MOLSS Mulls Management of 31 Billion RMB in Rural

UNCLAS SECTION 01 OF 04 BEIJING 010971

SIPDIS

DEPARTMENT FOR EAP/CM, DRL/IL
DEPARTMENT PASS USTR FOR KARESH, ROSENBERG
LABOR FOR ILAB HELM, LI ZHAO, SCHOEPFLE
TREASURY FOR OASIA/INA-DOHNER AND KOEPKE
USDOC FOR 4420/ITA/MAC/MCQUEEN
GENEVA FOR CHAMBERLIN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ELAB EFIN KPAO PHUM PGOV CH
SUBJECT: MOLSS Mulls Management of 31 Billion RMB in Rural
Pension Assets

Ref: A) Beijing 6611 B) 05 Beijing 9536 C) 05 Beijing 4121

Sensitive But Unclassified; Not for Distribution Outside U.S.
Government


1. (U) Summary: China's Ministry of Labor and Social
Security (MOLSS) is working to establish a pension system for
rural and migrant workers that will require low contributions,
be portable and have broad coverage, according to the Deputy
Director General (DDG) of the Ministry's Rural Pensions
Division. Migrants with stable jobs have the right to
participate in the urban pension system with contribution rates
of 28 percent and comparatively high benefits. However, to
provide pensions for rural residents and those migrants who
travel from place to place, the rural pension system will
require an enterprise contribution of 10 percent of the
worker's salary, of which 6 percent will be placed in the rural
or migrant worker's individual account, plus a worker
contribution of 5 percent of salary, all of which will go into
the individual account. Portability is difficult to achieve
because urban system "legacy" pensions, those owed workers
under the planned economy, easily deplete the pooled accounts
from which current pension benefits are paid, necessitating
"borrowing" from the individual accounts; information
technology could help solve the problem by tracking both
"borrowed" funds and individual accounts as people move from
place to place. Rural pension funds, which currently total 31
billion rmb (At mid-May exchange rate of RMB 8:USD 1, rural
pension funds amount to approximately USD 3.9 billion) in
assets (Note: In a related document, reference was made to 70
billion rmb (USD 8.75 billion) in assets. End Note.),are
managed at the county level. There is recognition that pension
funds must earn a higher rate of return. MOLSS officials hope
to travel to the United States to better understand how the
United States manages pension funds. If travel does not occur,
Laboff will again propose to MOLSS that the Embassy arrange a
digital video conference to allow Washington agencies and
interested others to address some of MOLSS' questions. End
Summary.


2. (U) Econoff met with Liu Conglong, Deputy Director General,
Rural Pension Division, Ministry of Labor and Social Security
(MOLSS) on May 17 regarding China's progress toward
establishing a rural social security system. DG Liu noted that
his work had been given support and impetus by the Government's
2006 Document Number 1 setting out guidelines for building the
new countryside. The National People's Congress included the
development of a rural pension system, on which MOLSS is
working with the Ministry of Finance, in the 11th Five Year
Plan. The Number 5 document issued by the Government also
called for solving the problem of migrant workers.


3. (U) The Government's Number 29 document, according to DDG
Liu, requires the establishment of a social security system and
an occupational training system for farmers whose land has been
taken for development. MOLSS must issue the guidelines for
this program within one year, DDG Liu said. To prepare for
these programs, MOLSS has calculated that there are currently
200 million farmers who have left farming to become workers.
Of these, 130 million farmers-turned-workers work in township
and village enterprises (TVEs) near their place of residence.
An additional 70 million migrants migrate back and forth from
the cities. (Note: There is probably overlap between these
two figures, as some migrants move back and forth between rural
areas to work. However, the number cited for migrants in the
cities differs from other estimates Embassy has seen. MOLSS,
based on an April 2004 survey, has published estimates that
there are approximately 100 million rural migrants currently
working in cities. The National Bureau of Statistics, based
upon results of a 2004 sample survey, estimated that there were
approximately 120 million rural migrants working in the cities.
The Ministry of Agriculture, in an undated study, concluded
that approximately 130-140 million migrant workers and their

BEIJING 00010971 002 OF 004


family members work and reside in the cities. End Note.)
There is a rural social security office established in MOLSS.
In addition, a State Council Joint Coordinating Committee on
migrant workers, headed by Secretary General Hua Jianmin has
been established.


