Social security is an economic and social system relating to the vital interests of members of the entire society for safeguarding social stability, promoting economic development. The social security system originated in the social salvage system designed to provide material compensation or aid to help citizens overcome difficulties in their livelihood and unexpected disaster. The Decision on Some Questions Concerning the Establishment of a Socialist Market Economic Structure adopted by the

Third Plenary Session of the 14th Central Committee of the Communist Party of China points out that China's social security system includes social relief, social welfare, special care to and emplacement of disabled servicemen, and family members of revolutionary martyrs and servicemen, and community service, pension, unemployment and other social insurances; and commercial insurances. The Decision clearly defines the goal and principles for reform of the social security system. I wish to discuss four questions in the following.

I. The Historical Evolution of the Social Security System

1. The social security system evolution of various countries

The social security system, originated in social salvage, is a product of the industrial revolution and large scale socialized production, and the inevitable requirement of productive forces developing to a definite level. After Britain embarked on the road of industrialization, numerous farmers flowed into cities and the number of the urban poor drastically increased, at the same time, the ranks of the working class expanded rapidly, worker movement developed day by day. Under this background, in 1830's, Britain promulgated the Law on Assisting the Poor, under which, part of the money was drawn from the surplus value created by the working class to assist the poor. A new economic and social system that brought the role of social security to full play began to emerge.

In the late 19th century, German working class waged long term struggle against capitalism in order to win their own economic benefits, labour rights and interests. In an attempt to ease class contradiction and disintegrate the workers' self help organizations, Germany successively promulgated compulsory social insurance regulations between 1883 89. Later many European countries followed suit. The birth of social insurance marked the entry of the social security system into a new stage of development.

During the 1929 33 economic crisis period, in an effort to alleviate class contradictions and heal its economic wounds, Sweden's ruling Social Democratic Party introduced a series of welfare measures, so as to readjust the redistribution of national income and narrow the income gap. These measures later became the theoretical foundation for the ``welfare country'' practised in Sweden.

In 1933, as part of his effort to shake off economic crisis and alleviate labour capital contradiction, US President F. Roosvelt proposed that the state introduce the practice of social relief, social insurance and social welfare. US Congress adopted the Social Security Law in 1935, and the Federal government set up the Social Security Administration. This was the first national social security law undertaken by the Federal government and put into practice in coordination with Roosevelt's New Deal, it was a means employed to introduce Keynesianism, impose government interference, stimulate and expand social demand, and alleviate and eliminate economic crisis resulting from overproduction. This marked the birth of a comparatively complete modern social security system.

After World War II, Western countries, driven by the existence of the socialist camp and under the pressure of domestic class struggles, instituted a social security system featuring exclusive stress on material benefits.

Britain was the first to declare establishment of a ``welfare state', wherein all citizens ``from cradle to grave'' were ensured social security, followed by developed countries in Western Europe, Northern Europe, North America, Oceania and Asia which successively declared implementation of a ``universal welfare'' policy. At the same time, socialist countries in Eastern Europe and Asia, following the model of the former Soviet Union, adopted the state insurance model which provided the greatest social security for the working class. Thus far, more than 160 countries and regions have established a social security system of different types.

After the beginning of the 70s and 80s, social security standards in developed countries remained high, resulting in the dependence of members of society on the state and heavy financial burdens on the government, the ``universal welfare'' policy suffered setbacks: the prolongation of people's average life expectancy; the aging population bracket; improvement in modern medical means, the update and replacement of medicines and the higher charges for medicine than the rate of GDP growth led to the continued growth of insurance expenses and therefore adversely affected society's reproduction and weakened enterprises' competitiveness; inappropriate management means led to the waste of resources and egalitarianism in consumption. Given this situation, various countries have begun different forms of reform. The main contents include:

(I) Reducing benefit

(1) Putting off the retirement age;

(2) Reemployment after retirement;

(3) Reducing or freezing pension.

(II) Increasing social investment

(1) Raising contribution proportion;

(2) Raising the upper and lower limits of payment of wages;

(3) Government allocations;

(4) Initiating the collection of new tax items.

(III) Privatization of social insurance fund

In short, various countries are actively trying to design a set of mechanisms which coordinate insurance systems with economic development, price index and personal contribution. They affirm that the pension is the continuation of ``labour wage'', not ``citizen wage'' which any person can receive when reaching a definite age.

2. Past and present of China's social security system

China's social security system, founded during the war years on the basis of the supply system, has roughly gone through four stages.

The first stage, which began in the early period after the founding of New China to 1966, was the initial stage. In 1951, the state promulgated the Regulations (Draft) of the People's Republic of China Concerning Labour Insurance, its contents include items such as disease, injury, birth, medical care, retirement and death treatment and job waiting reliefs. Later on a series of policies and regulations were promulgated. At that time, the All China Federation of Trade Unions was the highest leading body for national insurance service, and the Ministry of Labour was the highest supervisory institution for the national labour insurance work. Part of labour insurance fund was paid directly by enterprises, another part was raised by the All China Federation of Trade Union. The social security system has played an important role in rehabilitating and developing the national economy, guaranteeing the essential life of the people and consolidating people's democratic dictatorship.

The second stage ranged between 1966 and 1976. During the 10 chaotic years, social insurance work suffered serious setbacks and destruction, management organs were dissolved, trade union organizations were compelled to suspend activities, social pooling from society for retirement expenses was cancelled, and social insurance was turned into enterprise insurance.

