On August 1st, the Supreme Court of the Chinese Communist Party issued a judicial interpretation declaring that any form of “voluntary waiver of social security benefits” agreement will be invalid starting from September. Public opinion is concerned that the costs for small and medium-sized enterprises will skyrocket, potentially leading to a wave of closures and mass unemployment. Experts believe that the main reason for this move is the severe deficit in the social security funds, and in the current challenging economic situation in China, forcing contributions is like a desperate measure to address the shortfall.
According to the judicial interpretation of the Supreme Court of the Chinese Communist Party, the core content of the new social security regulations starting from September 1st is the complete prohibition of “voluntarily waiving social security.” Any written or verbal agreements to waive social security benefits will be deemed invalid, even if companies provide cash subsidies in place of social security (such as paying extra each month). Businesses will still be required to make up for the social security contributions and reimburse any subsidies provided.
If a company violates the above regulations, they will have to make up for any underpaid social security contributions and bear a daily late fee of 0.05% of the outstanding amount. Employees have the right to terminate their employment contracts based on this and companies will have to compensate them based on their years of service (1 month of salary for each year worked). If work-related injury insurance contributions were not paid, the employer will be responsible for fully compensating any injured employees.
In recent days, the judicial interpretation by the Supreme Court of the Chinese Communist Party has sparked a heated debate online. In one widely shared video, a blogger stated, “The first group of people facing pay cuts and unemployment due to social security issues has emerged! Ultimately, it’s the workers who will be most hurt!”
The blogger pointed out that starting from September 1st, companies will be required to compulsorily purchase social security, leading some employers to outsource projects, offer part-time positions, or reduce salaries by 2000 yuan (Chinese currency) – part-time salaries will be halved, leaving workers in a tough situation. Many small companies, comprising only a few individuals, were not contributing to social security before and made it clear to employees upon hiring. With the new mandate for compulsory contributions, there will likely be job losses and salary reductions.
According to analysis from mainland self-media, the current controversy stems from the anticipated significant increase in business costs, with social security expenses for small and medium-sized enterprises possibly rising by over 30%. Some businesses may opt for outsourcing, short-term cooperation, or rehiring retired personnel (who are exempt from social security contributions), leading to a reduction in job opportunities for the younger generation. Many workers prefer cash in hand.
Online discussions among netizens include remarks such as, “We won’t have any money left when we retire as ’80s generation.” “Would you choose a pay cut or resign?” “I earn my own money and spend it, and I don’t need anything else.” “In the future, the job market will be dominated by hourly workers.” “Labor dispatch companies are becoming popular.”
Professor Xie Tian from the Darla Moore School of Business at the University of South Carolina, remarked to Dajiyuan that the Chinese Communist Party’s implementation of mandatory social security contributions is a result of the inadequate social security fund. It seems that the authorities may already be struggling to meet the retirement payments for existing retirees. “They are in such a deficit that they have to find ways to increase social security income. However, it seems too late, and the CCP may have to reduce retirees’ salaries to fill this gap.”
Xie Tian pointed out that many small businesses have been able to survive so far because they had agreements with employees not to pay social security. If they are now forced to contribute, given their thin profit margins, they will have to cut employees’ salaries. For employees, it means compulsory pay cuts, potentially leading to a wave of mortgage defaults, the bursting of the real estate bubble, and an acceleration of bankruptcies among private enterprises.
Chinese issues expert Wang He stated that the authorities’ requirement for mandatory social security contributions is a sign of the crisis in the social security system.
He explained that as early as 2013, the revenue collected for social security could not cover the expenditures, and it has relied on massive subsidies from the national treasury to keep running. The problem now lies in the poor economic situation, with more people opting out of making contributions, leading to an ever-increasing deficit that the authorities need to address. While social security has been mandatory in the past, many companies and employees found ways to avoid it. So, this time the authorities are resorting to compulsory contributions through the form of a judicial interpretation.
In April 2019, the Chinese Academy of Social Sciences released the “Chinese Pension Actuarial Report 2019-2050,” predicting that by 2028, there may be a negative balance in the current pension funds, with a shortfall of 118.13 billion yuan. By 2035, the pension reserves could be depleted. At that time, the generation born in the 1980s will not have reached retirement age, yet they may have no funds to rely on when they do retire.
The 2021 budget report submitted at the 2021 National People’s Congress of the Chinese Communist Party revealed that in 2020, the total budgetary income for the national social security fund was 7.21 trillion yuan, a decrease of 13.3%. With an additional 50 billion yuan transferred from the national social security fund, the total income was 7.26 trillion yuan. The total budgetary expenditure for the national social security fund was 7.88 trillion yuan, resulting in a deficit exceeding 600 billion yuan.
Official budget figures from the Chinese Communist Party show that in 2024, the social security fund income increased by 5.2%, while expenditures rose by 7%, leading to a cash flow deficit for the first time in six years.
To alleviate the pressure on social security funds, Beijing has initiated a delayed retirement policy. Starting from January this year, the statutory retirement age has been gradually pushed back, with plans to extend the retirement age for men to 63 by 2040, also applicable to women.
Wang He commented that with retirement ages being pushed back, still decades away, there is little confidence in the sustainability of the social security system, leading many to be reluctant to make contributions. For businesses, this means reducing staff as much as possible, and resorting to layoffs if necessary. “The authorities’ actions won’t make up for the losses and will further deteriorate the economic situation. It’s essentially a desperate measure.”
With the Chinese social security system facing challenges that threaten its financial stability, the future of retirement for many workers remains uncertain. The issues related to social security in China reflect broader economic challenges and uncertainties, impacting both businesses and employees alike.