China wants everyone to pay into the pension system — not everyone will

On 1 August, China’s Supreme People’s Court held a press conference to release judicial interpretations on labour dispute cases, accompanied by six illustrative examples. The announcement included a bombshell ruling: any agreements waiving social security rights would be deemed invalid. This sparked widespread public debate and backlash, with some warning it could lead to a “mutual bloodbath” between workers and small or micro enterprises.

The announcement also triggered a wave of criticism and widespread anxiety online. Opponents included employees who questioned the financial viability, fearing their contributions might not be recouped upon retirement. Low-income earners, already struggling with daily expenses, expressed an inability to prioritise future pension issues.

Others argued that in the current economic situation, small and micro enterprises were already operating on thin margins — mandating social security contributions might lead to a host of small businesses shutting down.

At the same time, the dynamic of “policies from the top and countermeasures from the bottom” has prompted some practical responses, such as hiring hourly workers for rotating shifts or employing retirees who are no longer subject to social security contributions.

The controversy was triggered by the upcoming implementation of Judicial Interpretation II on the Application of Law in Labour Dispute Cases, set to take effect on 1 September. Article 19 states: “Any agreement between an employer and employee, or any promise made by the employee waiving the employer’s obligation to pay social security contributions, shall be deemed invalid by the People’s Court.”

This means that previous agreements where employees preferred to take home more money by foregoing social security payments are now legally invalid.

Supreme Court judges explained that if an employer fails to pay social security contributions as required by law, the employee can not only terminate the employment contract, but also request economic compensation from the employer, which the People’s Court will support.

The standard economic compensation is one month’s salary for each full year worked, and half a month’s salary for an employment period less than six months. This change is widely perceived by Chinese society as the advent of a “mandatory social security era in China”.

This perception is both accurate and misleading. Since 2011, Chinese law has required employers to make social security contributions for their employees. While these contributions have always been legally mandatory, in practice, many companies either underpay or skip them entirely — often with employees turning a blind eye or accepting the situation because they have no real choice.

In theory, compulsory social security benefits workers by preventing enterprises from cutting costs at the expense of employee rights. It represents a necessary step toward China’s goal of common prosperity — curbing cutthroat competition, reducing “involution” and moving beyond a low-cost labour model.

However, the latest push for stricter enforcement does little to address the persistent public perception of pension inequality, and many other underlying issues remain unresolved.

Currently, China has the world’s largest social security system by population coverage. As of the end of March 2025, over 1.07 billion people were enrolled in the country’s basic old-age insurance. However, a closer look reveals that only 246 million have fully contributed to all components of China’s “Five Insurances and One Fund” system — pension, medical, unemployment, work injury and maternity insurance, as well as the housing provident fund — accounting for just about 30% of the workforce.

And this is only the tip of the iceberg. Another striking problem with China’s social security system lies in the significant disparity in pension benefits. Employees of China’s state-owned enterprises, central enterprises, and public institutions not only receive the basic pension insurance for urban employees, but also benefit from supplementary pension plans — the so-called “second pillar” of the pension system.

These supplementary pensions are employer-led: typically, the employer contributes 8% of the employee’s salary, while the employee contributes 4%. All funds go directly into the individual’s personal pension account and are not pooled collectively. Data shows there are around 40 million of these supplementary accounts in China. The generous retirement payouts for their holders highlight the stark divide in retirement benefits between those inside and outside the institution.

Within China’s highly complex social security system, basic pension insurance forms the “first pillar”, with 1.07 billion people enrolled — a relatively high coverage rate. However, this basic system is split into two main types: the basic pension insurance for urban employees and the resident pension insurance, with a vast gap in benefit levels between them.

Over 500 million people are covered by the basic pension insurance for urban employees, which requires contributions of 16% from employers and 8% from employees. The employee’s share goes into a personal account, while the employer’s contribution goes into a pooled social fund.

Meanwhile, participants of the resident pension insurance typically do not have formal employment. They choose a contribution level annually from a range set by the government. For example, in Beijing in 2024, the range was from 1,000 to 9,000 RMB per year (about US$139 to 1,253). Because contribution levels are low, so are the benefits.

According to official data cited by Chinese media, the average monthly pension for retired urban employees is around 3,500 RMB, while the 178 million people receiving the resident pension insurance receive an average of just 223 RMB per month.

With the implementation of mandatory social security contributions, some urban employers may now be compelled to make these payments for their employees. While this could, in theory, allow more workers to benefit from the higher level of protection offered by the urban basic pension insurance, a more likely outcome is less encouraging.

Due to widespread distrust in the social security system, many private employers and employees may quietly opt out of contributions or underreport actual employee compensation. These practices could further expand the grey economy operating alongside the formal system.

Critics think that the real purpose behind the government’s push for mandatory social security contributions is to expand the funding pool and ease the pension system’s financial strain amid an ageing population — an objective that likely aligns with the authorities’ goals as well.

Still, as coverage broadens, the government could improve the system by more clearly targeting benefits toward low-income individuals, enabling social security to truly serve as a tool for wealth redistribution.

This article was first published in Lianhe Zaobao as “中国强制社保没有解决的公平问题”.

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