The third stage ranged from the Third Plenary Session of the 11th CPC Central Committee in 1978 to the 14th National Congress of the Party. Along with the in depth development of reform and opening up, we have engaged in the research and promotion of the establishment and advancement of the socialist security system as an important aspect of the economic system reform. In 1984, some regions began exploration of methods for reform of the old age pension insurance system, the method of raising funds from society for retirement pension was introduced to state owned enterprises and most urban collective-owned enterprises, and it was decided to institute employee's contribution system. Some regions even boldly explored ways for the establishment of a system which integrates social pooling with personal account. Government institutions and some villages have also conducted trial reform of the pension system.

In his Government Work Report to the First Session of the Seventh National People's Congress in 1988, Premier Li Peng pointed to the need of accelerating reform of the social security system, establishing and perfecting various social insurance systems and gradually forming a social security system with Chinese characteristics. In 1990, in many of his written instructions and speeches, Premier Li Peng noted that reforms of the housing system, the insurance system and the medical system should be placed in an important position in the next 10 years, these three reforms directly concern the vital interests of the people.

The fourth stage ranged from the 14th National Congress of the Party to the present. While proposal for the establishment of a socialist market economic system was put forward for the first time, deepening reform of the social security system was also clearly defined for the first time as one of the important links in the reform of the economic system. The Decision on Some issues Concerning the Establishment of a Socialist Market Economic System adopted at the Third Plenary Session of the 14th Party Central Committee further clearly defined the goal and principle for the establishment of a new social security system. The pace of the social security system reform has notably accelerated.

Some problems currently existing in China's social security system are in urgent need of solutions through deepening relevant supportive reforms.

First, chaotic management system. There are two major problems: one is making no distinction between the government and the institution, and confusing supervision and management have both adversely affected management efficiency and increased management cost; second, policies coming from many sources and multiple management. For example, the fact that the Ministries of Labour, Personnel, Civil Affairs, and Public Health, the State Family Planning Commission, the People's Insurance Company of China respectively participated in the management of social security, plus the trade insurance introduced to 11 local pension insurance trades, has aggravated the chaos in the social security management system.

Second, imperfection of laws and systems. As a system guaranteeing the basic interest of life of all labourers, social security needs to be standardized by law and to guarantee its implementation. China's current social security system, although having gone through many years of revisions and supplements, is still very incomplete and cannot meet the needs of the development of multiple economic forms, multiple operational methods and multiple employment systems in the market economy. For example, many difficult problems related to social insurance in foreign funded enterprises have been encountered, regarding which there are no laws to go by, and there exists the problem whereby foreign funded enterprises take advantage of loopholes in China's laws and evade employees' social insurance.

Third, limited coverage of social insurance and its uneven development between regions. Most employees with China's private enterprises have not as yet participated in social insurance; the urban unemployed can only enjoy a low level social security; the development of social security in rural areas is slow and its level is low, the current coverage of rural social security is less than 5 percent of the rural population. There is a wide gap in the average social insurance expenses for labourers in various provinces and cities. The level of social insurance expenses is high in Shanghai, Guangdong, Hainan and other provinces and cities, with the highest reaching 1,326 yuan per month, and the lowest being only 100 yuan.

Fourth, a low degree of socialization. China's social security system, which is based mainly on enterprise security, limits the universality of security, and weakens enterprises' competitiveness. In addition, there are many covert but few overt security projects, therefore labourers have only shallow impression on them, although the state and enterprise have spent huge amounts of expenses, social effect is not notable.

Fifth, heavy burden on the state and enterprise, personal right being dissociated from personal duty.

China's current security system features the high integration of employment and welfare, with social security funds either coming completely from the financial department, or being borne mainly by the enterprise. As a result, the enterprise become a ``welfare enterprise'' which provides all directional service for the employees, leading the enterprise welfare funds to get out of control, involving enterprises into trouble and putting burdens on the government. This system, which lacks a guaranteeing mechanism for the labourers themselves, lacks efficiency and is devoid of vigor.

II. The Attribute and Function of Social Security

Difference of views, which is of far reaching significance as approached from today's perspective, occurred during the 1930s. Debate on these problems was begun late for 50 full years in China. The idea advanced by Keynes of Britain that the state interferes in the economy through macro control includes the establishment of a social security mechanism, which is considered to be a means used by capitalist countries for self improvement and economic readjustment, and therefore it is essentially ``capitalist''. Myrdal, a Swedish economist, and some Frenchmen proposed that social security be used to regulate income redistribution, reduce polarization and realize social justice, thinking that this is essentially ``socialist''; in his New Deal, US President F. Roosvelt adopted a neutral attitude, holding that state macro control and social security are both means used by the state to interfere in and regulate economic development, they are neither ``socialist'', nor ``capitalist''.

In fact, to know the nature of social security, it is necessary to notice: First, the establishment and development of the social security system primarily source from the significant scientific and technological progress, as well as the resultant substantial rise in labour productivity and the rapid increase in social wealth. Therefore, we can say that it is the natural outcome of social development and cultural progress. Second, it is the result of the prolonged struggles waged by the working class and other labouring masses, and is the need for the bourgeoisie to promptly readjust the relationship of social production in order to suit the high level of socialized production and the new development of productive forces, and use this as a means to alleviate social class contradiction, and promote the steady development of society and the economy. This is also the necessity of social development and is no exception for capitalism and socialism for the sake of economic development and social stability, it is a subject socialism must face in regard to readjustment of the relationship of production. Third, it is a component part of the state's interference in economic operation and development, used to regulate income distribution, increase demand and alleviate periodic economic crisis resulting from overproduction. This is not unique to capitalism and therefore cannot be considered as completely ``capitalist''. Fourth, it cannot fundamentally eliminate, but can only alleviate, polarization. This shows that it is not purely ``socialist''.

