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Article | Global News Briefs

China: Employers to benefit from reduction in social security contribution rates for retirement

Total Rewards|Global Benefits Management|Retirement
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May 22, 2019

Most employers are expected to benefit from a reduction in social security costs, which is estimated to lower companies’ financial burden by CNY 300 billion in 2019.

Employer Action Code: Act

All provinces, autonomous regions and municipalities are now subject to reduced maximum contribution rates for the various social security programs under the “Comprehensive Plan for Reducing Social Insurance Rates” Notice (No.13) approved by the State Council. The changes are part of the government’s plans to reform social security and lower related costs for employers. Contribution rates for certain programs were already subject to temporary reductions introduced in 2016. The State Council has also confirmed its intent to consolidate the separate contribution rates for maternity and health care as a single contribution rate by the end of 2019.

Key Details

With effect from May 1, 2019:

  • Employer retirement contributions to social security are reduced from a maximum of 20% of covered wages to no more than 16%. Each jurisdiction will need to confirm its own specific adjustments and transition plans. To offset the effect of the lower contributions, the government plans to:
    • Direct more subsidies to jurisdictions having financial difficulties, in particular to central and western regions and old industrial base provinces.
    • Increase the portion of local pension funds collected by the central government (from 3.0% to 3.5%, or more in future), to be reallocated to jurisdictions where needed to ease payout pressures.
    • Emphasize the provincial government’s responsibility to build up sharing mechanisms to counter local pension fund shortfalls.
  • Calculation of covered wages for employer and employee social security contributions (for all programs, including retirement) is now based on city average earnings (CAE) of full-time workers in both the public and private sectors (it was previously based only on wages of public sector workers). Since average wages in the private sector are generally lower than in the public sector, the change is expected to result in lower covered wage ceilings. This change in the CAE calculation also affects the calculation of pension benefits (which are based on 1% of the average of CAE and the individual’s career average earnings, multiplied by years of service).
  • Existing temporary reductions in contribution rates for unemployment and workers compensation are extended until April 30, 2020.

In a separate announcement following a successful pilot program, the State Council has confirmed that all provinces/municipalities must combine the social security contributions for maternity and health care into one single contribution by the end of 2019. As part of this move, the maternity insurance fund will be merged into the basic medical insurance fund and will provide both health care and maternity benefits. The change should have no effect on the overall employer or employee contribution rate.

Employer Implications

Most employers are expected to benefit from the reduction in social security costs, which is estimated to lower the financial burden on companies by CNY 300 billion in 2019. Employee contributions, as well as future pension benefits, are also expected to decrease. Each provincial/municipal government needs to confirm its contribution rates based on these new requirements. Exact details of how they will apply the changes are still to be determined, but employers should monitor announcements in each province/municipality in which they operate and adjust payroll systems to reflect the reductions as well as inform employees of the changes.

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