Overview Of The Chinese Social Security System

China boasts a meticulously organized and all-encompassing social welfare framework that encompasses multiple insurance provisions for both employees and workers across the nation. Every employer is mandated to make these contributions on behalf of their employees, while contractors and self-employed individuals have the option to contribute to the social welfare fund.

Mandatory for all those employed within China, the Social Security system demands the vigilance of both local and foreign employers. It’s essential to recognize that the types and percentages of contributions for different coverages can differ from one city to another.

Types Of Social Security Systems In China

In its core, the Chinese Social Security system encompasses five primary insurance categories: pension, medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance, along with a compulsory housing fund. For instance, in Shanghai, maternity insurance has been integrated into the medical insurance category, resulting in four primary social insurances, complemented by the mandatory housing fund.

Contributions toward pension, medical insurance, unemployment insurance, and the housing fund are jointly funded by both the employer and the employee, whereas the employer bears the sole responsibility for work-related injury and maternity insurance premiums. These contribution rates are subject to regional variations, determined by local authorities. However, as a general reference, employers typically contribute 33.8% of the premiums, with employees contributing 17.5%. It’s crucial to recognize that these rates are considerably higher than those observed in many other countries and should be factored into the budget for staff costs.

Calculation Of Contribution Base

Employers must possess a comprehensive understanding of the fundamental principles governing the calculation of the contribution base for Social Security.

The Social Security contribution base is computed based on an employee’s average income in the preceding year (from January to December) and follows this formula:
Social Security contribution base = Total income of the previous year / 12

For newly hired employees, their Social Security contribution base is established using their initial full month’s salary in the year of hire.

These contribution bases for Social Security come with both lower and upper limits. Typically, the maximum contribution base is set at three times the local average salary, while the minimum base is often determined by either the local minimum wage or a specific percentage of the local average wage. For instance, in 2021, the average salary in Shanghai was RMB 11,396. This resulted in a maximum monthly contribution base of RMB 34,188 (three times RMB 11,396), and a minimum base of 60% of the average salary, totaling RMB 6,838. However, due to the adverse effects of the COVID-19 pandemic on the local economy, the government reduced the minimum base to RMB 6,520 to alleviate the burden on enterprises in Shanghai.

The Chinese government annually publishes the average salary figures for various regions. Consequently, the lower and upper limits for Social Security contributions are also updated annually, and the Social Security contribution base must be adjusted once a year, usually in July.

Practical Example

For instance, in the case of a wholly foreign-owned enterprise (WFOE) in Shanghai hiring a local employee with a gross salary of RMB 55,000 for the period from January 2023 to December 2023, the Social Security expenses are determined as follows.

RMB 34,188 is the contribution base since RMB 55,000 exceeds the ceiling.

	EMPLOYER CONTRIBUTION	EMPLOYEE CONTRIBUTION
Pension	5,470 (16% of contribution base)	2,735 (8% of contribution base)
Medical insurance	3,419 (10%)	684 (2%)
Unemployment insurance	171 (0.5%)	171 (0.5%)
Work-injury insurance	88 (0.256%)	/
Housing fund	2,393 (7%)	2,393 (7%)
Total	11,540 (34% of contribution base)	5,983 (17% of contribution base)

The work-injury insurance rate

The work-injury insurance rate fluctuates between 0.16% and 0.256%, contingent on the nature of the enterprise’s activities. Commonly, basic housing fund rates in Shanghai range from 5% to 7%. The mandatory basic housing fund carries a maximum cap of 7%, and it can be further increased by up to 5% (with identical rates for both employees and employers). When a company opts for both basic and supplementary housing funds at their maximum levels, the total contribution can reach 12%. It’s important to note that the supplementary housing fund is not optional and is solely at the company’s discretion, similar to the basic contribution, with the added benefit of being non-taxable.

In this scenario, the employer’s total expenditure encompasses the company’s share of the Social Security contribution, along with the employee’s gross salary. The employee’s contribution is deducted before taxes are applied. Although both the employer and employee have obligations to make contributions, it’s typically the employer’s responsibility to accurately compute and withhold these payments for both parties.

Should the employment contract be extended for another year, by July 2024, the employer must declare a new contribution base by calculating the average salary for the year 2023. Failure to declare the new base may lead to automatic adjustments by authorities in some regions, such as Beijing, where a 10% increment may be applied without prior notice to the company.

What Happens If An Employer Doesn’t Pay Social Security In China?