4. (U) DDG Liu described the social safety net of programs
that has been established, and in which enrollment is being
expanded, to protect migrant workers:

-- Workers' Compensation: Employers are required by a 2004
regulation to enroll all migrant worker employees in the
workers' compensation insurance program. MOLSS is especially
targeting construction and mining industries where many
migrants work.

-- Medical Insurance: A medical insurance program for
migrants has also been mandated. This program is intended to
insure migrants against the costs of 1) major illnesses, 2)
hospitalization; and 3) illnesses and injuries for which
immediate treatment is needed. (Note: A May 19 article in the
China Labor and Social Security News reported that the Shanxi
provincial government had established such a medical insurance
system for migrants. The article stated that all employers
must pay 3 percent of the insured's wage to the local Labor and
Social Security Bureau, out of which 3 percent, 2.5 percent
goes into a pooled account for basic medical insurance, and the
remaining 0.5 percent goes into a pooled account for
catastrophic expenditures. According to the article, migrants
with long-term, stable working relationships may enroll in the
urban medical insurance system. End Note.)

Rural Pensions: Portable, Low Contributions, Wide Coverage
-------------- --------------


5. (U) DDG Liu said that a system of pensions for rural and
migrant workers in China must have three characteristics:

-- Portability: Pensions should be portable, benefiting
individual participants and the system as well, DDG Liu said.
Currently, the few pension systems in which migrants and rural
residents can participate are not portable. As a result,
migrants do not want to pay into the system because when the
migrant changes jobs, he cannot take his pension contributions
or the contributions of the employer, with him. (Note: The
contributions remain in the local system, while the migrant
moves on, never meeting vesting requirements in any given place,
and never receiving a pension benefit. End Note.) Currently,
some local systems may allow portability within a restricted
area, but the individual must remain within that area in order
to receive benefits. Finally, most systems require that the
migrant or rural worker pay into the system for 15 years before
gaining the right to receive a pension upon retirement. Few
migrants remain that long in any given place, DDG Liu said.

-- Low Contributions: Migrant contributions should be low
because migrant workers are systematically underpaid. This is
the case, DDG Liu said, because current minimum wage
regulations state that the minimum wage should be set at a
percentage of the average local salary. However, he said, that
is not the case.

-- Wide Coverage: As many rural and migrant workers as
possible should be included in the system.

Stable Employment Allows Participation in Urban Pension System
-------------- --------------


6. (U) For analytical purposes, MOLSS has divided farmer
workers into two types: 1) those with stable employment, and 2)
those whose employment is not stable. The first group should
be treated like urban workers, and given the right to
participate in the urban pensin system, DDG Liu said. However,

BEIJING 00010971 003 OF 004


the urban system requires that workers contribute to the system
for 15 years before having the right to draw a pension at
retirement. This is a problem that must be solved for migrant
workers, whose work life often does not span a full 15 years.
To accommodate the frequent changes of employment experienced
by migrants who do not have stable employment, MOLSS has
decided that contributions by both the employer and the
employee will go into the individual account, and that the
individual account will be portable.


7. (U) The urban pension system is not suited to the needs of
migrants and farmers because the urban pension system has been
burdened with the cost of "legacy" pensions, pensions for
individuals who were entitled to pensions under the old planned
economy. In order to be able to afford to pay those legacy
pensions, the newly established urban pension system levied
high contribution rates for current participants. (Note:
Contribution rates are approximately 28 percent of wages; 20
percent is deposited into the pooled account from which current
pensions are paid, and 8 percent, the employee's contribution,
is paid into the individual account. End Note.) Migrants and
farmers who do not have stable employment are unable to
contribute at these rates, DDG Liu said. However, if a migrant
has stable employment, he may decide he wants to participate in
the urban system. In Shanxi, for example, an enterprise might
have urban workers and migrant workers with stable employment,
both of whom can participate in the urban system, as well as
local farmers or migrant workers who can elect to participate
in the rural pension plan, and to have their contributions made
into their individual account.

