

social insurance schemeor no insurance

60,255 possessed land rights

(100 per cent withinrural scheme)

37,848possessed land rights

(88 per cent withinurban scheme)

98,103 possessed land rights(95 per cent of district25 plus X population)

42,840previously under urban

social insurance scheme

103,095district population

transferred to25 plus X scheme

4,992 did not have land rights

(12 per cent withinurban scheme)

4,992 had no land rights

(5 per cent of district25 plus X population)

The remaining 4,992 individuals were those who did not have any land and werepreviously insured under the urban scheme. Again, it is likely that these employeeswere those perceived as possessing superior human capital and that the coverageprovided to them under the urban insurance scheme was an incentive used toattract or retain their expertise. Using education as a proxy for human capital, anindependent samples t-test confirmed this prediction (t = 64.92, p < 0.001). Unliketheir counterparts who previously had land-use rights, these individuals did nothave land to trade for insurance, so they were moved into the 25 plus X scheme withno compensatory insurance guarantee (i.e. the lump-sum equivalent to 15 years ofcontributions awarded to those who have lost their land-use rights) and no “jobsearch” allowance. Table 4 summarizes the land rights, social insurance and otherentitlements of each group prior to and after joining the 25 plus X scheme.

On the face of it, it appears that the 60,255 individuals previously insured underthe rural scheme — many of whom are likely to be displaced farmers with noinsurance coverage — have been rendered (at least for the next 15 years) moresecure insofar as their social insurance entitlements are concerned. These individu-als with land-use rights were moved into the 25 plus X scheme from a position ofeither no insurance coverage or inferior rural insurance coverage. Also on the faceof it, it is possible that those 4,992 people without land-use rights previously insuredunder the urban model are rendered less secure by their transition to the 25 plus Xscheme. In the worst case, where they receive no X component, their basic insuranceentitlement has been diminished and they have no 15-year compensatory insuranceguarantee. Purely in terms of social insurance entitlements, people in this groupwould have to receive an X component that is almost as large as their new entitle-ment just to break even. So, while the 60,255 dispossessed of land-use use rights —

Table 4. The land rights, social insurance and other entitlements of all individualsprior to, and after, their inclusion in the 25 plus X scheme in the district analysed inthe study (2004)

Number (percentage of total) Prior to joining 25 plus X After joining 25 plus X

4,992 (4.84)Likely to have high human capital

48 per cent urban insurance 25 plus X with no longevity guarantee

No land No land

37,848 (36.71)Likely to possess land rights with highhuman capital

48 per cent urban insurance 25 plus X with 15-year guaranteeCNY 290 a month x 24 monthsNon-agricultural hukou

Land rights No land

60,255 (58.45)Likely to possess land rights with lowhuman capital. Includes “dispossessedfarmers”

Rural insurance or none 25 plus X with 15-year guaranteeCNY 290 a month x 24 monthsNon-agricultural hukou

Land rights No land

previously either uninsured or insured under the rural scheme — have moved to abetter position in terms of “immediate” social insurance coverage, the positionunder the 25 plus X scheme of those people previously insured under the urbaninsurance scheme is less clear. Their position will differ according to the receipt ofX. Who gets X is thus fundamental to our extension/dilution thesis, and we turnnext to this issue.

Who gets X? Extension and dilution of social insurancebenefits among the three groups

As noted earlier, in the 25 plus X scheme, X2 has largely been sanctioned by localgovernments and X3 is paid to any displaced farmer who has given up their land-userights. Therefore, the X component under discussion in this section only refers toX1, i.e. commercial pension insurance. While we did not have data on how much X1any individual received, we could isolate the numbers of people who received someX1 component and consider these numbers in terms of the human capital anddemographic characteristics of the groups.

In terms of the 60,255 dispossessed of their land-use rights previously covered bythe rural insurance scheme or without insurance coverage, our analysis suggests thatdespite their transfer into the 25 plus X scheme, very few of this group receivedanything beyond the mandated 25 per cent contribution rate. Of these 60,255people, only 490 — a mere 0.81 per cent — receive an X1 component. In realitythough, it is not really surprising to see such a tiny proportion receiving X1 in thisgroup, since these are the people that we argued, and demonstrated, to have lowerlevels of human capital. As this characteristic is likely one that underlay the fact thatthey were previously covered by the rural scheme or without insurance coveragerather than being in the urban insurance scheme, it follows that this group containsthose less likely to be valued enough by employers to warrant X1. Similarly, we alsohighlight here that many of these people will be those we have called dispossessedfarmers, who may have few of the skills sought by enterprises and again may be lesslikely to be valued enough by employers to warrant X1.

