Pensions in China

China remains a strange country, a mixture of socialism and capitalism, of centralization and local governance. A good example of the latter is the country's pension system. For years, there have been two pension systems. One is a so-called employment-based system. In that system, pensions are provided to people who are formally employed. The other is a so-called residency-based system. In the latter, one qualifies for a pension because he (or she) is officially registered as a resident of a particular locale.

For most of its existence, though, the system left many people, especially informal workers and workers who had moved away from their place of birth, without pensions. Then in 2011, Beijing passed the Social Insurance Law. The law makes, at least in principle, a greater number of people eligible for one of the two pensions systems, and it gives local leaders incentives to expand pension coverage accordingly.

How have local leaders responded to the new directive? That is the question that Yujeong Yang, an assistant professor of political science at SUNY Cortland, tries to answer in a paper that will be published in Politics & Society.

According to Professor Yang, local leaders have been strategic in deciding who gets pensions and who doesn't. They have to be strategic because they face conflicting incentives. On the one hand, Beijing wants them to increase pension coverage; on the other hand, there are other top-down goals and institutions that discourage them from increasing coverage.

As it turns out, the decisions of local leaders depend a lot on the makeup of the local labor market, specifically, the mix of formal and informal workers. In short, in provinces with a lot of locally born informal workers--those tend to be provinces in inland China that export labor to the coastal provinces—the residency-based pension system has been expanded. In the coastal provinces, in contrast, the employment-based system has been strengthened; and any informal workers who have moved to the coastal provinces are left to register for residency-based pensions funded by their cities of origin.

The effect has been paradoxical: although pension coverage has in fact been expanded, the ways in which it has been expanded have worsened regional inequality in China.

Professor Yang bases her findings on national survey data as well as data she herself gathered from 31 provinces. Her findings have important implications for the decline of welfare states globally in the current era--an era in which more and more workers are only informally employed and an increasing number have to move to find work.