Rural System: 11 Percent of Salary to Individual Account
-------------- --------------


8. (U) MOLSS has decided that the appropriate contribution
rate for the rural pension system should be from 5 to 10
percent of salary. The enterprise contributes 10 percent of
salary, of which 6 percent is placed in the rural or migrant
worker's individual account. The worker himself pays a
contribution of 5 percent of salary, all of which goes into his
individual account. Therefore, a total of 11 out of 15 percent
is paid into the worker's individual account. The remaining 4
percent of the employer's contribution is retained in a fund
from which "adjustments" can be made.

Rural Pensions Pooled and Administered at the County Level
-------------- --------------


9. (SBU) Currently, there are 1,900 county level units
participating in the rural system of pensions, which covers 54
million persons. Of this 54 million persons, 420,000 are
farmers and the other approximately 53.5 million persons are
migrant workers. The total accumulation of pension funds has
reached 31 billion rmb. (USD 3.9 billion) (Note: In a paper
describing a hoped-for delegation to the United States by the
Department of Rural Social Insurance, the total value of assets
of the Chinese rural social insurance system was described as
70 billion rmb. (USD 8.75 billion) End Note.)


10. (U) County governments, which manage the rural pension
funds, have been asked to make contributions to the system, and
have complied by paying in. (Note: Although DDG Liu did not
so specify, these contributions are likely contributions in
lieu of an employer's contributions for farmers who continue to
farm and who are not otherwise employed. End Note.) In
Beijing, the municipal government has contributed 15 million
rmb to enroll migrant workers in the system, thus encouraging
participation. In the Daxing District of Beijing, the District
pays 15 million rmb (USD 1.8 million) every year for the
participation of 50,000 farmers; the district's pension system
has a total of 230,000 farmers enrolled.

"Legacy" Pensions Make Establishing a Portable System Difficult

BEIJING 00010971 004 OF 004


-------------- --------------


11. (U) Establishing a portable system is difficult, DDG Liu
said, because the problem of urban pensions has not yet been
solved. Even with high contribution rates, the urban system's
pooled accounts have not accumulated sufficient funds to pay
current pensions; as a result, the localities have "borrowed"
from the individual accounts. As a result, the individual
accounts in many if not most parts of the urban system are
unfunded. One way to resolve this problem is to have a
nationwide information technology (IT) system for the social
security system to keep track of amounts "borrowed" as well as
to track individual accounts as people move from place to place.

Pension System Needs Investments Yielding High Rate of Return
-------------- --------------


12. (U) There is also recognition, DDG Liu said, that the
system must ultimately allow for investments that will make the
funds increase in value. A 1999 regulation says that social
security funds should be invested in bank accounts and bonds.
However, MOLSS is actively seeking a safe way to invest in key
projects that provide a higher rate of return. MOLSS is
studying the possibility of using the banks, including the
Agricultural Bank of China, as a way to manage the funds.


13. (SBU) China wants to understand the U.S. experience in
investment of pension funds, DDG Liu said. Mr. Lu Haiyuan,
Director of the Department of Rural Social Insurance, MOLSS,
has studied the U.S. experience, and written a book about how
pensions in the United States are managed; many of his
suggestions were included in China's 11th Five Year Plan.
(Note: Individuals subsequently suggested for travel to the
United States to study the U.S. system include MOLSS officials
and asset management company personnel. End Note.)


14. (SBU) Comment: This savvy Deputy Director General's
comments reflect his understanding of the numerous challenges
he faces in making the rural pension system viable. Clearly,
one of his high priorities is improving the rate of return on
pension funds. MOLSS' Rural Social Security Office has for two
years announced its interest in traveling to the United States
to study how pension funds are managed, but travel has so far
not occurred. Laboff will again propose to MOLSS that the
Embassy arrange a digital video conference to allow Washington
agencies and interested others to address some of MOLSS'
questions.

Randt