In brief, like macro control, social security is a means the state uses to interfere in economic life, and does not involve the question of ``socialism'' or ``capitalism''. Regarding this, we should agree to F. Roosevelt's viewpoint.

Then its attribute and functions can be summed up as the following points:

1. The social security system is one of the basic aspects of China's socialist market economic system

A healthily operating market economy is an economy which allocates social resources on the basis of a market mechanism. It not only requires a qualified market mainstay, that is, enterprises engaging in independent management and assuming the responsibility for profits and losses, but also needs a sound, multi level social security system. These four aspects constitute an organic whole which complements one another, and none of them can be dispensed with. Western countries' market economy cannot work without social security, as a socialist country, China should establish a more sound social security system. The establishment and perfection of China's social security system directly affect whether the framework for the socialist market economic structure can be basically set up by the end of this century.

2. Establishing and perfecting a multi level social security system is one of the basic supporting measures for invigorating state owned enterprises

Social security is required by the transformation of the operational mechanisms of state owned enterprises and by the establishment of a modern enterprise system and the readjustment of the economic structure, as well as by state owned enterprises' equal participation in market competition. First, for a long time in the past, state owned enterprises have formed a system that integrates employment, welfare and security, centered on employment. As long as a person is employed to work in a unit owned by the whole people, he or she will enjoy old age pension, medical and housing insurance and various other kinds of security and welfare. Many contradictions and difficulties state owned enterprises currently encountered in the transformation of operational mechanisms, such as difficulties encountered in the course of the readjustment of the economic structure, the rational flow of assets, the enhancement of enterprise competitiveness and technological progress, are closely related to the imperfection of the social security system. Second, generally there exists the problem of redundant personnel in China's state owned enterprises, standing at an estimated 20 30 percent, the problem also exists in government organizations and institutions. Economic circles once called this phenomenon as ``hidden unemployment''. With the existence of large numbers of redundant personnel and ``the work for three persons to be done by five persons'', how can enterprise efficiency be improved? And how can enterprise operational mechanisms be transformed? Third, compared with enterprises of other forms of ownership, one difficulty currently facing state owned enterprises is the large numbers of retired personnel and heavy social burdens, thus obviously landing them in a disadvantageous position of competition. Reducing many social burdens on state owned enterprises, and enabling them to lay down burdens and go forward without any loads are an indispensable move to invigorate state owned enterprises. In short, a sound social security system is a necessary social condition for enterprises to really become the mainstay in market competition.

3. Establishing a social security system is one of the basic conditions for maintaining China's social stability

First, the social security system is the ``safety valve'' of society. Under this system, the elderly are supported, diseases are treated, workers suffering from industrial injury are given insurance, disasters given compensation, the unemployed given reliefs, the disabled are properly placed and the poor are provided with aid. From various aspects, social security guarantees people's essential life, ensures industrial and agricultural production, therefore naturally guarantees social stability. At the same time, it helps make up for the defects of the market economy which cannot guarantee the interests of the weak, playing the role as a safety net of society. Second, social security is an economic ``stabilizer''. Through readjusting the proportion of burdens on enterprises and the flexible use of social security funds, it can promote the ``cooling down'' of an ``overheated'' economy and boost economic growth when the economy is sliding downhill. Accumulated social security funds are the important source of funds for national economic construction. A rational control on the use of funds is conducive to readjusting the industrial structure in accordance with the state's industrial policy. In the meantime, a perfect social security system can bring about a rise in labour productivity, therefore it serves as a ``stimulator'' for economic development. Third, the social security system, also a distribution system, serves as a ``device'' to regulate the income distribution of different groups of the masses in society. It gives due consideration to both efficiency and fairness, thereby encouraging those becoming wealthy first to bring along those getting rich later, eliminating vicious polarization, and finally reaching common prosperity.

4. The social security system is an effective method for accumulating social wealth

The collection and operation of social security funds have amassed a huge amount of wealth for the state, constituting an important pillar of the state's monetary market. At present, foreign social insurance funds generally account for 6 10 percent of GDP, with per capita share standing at US$1,000 2,000. While in China, the 1994 social security funds only accounted for 1.4 percent of GDP, with per capita share standing at only US$6.3. The proportion of the assets of US insurance companies to the total value of the financial assets of banks reached 33.3 percent, that of Japan was 28.6 percent, while that of China was only 1.9 percent. In comparison, China's ability to amass social security funds is apparently inadequate. Approached from a worldwide perspective, social security funds are the ``second finance'' of a country. It is predicted that by the year 2010 China's accumulated social security funds will surpass national financial revenues. As an effective means for the accumulation of social wealth, the social security system plays an extremely important role in economic and social development. Its development has a direct bearing on the improvement of the financial market and the formation of a sound circle of the capital market.

Briefly stated, social security degree is a comprehensive reflection of a country's economic and social development, and constitutes an important component part of its overall national strength. From a long term point of view, the social security system will directly affect the development process of a country or a nation.

III. Methods and Principles for the Establishment of a Social Security System

Social security is a complicated social systematic project involving the interests of every citizen and the relations of various quarters, therefore, it calls for a systematic idea to engage in overall design and make overall arrangement.

First, as a systematic whole, the establishment of a social security system should have its entirety. Therefore, it is highly necessary to have unified policies and regulations, unified decisions and management and unified implementation and operation. At the same time, it should have the most extensive possible coverage, so as to enable each citizen in society as a whole to have the opportunity to get benefits.

