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One More Reason to Like Health Care ahead of China’s 12th Five-Year Plan

Details of the proposals for fiscal support for social insurance programs under the 12th Five-Year Plan (2011-2015) are slowly trickling out. Notable among them is a recent request from the Ministry of Finance (MOF) that the share of fiscal expenditure devoted to such programs be increased from the current level of around 10% to 25% by 2015. Policy advisors that we talk to are not worried about output growth, but have been fixated on how to boost household incomes, either in cash or through redistributive mechanisms such as entitlements and other forms of social insurance coverage. Although distortions in China's statistical system may understate the household share of national income, there is real worry in many corners of officialdom that the fallout from social inequity could soon reach dangerous levels if current trends in income distribution continue.


As a source of funding for this expenditure increase MOF could be preparing to make another run at the accumulated profits of state-owned enterprises, a turf battle that they have been fighting sporadically over the years, with little apparent success: from 2006-2009 only around RMB 1 billion of the estimated RMB 150 billion in central state-owned industry profits have been directed to social insurance programs. Much of the rest exist as cash on SOE balance sheets and capital contributions to non-core subsidiaries, such as real estate development companies, which have been driving urban land prices sky-high, among other things.


There is growing pressure on central and local governments to use the profits from central and local SOEs to expand social services, as many local governments remain cash strapped in the wakeof ‘macro controls’ on the property sector at the same time that expenditures related to accelerated urbanization begin to mount. This request for expanded fiscal expenditure on social insurance programs is linked to something that might eventually look like "universal coverage with Chinese characteristics"


The expenses of the national social security system have outstripped income gains in recent years, and this is a key long-term fiscal risk that MOF is positioned to address. From 2006-2009, the average annual rate of income growth for the national social security system came in at 22.6%, compared with an average annual rate of expenditure growth of 32.7%. True, the investment options available to social security fund managers are relatively few and asset prices have not performed particularly well recently, but the underlying reality is that the system is underfunded and the demographic tide will soon turn against a viable funded pension system. According to official reports, at the end of 2009, the overall balance of the various central social security funds that workers and firms contribute to was 1.77 trillion yuan, not exactly an overwhelming surplus.


At the same time, it is also highly possible that reductions to contribution rates for the 5 mandatory funds will be reduced from the current level, which is equivalent to 40% or more of local wage levels depending on the region and city in question, to around the 15% level. This might be accompanied by recommendations for the creation of portable private individual retirement funds accounts outside of the state-run pension system. Overall, there appears to be a big opening for private insurance and pension services. How big this opening is will depend on how the government addresses the solvency of the existing social security system and its future obligations. Some related current expenditures could be lumped into central and regional government budgets. Future liabilities could also be reduced by encouraging the development of funded private accounts.  In reality this debate has just begun, and it is unclear what the ultimate balance of burden sharing will be between various levels of government, firms and individual contributors. The burden on urban firms and individual contributors seems high to begin with, but the largest increases to system-wide expenses will probably come from expanding coverage in rural areas, a process that will be redistributive almost by definition given the yawning discrepancy between urban and rural income levels. Provincial and city-level governments may have to bear some of this burden, but current inter-governmental fiscal arrangements make meeting even the current level and content of coverage difficult for many localities. Provincial governments will be required to "unify and balance" annual social insurance budgets, including detailed expenditure projections, which could end up looking pretty ugly.


In making these plans, MOF and other ministries of government will look and the experiences of those cities, such as Ningbo, which are experimenting with expanding social insurance coverage to include migrant workers (meaning those who hail from other parts of Zhejiang or further afield, and as distinct from the original rural residents who lived on rural land absorbed to become part of urban Ningbo). In terms of cost sharing an obvious difference between urban and rural programs is that in urban setting companies can bear some of the costs of basic programs, whereas in rural areas these costs are mostly fiscal and require a large proportion of government subsidies.





Disclosure: no positions

Disclosure: no positions