China to Tap Foreign Employees for Social Insurance Funds

July 5, 2011

China has enacted a social insurance law that requires foreigners to pay into medical, pension and unemployment funds for the first time, but unclear implementation guidelines are fueling uncertainty among expatriates and their employers about the true costs.

The law, which took effect on July 1, will raise as much as $1.5 billion a year from foreign employees and companies once the implementation rules are finalised, estimates Grayson Clarke, a fund management expert with the EU-China Social Security Reform cooperation project.

But questions remain about how foreigners can reclaim pension contributions after leaving China and even if they will be entitled to unemployment benefits at all.

“Social insurance is said to be a benefit. If you can’t access it, then you really shouldn’t pay,” said Clarke, who predicts that it could be months before the guidelines are finalised.

China has made expanding its social safety net a priority, partly because insufficient pension and healthcare benefits are regarded as reasons for high saving and low consumption rates.

State media said on Tuesday that the government had kicked off a week-long campaign promoting the law, which also aims to lift restrictions on pension transfers between urban and rural areas and reduce misuse of social security funds.

Fees will vary according to the average salary in each region of China. In Beijing, foreigners will be docked about 11 percent on the first 12,000 yuan of their monthly pay, or about $200 a month.

Earnings above that threshold will not be taxed, though employers will be required to contribute more to the country’s pension, medical, unemployment and injury insurance pools.

Despite that added burden, the extra personnel costs are not likely to be a large deterrent on hiring foreign talent in China.

Foreign companies are more concerned about the uncertainty associated with timing and implementation than the financial costs, said Rainer Schmitz, the chair of the human resources forum of the European Union Chamber of Commerce in China.

“The challenge will be implementation, but the foreign contribution will not hinder foreign investment or foreigners coming to China,” he said.

The efforts to include foreigners in the nation-wide scheme will make it more like policies in many EU countries, where citizens and foreigners alike pay into the system.

The government has been taking a step-by-step approach in providing social security benefits to the country’s 1.34 billion people, hesitant to over commit to a system that could drain the government’s coffers.

“They are very wary about getting into long-term commitments, because if the rate of economic growth falls back, they would struggle to finance the system,” said Clarke.

(Reporting by Michael Martina; Editing by Don Durfee and Robert Birsel)

Was this article valuable?

Here are more articles you may enjoy.