Chinese employers are reported to bear one of the highest percentages of social insurance obligations in the world. According to statistics, in most parts of China employers have to pay social insurance premiums equaling to 28.25% of the employees’ salaries. The contribution rates are even higher in big cities such as Beijing and Shanghai. In the 13th Five-year Plan of National Economic and Social Development of the Chinese Government which was just issued in May 2016 (“the 13th Five-year Plan”), the Chinese Government plans to, in the next five years, adequately reduce social insurance contribution rates. Relevant changes are already implemented or will be implemented in the near future.
- Reduction of Social Insurance Contribution Rates
On 14 April 2016, the PRC Ministry of Human Resources and Social Security issued the Notice on the Interim Reduction of Social Insurance Contribution Rates. According to this notice, in the next two years, the contribution rate to the pension fund payable by the employer can be reduced to 20% or even 19% if, by the end of 2015, the accumulated balance of the pension fund in the location is at least sufficient for the payment of pension benefits for the next nine months. The contribution rate to the unemployment insurance payable by both the employer and the employee can be reduced to 1% to 1.5% while the rate applicable to the employee can be less than 0.5%. Further the contribution rates to the work injury insurance and maternity insurance must be reduced averagely by 0.25% and 0.5%. However, in China, the social insurance contribution rates are decided by the local governments at provincial level. Therefore, the implementation of such new polices is fully subject to the decision of the government at different locations.
In fact starting from 2015, some locations already reduced some social insurance contribution rates. Until now, more than 12 provinces/cities made adjustments. The reductions mainly concern unemployment insurance and maternity insurance. The table below summarises the adjustments of the contribution rates of the above mentioned insurances in some major provinces/cities:
Click here to view table
In Shanghai, in addition to unemployment insurance, the contribution rate for the employer to the pension was reduced by 1% from 21% to 20% and to the medical insurance by1% from 11% to 10%. Also from now on, employers will get 20% discount when paying premium for the work injury insurance.
According to local governments, the reduction of contribution rates on social insurance will not reduce the insurance benefits originally enjoyable by the employees. In case of any overpayments made by the employer of the social insurance premium after the effectiveness of the new polices, the social insurance administrative authority will return such payments later.
- New Changes on Work Injury Insurance
According to the PRC Social Security Law, the contribution rate of work injury insurance shall be determined for different industries in accordance with the extent of work injury risks in such industry taking into consideration the utilisation of the work injury insurance fund and the frequency of occurrence of work injuries, etc. In the past, in many locations such as Beijing and Guangzhou, enterprises were divided into three categories in accordance with different levels of potential work injury risks and contribution rates were adopted at three different grades. In some other places such as Shanghai and Suzhou, a fixed contribution rate applied to all enterprises regardless of industries.
Nowadays, according to the Notice on Adjusting the Work Injury Insurance Premium Rates which was jointly issued by the PRC Ministry of Human Resources & Social Security and the Ministry of Finance and became effective on 1 October 2015, enterprises shall adopt the contribution rates of work injury insurance at eight different grades ranging from 0.2% to 1.9% subject to the industries which the enterprises engage in. Such eight different grades are defined in accordance with the China national standards, i.e. National Industry Clarification (GB/T 4754-2011) which has eight different industry categories. Until now, some locations such as Shanghai and Tianjin have already adopted such new policies by applying the eight different grades of work injury premium rates to the enterprises. Some other areas such as Guangzhou and Suzhou have not changed yet but are expected to do so in the future.
According to the new policies, the contribution rate of work injury insurance applicable to an enterprise is decided by the industry and is not fixed, but can be adjusted every one to three years subject to the utilisation of the work injury insurance fund and the frequency of occurrence of work injuries at the enterprise. If any work injury incurs or frequently incurs in an enterprise causing the utilisation rate of the work injury insurance fund being higher than 400% or even 600%, then in the next year, the enterprise may be required to pay work injury insurance at the rate of one or two grades higher than the original one. If work injuries seldom incur in an enterprise causing the utilisation rate of the work injury insurance fund being lower than 200%, then in the next year, the enterprise may be asked to pay work injury insurance at the rate of one grade lower than the original one.
The new policies might increase the burden of work injury insurance obligations, to some extent, to such enterprises which have high potential risks but currently enjoy lower rates. However, from an overall point of view, the new policies decrease the financial burden of many enterprises. According to statistics in Shanghai, after adopting the new policies, about 75% of all enterprises are enjoying a lower rate than before. Further, under the new policies, enterprises are encouraged to take measures to reduce the frequency of work injury in order to enjoy a lower contribution rate.
- Expectations on Reform in the Near Future
According to the 13th Five-Year Plan, the Chinese government will combine the maternity insurance into the basic medical insurance in the future. In such case, the Chinese social insurance scheme will be changed from “five types of insurance” to “four types of insurance”, which include the pension, basic medical insurance, unemployment insurance and work injury insurance. The combination of both maternity insurance and medical insurance will eventually enlarge the number of beneficiaries, improve the utilisation of the insurance fund and reduce the operation costs.
Further, during the period of the 13th Five-Year Plan, the Chinese government also aims to realise the nationwide co-ordination of the pension scheme, which is now only coordinated at provincial level and has wide contribution gaps between enterprises at different places. For example, the pension premium payable by the employer is 20% of the employee’s average monthly salary in Shanghai while it is only 14% in Guangzhou. Once such nationwide co-ordination is achieved, the pension premium will be paid at a unified rate which is expected to be lower in overall view.
In the next five years, the costs of enterprises for social insurance will be reduced to some extent. However, this will unlikely bring substantial change to the current situation. The benefits both the employer and the employer can gain would be very limited. If any enterprise wants to reduce labour costs, it shall not only rely on this. As to other measures which could help to reduce labour costs, please refer to our newsletter on Reduction of Labour Costs.