Second, as a systematic structure, the establishment of a social security system should have its levels and differences. Here, firstly, the authority of the central and local governments should be clearly divided, primarily the following relationships should be properly handled: 1. the relationship between the central government's unified and centralized policy decision management and the management of relevant departmental division of labour; 2. the relationship between the central government's unified and centralized policy decision management and management at different levels of local governments; 3. the relationship between the administrative management of governmental departments and the business management of special organizations; 4. the relationship between socialized management and the management of grass roots units; and 5. the relationship between central level management of special organizations and local level management of communities. Secondly, different guarantee levels should be established in accordance with regional difference and difference between urban and rural areas (the standards for payment and provision), the scale of overall planning (the overall planning at the provincial, prefectural or national level), so as to bring out a certain degree of difference in the internal structure of the entire social security system. Thirdly, due consideration is given to the balance of its internal structure, this means permitting the existence of difference within the social security system, the difference, however, should not be too large, so as to maintain the overall stability of the structure, this requires maintaining a definite planning and regulatory ability for the central government.

Thirdly, as an element of the entire economic system, the social security system must maintain correlation with the macro policy, the entire system and market management, this is also a question of systematic coordination.

The social security system is a product of large scale socialized production. The century old social security system has accumulated rich experiences and lessons for mankind. The social security systems established in different countries have their respective theoretical principles as the basis. While studying the trends of the development and change in the social security system of various countries, we should learn from the useful experiences and absorb all outstanding achievements of the cultural progress of mankind and, based on China's specific national condition, creatively establish a social security system suited to the socialist market economic structure and having Chinese characteristics. Specifically, there are the following points:

1. The social security level should conform with China's national conditions and the developmental level of productive forces

Social security must suit the need of the development of productive forces, must be able to stimulate the raise of labour productivity and promote the development of productive forces. A given development level of productive forces determines a given social security level. A successful social security system can promote the development of productive forces, conversely, an unsuccessful social security system will hamper the development of productive forces.

Judging from foreign experiences and lessons, high level welfare and egalitarianism have led to a blind alley. The welfare country system practised in the West has stabilized society and developed the economy in a definite period. The social security system characterized by high standard and extensive welfare practised in Western ``welfare countries'', however, has brought about many negative effects, the great amount social security expenses have led to heavy financial burdens on the government and to continually increased deficits and have thus hindered economic development and exerted negative influence on the nationals' concept of value, the ``universal welfare'' policy preached in the past now finds it hard to continue. Statistics indicate that between 1960 90, among the member states of the OECD, the proportion of social security expenditures to the GDP rose from 7 percent to 15.4 percent; the proportion of medical and health care expenditures also doubled, climbing from 3.9 percent to 7.8 percent; around 25 percent of government public expenditures were spent on old age pensions. Excessive burdens of social security expenses resulted in huge budget deficits.

Now, Western countries have come to realize that the social security welfare tendency not only cannot raise labour productivity, but has developed inertia of human beings and fostered lazy bones. The mounting amount redistributed by ``welfare countries'' inevitably leads to a decline in labour productivity and the gradual drying up of the economic source for the mechanism of social security.

In brief, foreign experience proves that the item, scope and level of social security, if surpassing the developmental level of productive forces, will place heavy loads on the state and society; and will in turn restrict the development of productive forces and even adversely affect social stability if they lag behind the developmental level of productive forces and the economy.

The fundamental aim of the establishment of a new social security system in China is to promote development of productive forces. Excessively low security level is not socialism for it dampens the enthusiasm of labourers. All inclusive ``massive welfare'' will find it hard to continue, high level welfare should not be introduced, we can only proceed from the basic national condition to guarantee the essential living standards. For example, currently we are not in a position to draw all farmers into participation in social insurance; even for urban workers, the state's statuary social insurance level cannot be too high. Further security should be complemented by commercial insurance in light of the condition of each enterprise and each person. Firstly, the developmental level of China's productive forces is relatively low and the country, now in the primary stage of socialism, belongs to a low income country in the world. Secondly, China is a large populous country. China's population has now exceed 1.2 billion, the figure will reach 1.3 billion by the end of this century, and will further reach 1.6 billion during the peak period in the 2030s. Rural population currently accounts for 74 percent of the total. Due to the fact that large numbers of people were born from the 50s to the 70s, along with implementation of basic national policy of birth control, China will enter an aging population society at a fairly rapid pace. It took a transitional period of about 100 years for Western countries to enter the aging population society, while the transitional period is less than 20 years for China. It is predicted that by the year 2000, the proportion of the population aged at and above 65 will account for 7.4 percent of the total population, thus bringing China into an aging population society. By the year 2030, the number of retired personnel will reach a peak period, by then the number of retired personnel will be equivalent to over 40 percent of the working staff (it was 17.6 percent in 1992), retirement expenses will be equivalent to 44 percent of the amount of wages for employees at their posts (the rate of national average expenditures was 17.6 percent), far surpassing the internationally recognized warning line of 20 25 percent. Thirdly, development is uneven in various regions of China. There is a considerable gap between the southeastern coastal areas and the central and western inland areas, and this gap tends to be further widened in some regions over the past few years.

With regard to the proportion of social security expenses to the national income, it is generally accounting for 10 20 percent of GNP in Western countries, in China it should stand at around 8 10 percent, lower than the above figures. But according to related data, China's social security expenses have accounted for about 10 percent of GDP, while the figure is about 15 percent of GDP in Japan and the United States, the proportion stands at a low level of around 2.6 percent in developing countries. At the same time, China's economic development is uneven, with a wide gap between cities and the countryside and between regions, the coverage of social security is 92.1 percent in cities and towns, and is only 2.7 percent in rural areas. Such being the case, in operation we should consider both the unity of standardization and policy, and the flexibility and adaptability of policies and must not blindly adopt a ``uniform method'' for all regions without regard to their specific conditions. We should give consideration to both immediate and long term interests. If we do not collect and accumulate funds at present, we will lose the opportunity.

