The legislation surrounding China’s social security framework
The Standing Committee of the National People’s Congress (“NPC”) promulgated the Social Insurance Law (“SIL”) on 28 October 2010. It came into legal effect on 1 July 2011, although, as we shall see, in practical terms it cannot yet be put into practice.
If successful, this new law may go some way to reducing the pressures of social inequality. As mentioned, easing of social tension was highlighted as one of the key aims for the 12th five-year plan (covering 2011 to 2015). The 11th five-year plan contained identical aspirations but did not achieve them.
For the international community, a key issue is how and when the SIL will apply to non-Chinese employees. The compulsory application of the social insurance law to foreigners is effectively not yet in force, because various implementing measures are not yet finalised.
Countries like Australia, the US and the UK require foreign resident workers to contribute to their social insurance schemes, and so arguably China is following international norms by adding this new requirement. The Chinese health system, however, cannot yet provide social insurance at levels equivalent to those in developed countries. International companies in China generally provide private medical, pension and other social insurance, and so there is little benefit for international employers and employees in paying for local schemes. Employers would, under the proposed schemes, be faced with an increase in payment obligations in addition to demand from foreign workers for private insurance policies.
Another issue that affects all employees (not just foreigners) is the fact that the Ministry of Human Resources and Social Security (“MHRSS”) and its regional offices are understaffed. The MHRSS has difficulty meeting its obligations even under the present system. Officials from branches of the MHRSS in three different cities have told us informally that they would not be able to implement the laws and draft regulations as presently published. Relevant authorities currently differ in their opinion on how and when to impose social insurance obligations on foreigners and until these differences in opinion have been resolved it may be some time before the changes take effect.
Background to the SIL
Social insurance is not a new concept in China, having its origins in the “iron rice bowl” of the socialist era from 1949 to 1978. However, this welfare network depended on policy, not law, and was grounded on a socialist economy rather than a socialist market economy. As the old non-corporate “danwei” (work units) were gradually disbanded, and as more Chinese employees moved into the private sector, it became vital for there to be a mandatory nationwide social insurance system sponsored by government.
The PRC Labour Law, enacted in 1995, provided for social security and devoted its Chapter 9 to legislating for this. Various regulations followed, including the Provisional Regulations on Collection and Payment of Social Insurance Premiums promulgated by the State Council in 1999 and the Work-related Injury Insurance Regulations adopted by the State Council in 2003.
In addition to the nationwide regulations, policies regulating the social security framework were scattered throughout a range of directives, rules and regulations both at a central and local level. The SIL consolidates various existing rules and regulations and aims to establish a social security framework that will cover both urban and rural residents, tighten supervision over contribution of social insurance premiums and empower all Chinese nationals to enjoy social insurance benefits.
The new SIL is the first comprehensive social insurance law in China applying to both Chinese nationals and foreigners legally employed in China. The MHRSS has also issued implementation rules (one of which is still in draft) for the SIL, namely:
Several Rules on the Implementation of the Social Insurance Law (“Implementation Rules”), which prescribes how the SIL will be implemented and how disputes will be settled; and
the Draft Interim Measures for the Participation in Social Insurance of Foreigners Employed in China (“Draft Measures”), which extends the benefits given to Chinese nationals under the SIL to foreigners.
Forms of mandatory insurance and fund
As was the case in the past, five types of insurance schemes comprise China’s comprehensive social insurance system, being (i) pension insurance, (ii) medical insurance, (iii) unemployment insurance, (iv) occupational injury insurance and (v) maternity insurance. These five insurances, together with the mandatory housing fund, make up the regular package of benefits afforded employees.
Pension and medical insurance can be enjoyed by all individuals in China, unemployment, occupational and maternity insurance are only applicable to employed Chinese nationals or foreigners.
The housing fund, although handled in a similar way to the other five types of social insurances (and not strictly part of the social insurance portfolio), is always treated separately because it is handled by a different authority (the Ministry of Housing and Urban-Rural Development) and governed by different legislation (Regulation on the Administration of Housing Accumulation Funds).
While there has been no change in the types of social insurance available to employees, the SIL seeks to provide more flexibility in how certain insurance can be accessed. These are separately discussed below.
The rights of Chinese employees under the SIL
1. Pension insurance
Employees may now enjoy their pension insurance benefits even if they have not contributed to their pension account for the prescribed period of 15 years. Previously, employees who reached the mandatory retirement age (generally, 60 for men and 55 for women (“Stipulated Retirement Age”)) but who failed to meet the 15 year contribution prerequisite were required to exchange their pension benefits for a lump sum payment rather than enjoy regular basic pension until death. Employees also had the option of delaying their retirement for an additional 5 years if doing so would complete the 15 year requirement and make them eligible for pension.
