Local Governments Cut Pension Contribution Rate to Lower Corporate Burden

By Cheng Siwei and Lin Jinbing

Photo: IC Photo

At least 27 provincial-level regions have reduced their local companies’ pension contribution rate to 16% from the previous maximum of 20% in response to Beijing’s call to lower the tax burden on businesses amid the economic slowdown.

The moves mark part of China’s broader effort to pump more money into the economy by cutting nearly 2 trillion yuan ($297 billion) in taxes and fees this year.

Premier Li Keqiang said in March that local governments would bring down companies’ pension contribution rate to 16%, effective from the first day of May. In China, employers must pay pension contributions on behalf of every employee each month, the amount being a percentage of an employee’s salary or of a region’s average salary.

Of the 31 provincial-level regions on the Chinese mainland, at least 27 released plans as of April 30 to cut the pension contribution rate, according to Caixin’s calculation based on government files. Among them, eight reduced the rate to 16% from the previous 20%, including Beijing and Shanghai; 17 cut the rate to 16% from 19%, including Tianjin and Chongqing; and the provinces of Fujian and Shandong slashed the rate to 16% from 18%. All the rate cuts took effect on May 1.

Unlike the 27 regions that cut the pension rate, the wealthy southern province of Guangdong needed to raise the rate from the previous level that was as low as 14%. It said that it would gradually increase the rate to 16% within five years.

In general, the pension rate cut is expected to lower the burden on businesses by 300 billion to 450 billion yuan ($44.5 billion to $66.8 billion), Wang Tao, chief China economist with UBS Investment, said in a note.

Despite the benefit for companies, lower pension contributions mean less money in government pension funds, which makes it more difficult for some local funds to make ends meet, especially for those already with an annual shortage.

China acted in July to address the growing imbalance between regional pension funds by setting up a central adjustment fund to collect money from well-funded local pension funds and redistribute the proceeds to those regions with shortfalls. This year, seven regions including Guangdong and Beijing will contribute more to the central fund than they receive to help struggling neighbors facing mounting pressure to pay retirees.

Besides the regional shortages, China’s national pension system also faces an aggregate shortfall. Without fiscal subsidies, the country’s pension contributions collected this year will not cover current pension obligations, according to a report released last month by government-backed research organization Chinese Academy of Social Sciences. Even with subsidies, the pension system is expected to begin running an annual deficit in 2028 and run out of money completely in 2035 without reform, the report said.

China has started to make up for the pension shortfall by transferring some state firms’ equity to the national social security fund so that it can earn the firms’ dividends. Yet many critics, including former social security fund head Lou Jiwei, argue that such transfers have been too slow and more aggressive action is needed.

Contact reporter Lin Jinbing ([email protected])

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