Based on our human capital value argument we would have expected thosewho moved from the urban insurance scheme to be more likely to receive an X1component than those who moved from the rural insurance scheme. This expec-tation was borne out by the data with respect to those dispossessed of land-userights who had previously been insured under the urban model, but not withrespect to those who had no land-use rights to trade, previously insured under theurban scheme. Amongst those who previously had land-use rights, 3,256 of the37,848 (8.6 per cent) previously insured under the urban model received an X1component with the 15-year lump-sum insurance guarantee. But amongst thegroup of 4,992 people who had not owned land — and hence received no insur-

ance guarantee with their transition to 25 plus X — only 23 people (0.46 per cent)received an X1 component.

There are several major implications of these analyses. First, while the 15-yearinsurance guarantee may go some way towards compensation for dispossessedlandowners previously insured under the “48-model” urban insurance scheme, thevast majority of these people are, in effect, less well protected: for the vast majority(91.4 per cent), total monthly contribution amount to only 25 per cent of monthlyearnings, as opposed to their previous 48 per cent of monthly earnings.

Second, for those non-landowners previously insured under the urban insurancescheme, 25 plus X is catastrophic. For this group, almost entirely, X is but a letter.This group — save one-half of a per cent of them — face the worst case scenario of25 plus X, that is, 25 plus zero. Added to this, 25 plus zero is not guaranteed. We canreach no conclusion other than that 25 plus X places this group of people in anuncertain and increasingly insecure position.

Third, while those landowners previously uninsured or covered under the ruralinsurance scheme are immediately better protected in terms of social insurancecoverage, 25 plus X for these people is also, in reality, 25 plus zero. While they havesocial insurance coverage guaranteed for a 15-year period, their lifetime guaranteeof security from their land is gone. Added to this, and recalling that these are thepeople who are either dispossessed farmers or those without the human capital tohave previously gained coverage under the urban insurance scheme, it seems likelythat this group, on the whole, will comprise those who will find continuing employ-ment more difficult to secure.

Fourth, given the tiny percentage of X1 recipients, it is relevant to ask whether 25plus X is in fact being implemented with “conditions” attached, such that in practiceit will really become “if . . . . . . then 25 plus X”, with structural barriers that disad-vantage particular segments of the labour force against the receipt of X. Whetherthere is a gap between the information being disseminated and the benefits thescheme actually provides needs to be further investigated. In other words, within thecontext of X1 being heralded as a real incentive for employees to enrol in thescheme, it is also clear that in practice X1 may be entirely out of the reach of mostemployees.

In order to discern whether indeed we were looking at an “if . . . . . . then 25 plusX” scheme, we further analysed the X1 recipients to create profiles of their basichuman capital and demographic characteristics. The purpose here was to ascertainwhether the receipt of X1 has been, in practice, conditional on employees havingcertain characteristics. While we need to bear in mind the small numbers involvedin these X1 component analyses, it should also be remembered that these data arefor the whole population of recipients in the district. Our data, then, are a popula-tion, not a sample, so our results are not sample-biased, making the small numbersless problematic than they might be under sample conditions. Furthermore, while

our results are limited by the few human capital and demographic variables avail-able to us, they do go some way towards painting an interesting picture of X1 inpractice. The results are summarized in Table 5.

Initially, analysis of these data did not reveal any stable profile that defined an X1component recipient. However, when we compared the X1 recipients within eachgroup to the global group profiles, an interesting difference emerged. Across each ofthe three groups, the proportion of X1 recipients who were male were up to 16percentage points higher than the proportion of males in each of the global groups.This difference suggests a systematic gender bias, in favour of males, in the receiptof X1. A chi-square analysis revealed that employers do pay an X1 component to astatistically significantly greater proportion of males than females (c2 = 16.70,p < 0.001).

There were no practical differences between the age and education profiles of X1and non-X1 recipients within any of the groups. These observations are quitestartling, given that if X1 is an incentive it should favour the more experienced orthe more skilled. To the extent that age and education are proxies for these favour-able characteristics, X1 has not been targeted to those human capital strengths.Rather, it is being male that sets apart the small percentage of X1 recipients. But,even despite the greater likelihood of X1 for males, it remains that very few menactually enjoy this privilege: of more than 103,000 people, only around 2,200 receiveX1. For the majority who transferred to the 25 plus X scheme, the chance of gettingX1 remains slim.

