Myth 273: In China, at least they do not have social security

by Tim Swanson

Part of the zeitgeist throughout much of the libertarian speaking circuit today involves a false dichotomy: that economically speaking, the US is on the way down and China is on the way up.  That entitlement programs in the US are dragging an already wounded thoroughbred down into an abyss.  And that China does not have these same sort of entitlement programs and is therefore becoming a bastion of free-market liberty.
For example, Jeffrey Knoll wrote in the TLS comments section two months ago:

One aspect of China that is more libertarian is that they have limited welfare and social security, so their society is not burdened with unfunded liabilities like the West is. This also forces the Chinese to save more which provides more capital for investment.

Another example is from Peter Schiff, who said in a debate four months ago that:

“[China has] accumulated massive savings, doesn’t have social security and doesn’t have a lot of the same government programs that the US does.”

Both of these statements are wrong.  In fact, here is the official website from the PRC explaining their social security system.  China’s public pension system has been operating in the red for many years now (due in part to a relatively low retirement age and longer lifespan), hitting a purported $267.6 billion deficit last year.  Chinese policy makers have even rolled out universal health care plan that is targeted for a 2020 completion date — what will the ultimate financial costs be for this?
Cato even published a paper (pdf) back in 2003 explaining the challenges that the Chinese pension system faces.   And this demographic issue is only going to get worse, or in the words of The Economist — China will become old before they become rich.
Not only has the Chinese government implemented several types of social security plans, but foreigners are fully co-opted into the apparatus too.
In fact, the only way for a foreigner to get out of the new laws that were passed last year are to sign a promissory note, saying that you will never work in China again.
So, just like the myth of a China that is visa-free was busted, the myth of a social security-free China should be taken off the list as well.
Below is a fantastic overview from Matthew Stinson regarding the new laws, specifically applied to foreigners.

Six Points on Social Insurance for Foreigners

Author’s note:  This post has been modified slightly from the original to correct a couple of misstatements and reflect new information and concerns.  These changes are mainly found in the introduction below, points one, four, and five.

Starting in July, my coworkers and I will be among the first foreign residents of China asked to contribute to the Chinese social insurance system. Although the law was promulgated last October at the national level, Tianjin, like most major cities, has been slow to implement it locally. In fact, according to people at my company’s headquarters in Shanghai, Suzhou is the only other city which has enforced the social insurance law for foreigners working at training centers like mine. For many foreigners working in Shanghai and Beijing the social insurance tax is still something on the horizon.

The English language press published a flurry of articles about the law in fall 2011, but since then reporters seem to have tabled the topic, mostly because of the glacial speed of Chinese bureaucracy, but also because, for most foreigners, the tax seemed hypothetical, not something we could comment on directly. Now that I actually have to pay the tax, I went back and reviewed the original news articles for information, and also submitted a list of questions for the government to our HR department. After doing so I decided that there are six major issues for foreigners and their employers to think about:

(1) According to Chinese law, workers will be guaranteed retirement benefits after contributing to the system for fifteen years. However, during those fifteen years there is no interest on your contributions, though the government should provide something like a cost of living adjustment once you start receiving benefits. Every city will set its own contribution rates. In the case of Tianjin, I pay 11% of my base salary and my danwei “matches” with 33%. Much like Social Security in the United States, there’s an income cap, and any income above that level isn’t taxed for social insurance purposes. In Tianjin the income cap is 10,560 while in Beijing the cap is 12,600. Some of these funds go to medical insurance, unemployment insurance, and maternity insurance, but most are earmarked for retirement insurance. Given the rate of the inflation, the Chinese social insurance system represents a net loss for contributors, even more so than China’s low-interest savings accounts. Many of us will be wishing we could’ve spent the money while we had it – or put it into private retirement insurance.

(2) Most foreign workers have no intention to stay in China for fifteen years or more, and thus the issue becomes: how can I get my money back? Well, the government has assured us that we can get our own contributions refunded, but contributions from our employers will stay in the system. We have been told that to get the money back a foreign worker must sign a document declaring that he or she will never work in China again. However, this will certainly increase the rate of illegal foreign workers (see point 5 below), as many foreigners “swear off” China, leave, and wander back a few years later. A separate but arguably related issue is that most social insurance in China is being run on a city-by-city basis, and is not easily portable if a worker decides to move, but few foreigners want to stay in a single Chinese city for the rest of their life. What happens if I move from Tianjin to Shanghai? The government hasn’t answered this question yet.

