(Yicai) Nov. 12 -- Social security can have a positive impact in various areas, including supporting technological progress, creating jobs, building a unified market, and promoting common prosperity. China must proactively address potential future shortfalls in basic pension insurance by strengthening multi-source funding mechanisms, increasing fiscal subsidies, continuing the transfer of state-owned capital, and establishing specialized management institutions for basic pension insurance funds.

Social Security Is a Key Driver of Economic Growth

Social security spending is classified as government expenditure or social consumption, and so it is sometimes seen as an economic burden. But nowadays, more and more people realize that it is a vital investment to ensure high-quality population development and is also an important driving force for economic growth. Although social security may take up a certain amount of economic resources, it is also highly productive and contributes positively to high-quality economic development in many ways.

Social security can play a decisive role in fostering innovation. Pension funds and insurance funds are important sources of long-term “patient” capital for technology companies from their startup and financing phases to getting listed. China’s pharmaceutical industry is now the second-largest globally and its rise has been powerfully bolstered by the national medical insurance fund, which has facilitated centralized procurement and the inclusion of innovative drugs in the reimbursement list. International and domestic experience shows that social security can be an important force in supporting technological progress and stabilizing the capital market.

Another benefit of social security is its potential to create jobs. New technological trends have brought concerns over the impact on the job market, but unlike traditional industrial labor that can be replaced by automation, industries related to social security are knowledge-intensive, labor-intensive, and value-intensive. They provide services that are complex, emotional, and human-centric, which are more resistant to being replaced by technology. It is highly likely that a large share of future job growth will be in areas related to public welfare and social services.

The social security system requires a unified national market. The free flow of labor across regions is a fundamental prerequisite for a market economy, so to optimize the social security system there must be consistent payment responsibilities, fair and unified treatment, and cross-provincial mutual aid and sharing to ensure that workers and their employers enjoy equal status, fostering an environment of fair competition and equitable cooperation.

The 20th National Congress of the Communist Party of China established a strategic roadmap, aiming to realize socialist modernization by 2035, with per capita gross domestic product reaching the level of a moderately developed country. Experts estimate this means per capita GDP of about USD30,000, and social security will play a key role in achieving growth in household income and optimizing the structure of income distribution.

Employment services, labor protection, and various welfare benefits can help low-income groups increase their income more rapidly. The country can also expand its middle-income group by improving the quality and efficiency of elderly care, healthcare, education, and maternity services. The system can also be made fairer by adjusting personal contributions on the basis of people’s ability to pay.

Pension Insurance Income and Expenditure Gap Needs Addressing

The current basic pension insurance and basic medical insurance system in China is based on a model that combines social pooling and individual accounts, which was established under the unique conditions of the country’s economic transition. Multiple studies have estimated that in the next 20 years, revenue may fail to cover expenditure in the pension insurance system, and the gap could widen as the population ages.

Within the basic pension insurance system for urban and rural residents, the vast majority of the insured are farmers, and the system currently relies primarily on government fiscal subsidies. But the average monthly pension of about CNY260 (USD39) per elderly resident is far from enough to meet their basic living needs. Historically, the agricultural sector contributed significantly to the nation’s wealth accumulation. If these factors are taken into account and the basic pension level is raised substantially, it would inevitably lead to an additional funding gap.

Fortunately, the country has huge assets and resources that can cover its macro-level liabilities. If these can be made sufficiently liquid, they could provide a robust foundation for resolving these issues. Whether elderly people can enjoy their later years largely depends on their health, and financial expenses for medical and nursing care are likely to exceed general living expenses. China’s reforms to its basic medical insurance system have yielded positive results, with an accumulated surplus of nearly CNY6 trillion (USD899 billion), allowing for long-term insurance nationwide from 2025 that covers about 300 million people.

These factors effectively broaden the financial scope for adjusting and optimizing pension replacement rates and overall expenditure levels. In short, despite severe challenges, there are more solutions than difficulties, and we should have confidence in preventing and resolving the funding gap.

Here are some specific suggestions on solutions. Firstly, improve the actuarial system of social insurance. Due to the rapid changes in the demographic, institutional and economic spheres, relevant parameters and models must be updated frequently to form a scientific and dynamic actuarial system for pension insurance.

Secondly, develop a long-term, sustainable financing mechanism that fully implements a shared-responsibility model. The state, employers, employees and their families, collective organizations, and other relevant institutions are all a community of shared interests. The country must reform and improve incentive and constraint mechanisms to encourage participation, thereby expanding coverage and bolstering the basic pension insurance fund.

Thirdly, further unify basic regulations and policies, including the actual contribution rate and benefit adjustment mechanism, pension age and minimum payment years. This also entails addressing disparities in the transition from resident-based pension insurance to employee-based pension insurance, to eliminate negative incentives.

Fourthly, increase the proportion of government expenditure on public services and allocate a considerable portion to subsidize and regulate basic pension insurance.

Fifthly, continue to transfer state-owned capital to enrich the social security fund, and most importantly, initiate the implementation of the first phase as soon as possible.

Sixthly, improve mechanisms for the centralized pooling and adjustment of social security funds, ensure the preservation and appreciation of their value, and strengthen safety oversight.

(The original article was first published in the fifth issue of the Chinese Social Security Review in 2026. This version is not the full text. The author, Guo Shuqing, is a member of the Standing Committee of the 14th National People’s Congress and is vice chairman of the Finance and Economic Committee of the NPC. He previously chaired the China Securities Regulatory Commission, the China Banking Regulatory Commission, and the China Banking and Insurance Regulatory Commission, and was also a vice governor of the People’s Bank of China.)

Editor: Tom Litting