Conclusion

The ILO, via its Global Campaign on Social Security and Coverage for All has theobjective of extending social security coverage to those who currently do not receivesocial protection. There is a growing consensus that extending social securitycoverage has the potential to strengthen social stability and foster economic growth

Table 5. Human capital and demographic characteristics of X component recipientsin the district analysed in the study (2004)

Agricultural / none !25 plus X(guaranteed)(N = 490)

48 per cent urban model !25plus X (guaranteed)(N = 3,256)

48 per cent urban model !25plus X (not guaranteed)(N = 23)

Gender 67 per cent male 47 per cent male 70 per cent male

Age Average 39 years Average 37 years Average 33 years

Education 68 per cent junior middle 66 per cent junior middle 64 per cent polytechnic/tertiary

in the face of globalization and economic restructuring. With the assistance andbacking of the ILO, the Chinese government has committed to extending socialsecurity coverage for its citizens as part of a broader programme of economicrestructuring towards greater integration with the global economy. This commit-ment is based on the recognition that marketization and global integration createboth winners and losers and while the process of marketization in China has overallhad a positive effect on living standards, it has also rendered those rural workerswithout land and with no or low skills more vulnerable in a volatile labour market.The importance of protecting those who have been disadvantaged as a consequenceof the reforms is not lost on the Chinese government.

Through the 25 plus X scheme, Shanghai has been in the vanguard of the Chinesegovernment’s efforts to extend social security. Not surprisingly, the 25 plus Xscheme is widely held up in the Chinese media as a successful experiment in theextension of social security coverage to those in the towns surrounding Shanghaiwho previously received either lower benefits under the rural insurance scheme orno coverage at all. And it is also being used as a means to compensate those whohave been dispossessed of their land-use rights as a consequence of Shanghai’surban expansion. Our analysis of the pros and cons of the 25 plus X scheme, basedon the entire population of those participating in the scheme in one district ofShanghai, suggests the picture is not as rosy as it has been sometimes depicted. It istrue that the 60,255 dispossessed of their land-use rights, constituting 58.45 per centof those enrolled in 25 plus X in the district, who previously had either ruralinsurance or no insurance coverage have an improved level of coverage. In the firstinstance, this coverage is guaranteed for 15 years, which then entitles them to receivethe basic old-age pension in the future. This group is ostensibly better covered with25 plus X, although the trade-off is that they have lost forever the security providedby their land. This leaves 42,840 individuals, or 41.55 per cent, of those participatingin 25 plus X who were previously covered under the urban insurance scheme, butwho have had their social insurance coverage reduced. For the 37,848 individualsdispossessed of their land-use rights (36.71 per cent of the total), their baselinecontribution of 25 per cent of payroll is paid in lump sum for 15 years, although atthe cost of losing the security of land-use rights. For the other 4,992 individualsthere is no guarantee of 15-years coverage, which means that if they lose their jobsthey will no longer be covered by 25 plus X. This is the group that loses the mostfrom the introduction of the scheme.

One of the much vaunted features of 25 plus X is the flexibility afforded to topup the baseline contribution with commercial superannuation under the X1 com-ponent. The X1 component is supposed to give employers the opportunity to attractand retain good quality staff by making contributions to commercial superannua-tion and from the employees’ perspective provide added incentives because itrewards performance. Based on our analysis, the reality does not conform to these

objectives. Only a very small proportion of those participating in the 25 plus Xscheme receive any X1 component at all. For those who do receive an X1 compo-nent, being male seems to be the only predictor with education and experienceunimportant.

In terms of the ILO’s objective of extending social security coverage in China andother developing countries, it might at first appear easy to dismiss the 25 plus Xscheme as one experiment in one city. But to do so would understate the importanceof this particular experiment. The central government is closely watching the 25plus X scheme, with plans to implement similar models in other cities if the schemeis successful. Given the enthusiasm with which the 25 plus X scheme has generallybeen received in the Chinese media, this looks likely. In this context our findings aresobering. The fact is that, overall, the 25 plus X scheme represents a dilution inbenefits for many. This should be borne in mind before the model is held up as asuccessful example for developing countries.

A limitation of our study is that while the dataset is large, it is limited to onedistrict in 2004, only one year after 25 plus X was introduced. Thus, the conclusionsdrawn from the data relate to the state of play as of 2004. During interviews with theBOLSS, the Bureau officials highlighted that the data for this article were collectedsoon after the inception of the 25 plus X scheme and that both firms and employeesneed time to gradually understand the use of the X part. Therefore, any conclusionsconcerning the effectiveness of the new model need to be seen in light of thisproviso. In this respect, the most that can be said is that the small percentage of X1recipients as reflected by the 2004 data bespeaks the fact that as the new schememoves on, it will still take time both for employers and employees to acquire aclearer understanding of 25 plus X. It may be that the proportion of employees whobenefit from the scheme increases in the future as employers and employees becomemore aware of their rights and obligations and the Bureau’s efforts to disseminateinformation about the scheme have effect. This could fruitfully be the subject offuture research using more recent data as it becomes available.

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