Under the SIL, an employee may now enjoy his/her pension benefits upon reaching the Stipulated Retirement Age even if the required contribution period is not met, provided that the employee continues to pay premiums to fulfil the 15 year payment period. This can be achieved by any one of the following four options:
delaying retirement to reach the 15 year contribution period;
paying regular premiums over a 5 year period and then paying any outstanding payments in one lump sum. This option is only available to employees who would have met conditions prescribed by previous effective legislation. For example, pre-SIL Shanghai regulations stipulated a 10 year contribution period only. As such, if after delaying retirement by 5 years the employee exceeds the old 10 year contribution requirement but fails to meet the new 15 year contribution period requirement, such employee could pay-in a lump sum amount;
transferring pension insurance to another program available to urban or rural residents; or
as was originally available, the employee may opt to retrieve his/her pension account balance, together with interest, in one lump sum.
Obviously these options still do not eliminate the possibility for financial hardship, since they require capital investment by someone who may not be earning. They are nevertheless an improvement on the previous regime.
2. Transferability of social insurance across different districts
Employees now have greater flexibility in terms of job mobility. Traditionally, insurance benefits accumulated during an employee’s employment tenure in one district were not readily transferable to another as social insurance programs were separately managed according to location. The new social insurance regime is intended to allow employees to work in different locales without concern over whether they are able to retain the full value of payments made to his/her insurance funds.
Despite the fanfare in the Chinese press that greeted this provision, it was already provided for in the PRC Labour Contract Law of 2007. Article 49 of that law provided that the state must establish a comprehensive system that ensures employees’ social security relationships can be transferred from one region to another and can be continued in such other regions. The SIL repeats this, but in the end it will be the local labour bureaus in each location that will be responsible for effecting the same.
3. Inclusion of rural residents
Under the SIL, rural residents are now eligible to participate in social insurance programs enjoyed by urban employees. In the past, rural residents working outside of urban areas did not have the right to social insurance. Further, while rural residents working in cities could participate in social insurance programs, the programs for rural residents were inferior to those enjoyed by their urban counterparts and were not transferable.
The new social insurance program effectively allows rural residents the option of upgrading to an urban social insurance scheme. Upon cessation of employment, rural resident employees can choose to transfer back to their rural social insurance program. As a result of this coverage, the discrepancy in benefits for rural residents as against urban residents has been considerably narrowed.
The Draft Measures - Inclusion of foreigners under the SIL
The SIL mentioned, in a casually-worded provision at the end of the law, that foreigners would be covered by the new rules. The Draft Measures contain some explanation of how this will work, but since they are still in draft form with no guarantee of issuance in the same form, there is still uncertainty over how, if at all, the SIL will apply to foreigners. In this section, we examine how the Draft Measures, if enacted, would deal with social insurance for foreigners.
Foreigners legally employed in China (including employees from Hong Kong, Macau and Taiwan) would be required to participate in China’s national social insurance program. “Legal employment” includes foreigners seconded or sent by their overseas office to work in China on a limited fixed-term basis. To qualify for social insurance, a foreigner must be engaged in an employer-employee relationship, and therefore self-employed foreigners will not be required to participate in the national social insurance regime.
Prior to the Draft Measures, nine cities in China (Beijing, Shanghai, Suzhou, Kunshan, Hangzhou, Guangzhou, Shenzhen, Tianjin, and Nanjing) already provided foreigners the option of participating in local social insurance programs on a voluntary basis. In practice, even in those cities, it was difficult for the tiny minority of foreigners who wished to participate in Chinese social insurance schemes to be registered. This was partly because those foreigners tended to come from developing countries whose nationality documents were unfamiliar to the relevant government authorities, and partly because the relevant branches of the MHRSS did not have the time, manpower, forms and bureaucracy in place to cater for foreigners.
At present, details of how foreigners may participate in the social insurance programs are vague and lacking in detail.
1. Settlement of the social insurance premiums
Given that many foreigners reside and work in China on a temporary basis, provisions have been made in the Draft Measures in the event of their departure. Foreigners have the option of applying in writing to cash out their contributed funds or simply reactivating their social insurance packages upon resuming legal employment in China, which must be effected prior to reaching the Stipulated Retirement Age.
The Draft Measures do not stipulate for how long a period a foreigner’s social insurance accounts will be kept active should he/she depart China. As such, there is a possibility that failure to apply for a cash-out could result in a loss of these funds. Further, it is unclear how the authorities will maintain a foreigner’s social insurance accounts so as to keep them active or whether there is fee associated with this process.
2. Status of benefits while abroad
Eligible foreigners will be able to enjoy the benefits of their social insurance programs abroad. While no guidance is provided on what constitutes qualifications required for eligibility, it is likely similar to those imposed on Chinese nationals i.e. must have reached the Stipulated Retirement Age and contributed to the pension fund for 15 years.