2. Combination of efficiency and fairness

According to traditional theory, social security is the direct redistribution of national income by the state, with the main purpose of realizing social justice. According to this theory, the state and enterprise undertake full responsibility for social security, which is regarded as a characteristic of socialism. As we see it today, this is a sheer misunderstanding.

In fact, the different items of social security are an expression of the different degrees of fairness and efficiency. The expenditures on social reliefs, special care to and emplacement of disabled servicemen and family members of revolutionary martyrs and servicemen and part of social welfare services are borne mainly by the state financial department. Those who meet the conditions can use them without compensation, which embodies the principle of fairness; social insurance, which belongs to redistribution of national income, should help reduce the gap in the primary distribution. Proceeding from China's reality of the present stage of reform and economic development, it is of particularly important significance to give social insurance the incentive function of promoting and improving efficiency. Therefore, we should adhere to the principle ``priority to efficiency with due consideration to fairness'' and introduce the method of allowing the individual, enterprise and state to undertake responsibilities for social insurance. The level of social insurance enjoyed by employees should play the function of social mutual aid, guarantee employees' needs of basic life, and should be linked with the amount of personal payment, so as to spark the labour enthusiasm of workers and improve efficiency. Commercial insurance follows the principle of efficiency.

In some countries, such as Singapore and Chile, the social security system is established on the basis of self labour accumulation, self security and self deposits are incorporated into social insurance, enabling most people to rid themselves of dependence on the state's redistribution of national income. At the same time, the mutual aid mechanism of social insurance makes up the deficiency of self security and family security. Such social insurance has vigor and fully embodies the incentive and efficiency mechanism and genuinely embodies the principle of high level fairness.

China is a developing country and is in the reform stage for establishing a socialist market economic structure, our policy of distribution and redistribution of income should embody the principle of priority to efficiency and due consideration to fairness. Regarding social security, in order to enhance a person's participation and self security consciousness, the new security system should, on the one hand, encourage labourers to work diligently and, on the other hand, require that labourers contribute part of their wage incomes for insurance, their long term deposits and accumulation funds will enable them to get economic compensation once they lose working abilities. In this way, those employees who work well and earn a high income when young not only can live a good life at present and after retirement in the future and can enjoy a happy life in their later years. Only when social insurance is based on an incentive mechanism for promoting and raising efficiency, can it accelerate the development of social productive forces and can reach a high level of fairness. The personal account system established for old age pension and medical insurance is a ``mode for stimulating efficiency''. In the meantime, we should give play to the functions of overall social planning, mutual aid and fairness, particularly with regard to the low income stratum and groups of people facing difficulties who are in dire need of social help and care, we should ensure them a basic living standard, so as to realize social fairness and social stability.

Efficiency is the foundation for developing productive forces and the foundation of fairness, any act that damages social efficiency is an act damaging fairness. Only when there is high efficiency can there be a high level fairness. Fairness embodies the principle of distribution according to work and more pay for more work, it encourages labour and helps raise efficiency. Fairness and efficiency complement each other.

3. The integration of social pooling and personal account

The method of integrating social pooling and personal account is introduced for workers' pension and medical insurance, and is a correct choice for the social security system with Chinese characteristics. The Decision on Some Issues Concerning the Establishment of a Socialist Market Economic Structure adopted by the Third Plenary Session of the 14th Central Committee of the Communist Party of China clearly notes, ``responsibility for the urban workers' pension and medical insurance funds shall be undertaken jointly by work units and individuals and the system of integrating social pooling with personal account is introduced.'' This prudent decision was made on the basis of many years of investigation and study carried out by relevant state and local departments and after repeated research conducted by the Party Central Committee and the State Council. The method of integrating social pooling and personal account is, in essence, a social mutual aid system established on the basis of a statuary self security, which helps to overcome the many defects of the current system, and to ease the contradictions currently existing between the central and local departments, between provinces and cities, between old and new workers and between old and new enterprises.

Firstly, it helps to establish an internal incentive mechanism which sparks workers' personal payment enthusiasm and to spur workers to work diligently. Current difficulty in collecting pension funds has been accompanied by the serious problem of decreasing accumulation and failure to make both ends meet. Enterprises' pension fund collection rate was 94 percent in 1992, the figure dropped to 86 percent in 1993, and less than 80 percent in some provinces. Because of the low rate of its collection, some localities were compelled to raise the proportion of the collection of pension funds from society, thus further increasing burdens on enterprises. Some enterprises with financial difficulties could not afford payment, some well performed enterprises thought it a loss to pay more; because the amount of payments by workers is not directly linked with personal benefits, people generally thought they paid old age pension funds simply for others. After establishment of the personal account system, workers changed their concept from the original payment for other employees to payment for their own old age savings deposits. Whether one pays or not and how much one pays are directly linked with a person's future old age pension level. Ownership of the accumulation funds paid by a person belongs to the worker himself, the amount is direct viewing and can be transferred and partially inherited according to regulations. This helps enhance workers' self security consciousness and urge workers to work hard.

