The Trade War Is Draining China's Social Security System

The Trade War Is Draining China's Social Security System

The effort to reduce the burden on businesses is narrowing the budget for social security, which is already small in China.

The trade war with the United States and the coronavirus epidemic have forced the government to constantly introduce generous stimulus measures to ease the burden of social welfare contributions of Chinese companies. But this leads to a smaller pension pot.

Meanwhile, the social security cost for fiscal 2020 is forecast to exceed for the first time since 1998, alarming the alarm. This comes at a particularly unfortunate time for the country's social safety net when a large portion of China's own baby boomers reach retirement age by 2022.

China offers seven types of programs for citizens including pensions, health insurance and insurance covering labor injury, unemployment or maternity. Receipts are collected in a shared trust fund that disburses payments to beneficiaries.

But overall fund revenue will fall 4% to 7.73 trillion yuan (US $ 1.09 trillion) according to the 2020 budget approved at the National People's Congress last month, while spending will increase 10% to 8.23 ​​trillion yuan.

The deficit of nearly 500 billion yuan will cut 5% of the social insurance fund balance to 8.9 trillion yuan by the end of the year, the first such narrowing since the data was recorded again in 1998.

China's aging population has caused interest payments to skyrocket. Social insurance revenues are derived primarily from contributions from employers and employers, as well as government subsidies. Although subsidies are expected to grow 12% to a record 2.16 trillion yuan, the contribution will decrease 9% to 5.24 trillion yuan.

The decline in contributions is related to the US-China trade war. To help companies survive the tariff war, Beijing in May 2019 reduced the highest fee bracket that corporations pay to 16% of employee salaries, down from 20%. As a result, the company paid less than 425.2 billion yuan in social welfare contributions last year.

Similar measures follow the new coronavirus epidemic that swept the country this year. The government reduces pensions and contributes to unemployment, especially for small, micro and medium enterprises. The total amount of 500 billion yuan was wiped out of social insurance revenue between February and June.

The relief measures are expected to expire at the end of June, but Prime Minister Li Keqiang announced an extension until December when he published a government work report last month.

Meanwhile, the aging of the Chinese population shows no sign of slowing down. The country experienced a baby boom after 1962, the last year of the Great Leap Forward campaign that caused great famine. People born that year will reach 60 years of age by 2022.

More than 20 million people are born each year from 1962 to 1976, a survey conducted in 2010 showed. That's the equivalent of a mass retirement of no less than 15 years, resulting in an increase in pensions and health care payments.

This year's government grant for social welfare programs will exceed 70% of defense spending. Benefit spending is on track to tightening China's treasury, just like in neighboring Japan.

The central government does not disclose the prospect of expansion for social insurance financing. 

The Chinese Academy of Social Sciences has published a first estimate of the urban workers' retirement fund. The state-backed research institute makes a shocking forecast that stocks will bottom out by 2035.

In the government's work report, Li announced that he would expand state financial support for health insurance and increase pensions, regardless of budgetary concerns. Even China's one-party state is forced to take a political balancing act when it comes to rights reform.

In order to maintain a retirement population of nearly 300 million, the Communist Party may need to consider curbing domestic military and security spending - two areas that preserve party rule. Such a result could affect the long-term security balance in Asia, as well as the sustainability of China's current power structure.