Recently, the report of the State Council on carrying forward the development of social security systems for urban and rural residents was deliberated at the 12th meeting of the Standing Committee of the 12th National People’s Congress. It signifies the long-held dual pension system will come to an end in China.

According to the report, the basic idea of the reform is to build a pension system for government and public institutions with the same qualities as that for the private sector to break the dual system. It fully reflects the requirements of comprehensively deepening the reform, conducive to promoting the modernization of the national governance system and governance capacity.
 

In the process of reforming the dual pension system, comprehensively enhancing the governance capacity for social security is needed by using a “new normal” thought, rather than just focusing on sound institutional design.

First, the financing method must be unified. Currently, there are nearly 7 million civil servants and more than 30 million employees in public agencies. If these people are directly included into the pension system in accordance with their years of working, an empty account worth trillions of yuan will form.

However, the 2013 national basic pension insurance fund balance accumulated only 3.1275 trillion yuan ($504 billion). It is predicted that the central and local governments, enterprises and individuals will commonly share the burden, in which most money comes from public sources.
 

In accordance with the theories of insurance actuarial, if the capital pool becomes bigger, its earning and risk-sharing capacities will become stronger, benefiting all of people in the system in the long term. It is therefore necessary to actively and stably promote the unification of capital accounting and expenditure, as well as allocating the responsibilities of central and local governments.
 

Second, investments must be transferred from single to diversified funds. Nowadays, social insurance funds face the problem of serious devaluation, largely affecting people’s enthusiasm for engaging in the system and long-term development of the system.
 

Reforming the system, investment mechanism and social insurance fund management is necessary to promote the marketization and diversification of fund investment. There is also a need to establish efficient mechanisms for controlling investment risks, evaluate achievements and investigate responsibilities. It is also necessary to set up related institutions for managing funds and formulate investment decisions.
 

Third, the government should transform its role from management to service in the process of dealing with social insurance issues. This requires establishing a unified information network nationwide, which will spur the market and social vitality based on its convenience.
 

On this basis, various policies and measures for the pension system should be improved, with subsidies for the elderly, disabled and financially disadvantaged. It is also necessary to support the development of charities, setting up a cohesive mechanism between charities and social assistance. In general, the government should play the fundamental role in the social security system.

 

Hu Yinglian is an associate professor at the Chinese Academy of Governance.