Secondly, it helps to urge enterprises to pay and strengthen the management of funds. Under the new mechanism, employees and enterprises show greater concern for old age pension insurance funds, therefore, this mechanism helps solve problems concerning those enterprises which refuse to pay or pay less than required, which conceal facts about or give a false report on the basic amount of their wages; it helps prevent the appropriation and misuse of funds; it also facilitates the preservation and increase of value of the funds.

Thirdly, it is conducive to the transformation of enterprise operational mechanisms and the rational flow of labour forces. After the institution of the personal account system, when transfer of work posts, cessation of employment and change of wage occurs, the pension funds deposited by the workers concerned at different periods and in different work units can be added up to personal accounts which can be transferred. These stipulations have created good conditions for accelerating the flow of labour forces and promoting the development of the labour market.

Fourthly, the introduction of the system of integrating social pooling with personal account for the major items of social insurance helps the state to make overall planning for its ability to undertake responsibility and the security level, and for wage reform and other comprehensive supporting reforms, it is also advantageous to the unified management, regulation and use of funds.

Fifthly, the system of combining social pooling from society with personal account gives play both to the great advantages of social pooling for mutual aid (mutual aid between long and short lives and between high and low incomes), and to the advantage of the great incentive role of personal account. In the design of personal account, the reform method also embodies the functions of raising funds for mutual aid and ensuring fairness. For instance, the stipulation of the upper and lower limits of payments; the average monthly wages of local employees are partly entered as the base number in personal account; the deposit amount in personal account can be regulated and used between earlier and later retirement, and between the previous and later generations, thus properly combining fairness and efficiency. The system of integrating social pooling and personal account can conform with the condition of the wide gap between China's different regions, different departments and work units of different forms of ownership, and between urban and rural areas, integrating the unity of the basic mode and the difference of security levels together proves to be an effective way adapting to China's national conditions and for expanding the coverage of old age pension insurance.

4. Unified management, division of functions and separation of the government and institution

Firstly, establishing a unified national social security organization. Social security is a government action taken with the state as the mainstay, so it is necessary for the state to make and set up a unified organization, such as the State Social Security Commission or the State Social Security Ministry to make unified and centralized policy decisions and exercise management, so as to change the current situation wherein management is exercised at different departments and policies come from many sources. The organization can be divided into three levels: Firstly, macro management level. The State Social Security Commission set up by the government, as a government department in charge of the social security undertaking, performs its government social security functions. It is mainly responsible to formulate regulations and engage in supervision, planning and coordination. Social security activity, a systematic project, involves both the problem concerning the coordination between object of application, criteria and level of benefit, source of funds and method of management; and the problem concerning regulation and balance between the payment and collection of funds, the deposit, application, and preservation and increase in the value of funds and distribution and use. Therefore, the state should establish a decision making and management organization with the function of unified coordination to conduct unified planning and decision making, comprehensive coordination, effect coordinated implementation, exercise unified macro management, raise the organizational and managerial level of the social security system, and strengthen the due role state laws and regulations should play for the system. Secondly, medium executive level. A provincial (city) social security bureau is set up as an organization in charge of social security undertaking. It is responsible for the concrete operation of social security, including the levy and management of insurance premium and the payment of insurance money, providing the insurance unit and the insurant with fund and service guarantee. Thirdly, micro operating level. County and grass roots level insurance offices are set up to take charge of the frontline operation of social security affairs. Their concrete task is to handle the collection of insurance premium, the payment of insurance money and social service.

Secondly, clearly defining the division of the central and local authority over social security management. The unified and centralized management of social security should also be integrated with management at different levels, this means locality and its branch office should enjoy appropriate management power. China has a vast territory with scattered cities and towns, in order to ensure the effective operation of social security, the state's social security plan should be implemented through local governments and their affiliated social organizations.

Local management at different levels is manifested concretely in the following two aspects: First, multi level social insurance, such as pension, in addition to the statuary basic pension implemented by the state, various provincial governments are allowed to set up and manage additional local pension , so as to adapt to the needs of the uneven economic development between regions and enable labourers in economically developed regions to enjoy a higher level insurance treatment. Second, certain social insurances, such as industrial injury and unemployment insurance. Due to difference in the economic developmental levels in various regions, various provinces and cities should make laws, formulate rules and regulations for management and application.

Thirdly, the administrative management functions of social security should be strictly separated from operational management functions. Government social security departments and relevant departments in charge of concrete items of social security exercise macro management and give guidance on the basis of the central government's general and specific policies and basic principles. But the concrete business of various items of social insurance is not only complicated and highly professional and therefore requires the establishment of a social insurance institution for special business management. Special business management organizations can respectively set up management institutions for old age pension, industrial injury, medical and unemployment insurance to take charge of the collection, use and issuance of various funds.

In order to do a good job of the investment and application of social insurance funds, it is essential to establish relatively independent special funds management organizations, for instance, setting up special social insurance funds and social investment banks, their board of directors should be composed of representatives of finance, labour, trade unions and social insurance institutions, experts in financial securities and investment and management of financial affairs should be invited to participate and to take charge of concrete operation and management. At the same time, it is necessary to establish and perfect the system in relation to supervision, examination, verification, and inspecting the investment and use of social insurance funds.

IV. The Basic Framework of China's Social Security System

China's security system is composed roughly of three parts including 14 items. The first part is the security item supported by state finance, including four items social relief, social welfare, special care to and placement of disabled servicemen and family members of revolutionary martyrs and servicemen, and community service. The second part is social insurance introduced under the compulsion of state laws, including six items pension, unemployment, medical care, industrial injury, and maternity insurance and housing security the main part of the social security system. The third part is commercial insurance introduced by following the principle of voluntary participation and aimed at making profits, it includes the three items of personal insurance, enterprise insurance and mutual aid insurance the main supplement to social insurance.