(3) Like Chinese, foreigners should receive a social insurance card and corresponding social insurance number. There’s a fly in the ointment, however: is the Chinese system prepared for foreigners who get a new passport and thus a new passport number? Those of us who have been around long enough know that Chinese bureaucracy operates by analogizing passport numbers as Chinese ID numbers, yet Chinese ID numbers never change. Whenever foreigners renew their passports there’s a mad scramble at the bank, the phone company, and the local paichusuo (among other places) to update paperwork to reflect the changes. Most of the time we can’t get this done without letters from the embassy which endorse the passport renewal process. Considering the (potentially) large sums of money involved, and China’s track record thus far, one is left doubting the ability of the system to handle an essential fact about foreigners.

(4) One of the less commented upon yet more onerous aspects of China’s social insurance law for foreigners is retroactivity. When the central government said that the law went “into effect” in October of 2011, they really meant it. Even though most Chinese cities have been lax in implementing the law, the requirement of retroactive payments has been sitting there like a time bomb waiting to go off. The first time a foreigner has to pay social insurance it’s probably going to be a massive hit – at the time of this writing foreigners and their employers will have to pay up to 9 months of tax in one lump sum. The degree of retroactivity seems to vary from city to city and even district to district, but Tianjin seems fairly consistent.  Consider a foreign teacher employed at an international school in Tianjin with a hypothetical base salary of 18,000 RMB/mo. and benefits worth 7,000 RMB/mo. The teacher would have to forgo more than half an entire month’s salary in back taxes (10,454 RMB, to be precise), while his/her employer would have to pony up more than 30,000 RMB. Afterwards this teacher will still be paying an extra 1,161 RMB in taxes every month while his/her employer will be paying roughly 3,500 RMB in tax.* Those expensive kindergartens with foreign teachers in Beijing just got even more expensive, which leads me to…

(5) The law only applies to foreigners with a “Foreign Experts Certificate,” aka the “work visa” aka the Z Visa aka the Zed Visa. Here’s where the perverse incentives come into play. If a foreigner has a tourist visa, business visa, or marriage visa and is thus working illegally (Yang Rui knows who you are!), he/she won’t have to pay into the system. In fact, the requirement that employers must make contributions on our behalf means that, all other things being equal, an illegal employee is going to be considerably cheaper than a legal one, even if the foreigner in question has exactly the same contract salary as his/her legal counterpart. Moreover, employers during the next round of contract renewals may decide to pressure employees into changing their visas and working illegally so as to cut costs, and foreigners themselves may agree, figuring that the risks of being one of the san fei is worth the benefit of paying fewer taxes. At the same time, an employer wishing to stay aboveboard may decide to keep employees legal but refuse to offer raises during the next contract on the grounds that we are now receiving the “benefit” of social insurance.  We haven’t even factored freelance workers into the equation – those working legally should fall under the aegis of the social insurance law, which begs the question of whether they or their employers are prepared to pay the tax.

(6) Many of the above complaints and concerns could be addressed or alleviated if China reformed its green card process. For those of us who have worked here for an extended period of time or are married to a Chinese national, it’s frankly ridiculous that we have to renew our visa every year or have a work visa that ties us to a single employer’s tender mercies. Yet, despite periodic talk about making green cards easier to obtain (which recalls similar talk about ending the hukou system for Chinese migrants), the Chinese green card quota remains out of step with China’s aspirations to be a global leader. That foreigners are now being asked to contribute to a social insurance system that they are not actually guaranteed access to only adds insult to injury.

Matthew Stinson is a Floridian stalking the urban wilds of Tianjin since 2004. An educator, writer, and photographer, he pens 140 character rants as @stinson

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* Before anyone shouts “Wait a minute!” the above calculations may not reflect final tax burdens, insomuch as a foreign employee’s base salary may shrink and bonuses and benefits may grow in response to the law.