There are some companies that take calculated risks to reduce their operational costs by deviating from the practice of paying social insurance based on the average salary from the previous year. Instead, they opt for a lower base.

Engaging in the above-mentioned practices is strongly discouraged for the following reasons:

• Risk of Legal Consequences: In the event of an employee raising concerns about underpayment and reporting it to the authorities, the social security bureau typically sides with the employee. This could potentially lead to the company being held responsible for underpayment, along with associated penalties and accrued interest.
• Importance of Compliance: The adherence to social insurance and housing fund regulations is a pivotal component of a company’s compliance management structure. Non-compliance can result in legal and financial repercussions, tarnishing the company’s reputation and operational stability.
• Financial Due Diligence: Companies seeking financing, pursuing initial public offerings (IPOs), or engaging in merger and acquisition (M&A) deals must strive to maintain a clean record and avoid any irregularities. Such issues can negatively impact the outcome of these financial transactions and the company’s overall valuation.

In the event of violations pertaining to the underpayment of social insurance, the social insurance bureau would assess the underpayment for both employees and employers, along with imposing a daily late interest fine of 0.05%.

As labor costs in China continue to rise while economic growth shows signs of slowing down, foreign investors might view Social Security contributions as a burden rather than a benefit. However, drawing from our extensive industry experience, it becomes evident that this perspective doesn’t accurately reflect the situation. To provide a clearer understanding, we’ve outlined some practical functions of Social Security contributions.

Social Security System

First, the employer’s mandatory Social Security payments for its employees can be considered reasonable salary expenses and are eligible for deduction from corporate income tax.

Second, Social Security serves as a risk-mitigating tool, particularly when it comes to work-injury insurance. In certain manufacturing sectors, where work-related injury risks are high, Social Security plays a crucial role. For minor injuries, employees can seek medical treatment, with medical expenses covered by basic medical insurance.

However, it’s essential to note that basic medical insurance does not provide full reimbursement; employees are responsible for a portion of the expenses. To address this gap, many organizations in China opt to purchase supplementary commercial medical insurance for their local staff, which can offer substantial coverage, often up to 90% or 100%. Moreover, they typically secure mid to high-end commercial medical insurance for expatriate employees, ensuring comprehensive coverage, even for private hospital treatments.

For severe injuries, the relevant government department steps in to reimburse medical expenses following prompt reporting of the work-related injury by the employer. If the employer has failed to make the necessary contributions, they may be liable for the medical treatment costs incurred due to a work injury.

Third, Social Security becomes a critical tool for talent acquisition, especially for businesses heavily reliant on professionals and skilled workers in major urban centers. In Shanghai, for instance, many companies are willing to provide extra supplementary housing fund contributions for their valued employees and offer the opportunity for Hukou settlement for overseas returning talent by offering a higher Social Security contribution base.

Lastly, during maternity leave for female employees in Shanghai, employers are relieved from the responsibility of arranging monthly salary payments, as maternity allowances are directly disbursed by the Shanghai government to the female employees. It’s important to note that practices may vary by city; in Beijing, for example, companies typically make the monthly salary payments during the employee’s maternity leave, with the government reimbursing the maternity allowance to the company afterward.

Exemptions

According to regulations, social insurance contributions are mandatory for all individuals employed in China, including foreigners (with local practices potentially varying). Nevertheless, China has entered into Totalisation Agreements with 12 countries: Germany, Korea, Denmark, Canada, Finland, Switzerland, Netherlands, Spain, Luxembourg, Japan, Serbia, and France (though the agreement with France is not yet in effect). These agreements provide provisions for exemptions from specific contributions when specific conditions are met.

Conclude

The Social Security System serves as a crucial safety net for both Employers and Employees. While it can pose a significant cost burden on companies, with contributions as a percentage of salary higher than in many other countries, it offers extensive coverage. Navigating this system effectively is essential, and businesses must comprehend and adhere to the Social Security Law. These mandatory Social Security contributions are non-negotiable, and any delays or insufficient payments can expose employers to non-compliance risks.

Iris International boasts extensive experience in evaluating social welfare and employment benefit structures, aiding in the identification and mitigation of potential risks. To make the most of Iris International’s services, companies should consider conducting audits of their social welfare and staff cost structures, revising company policies, and reviewing insurance coverage to proactively address potential liabilities. Additionally, Iris International can assist clients in ensuring they adhere to the ever-evolving regulations and remain compliant with Social Security requirements.

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