(I) Security items supported by the state finance

In China, social relief, special care to and placement of disabled servicemen and family members of revolutionary martyrs and servicemen and social welfare are funded mainly by the state finance and come under the category of redistribution of national income. They embody the responsibility which should be fulfilled by the state for those people who are unable to secure a basic living standard and to special groups of people and embody the principle of fairness.

1. Social relief

Social relief aims to help those in danger and relieve those in need, and salvage social weak groups. It is intended mainly for low income throngs and crowds in financial difficulties. Low income throngs refer to those people who cannot secure a basic living standard through their own labour in their remaining years, such as the disabled, widower, widow, orphan and childless. Crowds in financial difficulties refer to those people who temporarily cannot secure a basic living standard, such as orphans, and the long term unemployed. State relief enables them to secure basic living conditions. Statistics indicate that around 86.69 million people get state relief in the year, with expenditure of relief funds standing at about 600 million yuan. The introduction of social relief is aimed at eliminating the phenomenon of absolute impoverishment within a short period of time, and at the same time, reducing relative poverty as far as possible within a medium or long term period of time. This is the minimum requirement of application of social security.

Social relief calls for greater use of active salvage methods such as providing for and helping oneself by engaging in production, and helping the poor by providing them with scientific and technological knowledge, and giving play to the self reliance spirit of the poor. It is necessary to combine helping the poor by granting them relief with helping the poor by enabling them to promote development, and raise the social effect and long term efficiency of the state's relief funds.

2. Special care to and placement of disabled servicemen and family members of revolutionary martyrs and servicemen

Special care to and proper placement of disabled servicemen and to family members of revolutionary martyrs and servicemen belong to special government guarantee. The objects are personnel who have rendered meritorious services to the state and people. Generally, this refers to families of revolutionary martyrs and servicemen, disabled armymen, demobilized compulsory servicemen and volunteers.

At present, there are 39 million people needing special care and proper placement, including 3.96 million people to be given special care and placement by the state. In 1993, the government issued a total of 2.01 billion yuan of pension for the disabled or families of the deceased, 1.32 billion yuan for families of revolutionary martyrs and servicemen, which basically guaranteed their daily lives. China has 600,000 people needing to be placed each year, 30 million demobilized servicemen have been properly placed since the founding of New China in 1949.

The basic principle for the special care and placement work is to comprehensively implement the principle of ``ideological education, supporting production, with the masses being responsible for giving special care and the government responsible for granting allowances'', and to steadfastly follow the road of ``the three in one combination of the state, society and the masses''. It is necessary to gradually take the road for guaranteeing placement by relying on legal means for guarantee, adopting administrative means for regulation and control and using economic means for invigoration. It is essential to gradually establish a placement security system featuring the connection of conscription, demobilization and settlement, the coordination of fostering, recommending and employing talented people, the linkage of planned housing construction, acceptance and settlement and service management, and the integration of acts of the government, society and the market. The guaranteeing target should be higher than the average living level of local masses, and a mechanism wherein the standard for special care and placement gradually rises along with economic development.

3. Social welfare

The objects of social welfare guarantee are the lonely, elderly, handicapped and orphan, and mental disease patient. By the end of 1993, there had been 43,681 welfare institutions nationwide, 56,843 welfare enterprises of various types had been set up, 842,000 disabled had been settled, 1.4 million people had been employed in scattered localities in proportion, 200,000 people had been self employed, the employment rate for the country's disabled had topped 60 percent, with the figure exceeding 80 percent in large cities.

With regard to social welfare work, it is necessary to further change the situation in which the state undertakes the responsibility for every related work, extensively mobilize and rely on social forces, explore a road whereby social welfare service is developed by various forms including granting financial aid by the government, operation by mass organizations, joint management by enterprises or institutions as share holders, and contracting by legal entity, so that welfare service units will gradually develop in the direction toward civilian run and public subsidized and managed by legal persons.

4. Community service

Community service is of important significance for social security. Community service organizations are mainly organizations of the people who get organized to serve themselves and society with support and encouragement by governments at various levels. They enjoy government economic support and legal protection. Communities, under the management of civil affairs departments, have provided much social security service over long years for retirees, the elderly, weak, patient, disabled, widower, widow, orphan and childless, and thus made tremendous contribution to social stability. The development goal of community service is to basically establish a social welfare service network in cities which is adapted to the economic developmental level, with joint participation of the public, the coexistence of various economic sectors, different standards, a high level of service quality and good service efficiency, and gradually realize the objective of ensuring that in the communities, the elderly are supported, the young are nursed, the widowers are given allowances, the disabled are aided, the poor are provided with relief and the needy are helped. The policies for the community service trade should be gradually systematized and management legalized.

By the end of 1993, the country had had 54,380 formally registered community volunteers organizations, specialized service contingents with a membership of 414,000 people, 3.154 million volunteers, 2,584 community welfare service entities, with a total output value of 8.17 billion yuan, and 70 million residents accepting community services.

Along with the acceleration of the pace of urbanization, stem families in cities and the countryside have increasingly split into nuclear families. In order to adapt to the situation of excessive loads on working couples in cities and towns, communities should energetically organize service networks whereby residents' kinsfolk and neighbours keep watch, coordinate with and help one another, give play to the role of communities to eliminate the defects of one child families who have no time to look after the elderly and promote mutual aid and mutual help guarantee

based mainly on families. Economically, the kinsfolks should help the insurants in their payments, personal savings deposit guarantee should be combined with family guarantee.