From a procedural perspective, in order to receive local social insurance benefits, overseas foreigners must submit annual documentation (obtained from their Chinese Embassy) to the relevant social insurance agency to ensure that their accounts remain active.
There is no guidance on which social insurance agency will be considered appropriate if, for example, a foreigner had been a long-term employee in several locales. In this regard, the authorities may adopt an approach similar to that for Chinese individuals. That is, it will depend on whether the last location at which the individual worked was for more than 10 years. If not, the previous locale having a tenure of 10 years will take precedence. If a Chinese individual has worked in several locations, none of which met the 10 year requirement, then the social insurance agency at the PRC national’s place of residence will be responsible. It is uncertain whether the authorities will extrapolate similar principles with lower time limits for foreigners to determine the social insurance agency.
3. Legislative gaps
While the Draft Measures stipulate the right of foreigners to participate in social insurance programs under the SIL, they do not contemplate how foreigners might qualify for the receipt of certain social benefits or how it may be implemented in practice. For example, although the SIL provides that foreigners may participate in unemployment insurance, a foreigner must first have a legitimate work permit to enjoy these benefits in China which can only be obtained through employment. This requirement may effectively defeat a foreigner’s ability to access unemployment insurance onshore. In addition, foreigners may have difficulty accessing their medical insurance, as foreign hospitals and clinics are often excluded from medical insurance reimbursement, and language barriers often keep foreigners from visiting local medical institutions.
These gaps in the law may act to preclude foreigners from enjoying the benefits afforded them under the SIL. Given these uncertainties, further clarification is welcomed prior to the Draft Measures coming into force.
4. Increased costs to hire foreigners
Under the Draft Measures, depending on the province or city of employment, employers will now be expected to contribute an additional percentage of a foreigner’s salary to support an employee’s mandatory participation in the social insurance program. This would impact employers’ costs of hiring foreigners and may, in turn, also affect foreigners’ ability to successfully compete for employment in China. Further, as social insurance premiums are only payable after six months of a foreigner’s employment in China, employers may be inclined to hire foreigners on limited engagements to avoid additional costs.
4. Exemptions for foreigners
Foreigners must participate in the SIL unless his/her home country has a bilateral or multilateral social insurance agreement with China. At present, only German and South Korean citizens employed in China may opt out of participating in China’s social insurance programs provided that they are able to produce a certificate of proof showing collection of premiums in their home country.
Employers’ responsibilities under the SIL
According to the SIL, both the employer and the employee must contribute jointly to pay social insurance premiums. The employer is responsible for withholding premium contributions from the employee’s monthly salary, and transferring such premiums to relevant authorities fully and in a timely manner. If an employer fails to act accordingly, the social insurance agency will issue an initial warning, which is then followed by a compulsory deduction or the provision of an employer guarantee to pay the outstanding funds.
Premium contribution rates for the insurance schemes payable by employers and employees differ from province to province. As a general reference, the tables below set out the revised monthly contribution rates of social insurance programs in Beijing and Shanghai as at 29 June 2011.
|Contribution rates in Beijing per employee per month |
|Insurance items for contribution || Employer|| Employee|
(% of basic salary)
|Maximum payable (RMB)||
(% of basic salary)
|Maximum payable (RMB)|
|Contribution rates in Shanghai per employee per month |
|Insurance items for contribution || Employer|| Employee|
(% of basic salary)
|Maximum payable (RMB)||
(% of basic salary)
|Maximum payable (RMB)|
Social insurance payments are subject to a cap and these are indicated in a separate column above setting out maximum amounts payable. With these caps, higher compensated employees pay a lower percentage in contributions on the whole. To illustrate, a shop-floor employee receiving an average wage would pay over 30% of his/her monthly salary into the funds. By comparison, a manager receiving US$150,000 per annum would only pay around 5% per month into the funds.
Please note that rural resident employees may be subject to lower percentage contributions and each province also has minimum contributions. These have not been detailed in the tables above.
With the promulgation of China’s 12th five-year plan, the SIL, the Implementation Rules and Draft Measures can collectively be seen as integral to the development of China’s social security system, helping to cope with social transformation and sustaining the rapid development of the economy.
It is, however, too early to comment on how the law will be applied to foreigners in China. While there is a clear attempt to include foreigners in China’s social insurance regime, authorities may wish to better understand foreigners’ social insurance needs prior to applying the regime to them. Employers should in the meantime review their Chinese employees’ current payment structure and social insurance registrations to ensure compliance with the new laws to avoid unexpected liabilities.
This article was contributed to AustCham Beijing from Mallesons Stephen Jaques. This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any legal action based on its contents.