(II) Social insurance items with funds being borne by the state, work unit and individual

China's social insurance currently includes old age pension, unemployment, medical care, industrial injury and birth insurances. Social insurance is implemented under compulsion in accordance with state laws. The current focus of reform is on old age pension and unemployment insurance systems for urban enterprises.

1. Urban pension system reform

The unified formula for the reform of the urban workers' pension system which combines social pooling and personal account currently under trial implementation, as well as the basic pension system for enterprise employees soon to be adopted is the continuation and deepening of the years long reform of the pension system. The main contents of the unified formula include:

(1) The scope of application

The basic pension system is applicable to all employees of various types of urban enterprises, the proprietors themselves of urban individual industrial and commercial units and their helpers, proprietors of urban private enterprises and urban professionals.

(2) The collection of basic pension expenses

a. A worker's personal wage is taken as the base wage number for personal contribution. That part of a worker's personal wage that exceeds over 300 percent of the average wage of local employees is charged neither to the personal base wage number for payment, nor to the base number of basic pension issued; when a worker's wage is lower than the lowest wage of local employees, the base wage number for payment is calculated in accordance with the lowest wage standard.

The proportion of personal payment will gradually be raised along with the rise in the wage level, generally the proportion is raised by 1 percentage point once every two years, in regions and years when workers' wage increased at a relatively rapid pace, the proportion can be raised a bit higher, till the proportion finally reaches 8 percent of the base wage number for personal payment.

b. Enterprises shall pay pension premium in accordance with a fixed proportion of the total of the base wage number for payment by all employees, the concrete proportion shall be determined by the people's government of the fund pooling area.

c. The owner himself of an urban individual industrial and commercial business, the proprietor of a private enterprise, professionals and other non wage or salary earners can take the average wage of local employees as the base number for payment, the insurance premium shall be paid by a person to the local social insurance institution in accordance with the stipulated rate, the proportion of payment shall not exceed the total of the proportion of payments by local enterprise and the worker himself.

(3) The personal account of basic pension

a. In line with the principle for the combination of social pooling with personal account, the social insurance management institution shall establish a life long immutable personal account for each person participating in basic pension in accordance with the social security number (national standard GB11643 89) published by the State Bureau of Technical Supervision.

b. A worker shall enter the premium into the personal account related to basic pension in accordance with 11 percent of his personal base wage number for payment, non wage and salary earners with urban individual industrial and commercial units shall enter premium in accordance with 11 percent of the average wage of local employees.

The pension premium paid by a worker himself shall all be written into the personal account, a fixed proportion of the pension premium paid by an enterprise shall be entered into personal account; along with the rise in the proportion of personal payment, the proportion of enterprise payment entered into personal account shall be reduced correspondingly till it falls gradually to 3 percent.

c. Interest on the amount of deposits in the personal account related to basic pension scheme is calculated on an annual basis. The interest rate for personal account shall be determined in accordance with the regulation laid down by the People's Bank of China that the interest rate for personal account shall not be lower than the interest rate of urban and rural residents savings deposits in the same period and in reference to the growth rate of wages.

d. The personal account related to basic pension scheme shall be transferred along with the transfer of posts of workers between different regions.

e. The amount of deposits in personal account related to workers' basic pension scheme can only be used for paying pension after the retirement of the worker himself, and cannot be drawn ahead of schedule.

f. The social insurance management institution shall calculate the amount of deposits in the personal account related to pension scheme once every year and check the account with the worker himself at least once every year. Workers and retirees have the right to verify and ask about the amount of deposits in personal account, the social insurance management institution should provide unpaid service.

(4) The method for calculating and issuing basic pension scheme

a. For workers who have fulfilled retirement formalities after reaching the legal retirement age, personnel who have paid personal insurance premium totalling 15 full years can enjoy basic pension scheme treatment and receive pension on a monthly basis.

Basic pension scheme is composed of two parts foundation pension and personal account pension.

Foundation pension = workers' average wage of the previous year x 25 percent (the calculation proportion can be divided into several grades in accordance with the number of years of payment within the range of 25 percent);

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Personal account pension = personal account deposits 120.

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Those personnel who have retired before implementation of this method can get pension still issued in accordance with the original standard, at the same time, the method for normal readjustment of basic pension is carried out.

For workers who participate in work before implementation of this method and retire after its implementation, on the basis of the above mentioned two pensions, a transitional pension (the method for it will be decided separately) will be added, so as to realize the connection of the old and new retirement methods.

b. For personnel who have reached the retirement age, but the number of year of payment of premium (including those regarded as years of payment) is less than 15 years, pension equivalent to two months of the average wage of local workers will be issued in accordance with one full year of payment, the pension will be paid off lump sum; for that part of personal account deposits which belong to personal payment, principal and interest will be paid lump sum to the person concerned, at the same time, the basic old age pension insurance relationship will be terminated.

c. When workers or retires die, that part of money which has not been drawn from their personal account shall be used as allowances for the families of the deceased; after the personal account deposits of the retirees have all been drawn, basic old age pension will continue to be paid till their death.

(5) Establishing a mechanism for the normal readjustment of basic pension

In order to guarantee the basic living need of retirees and enable them to appropriately enjoy the fruit of socio economic development, it is necessary to establish a mechanism under which basic pension scheme is appropriately adjusted along with wage increases. The basic pension scheme of retired personnel can be readjusted in accordance with a fixed proportion of the growth rate of the average wage of local employees in the previous year, but no readjustment will be made when the average wage of local workers witnesses a negative growth.

The current rural pension is based mainly on family guarantee. This measure is our good tradition as well as our superiority. Supporting the elderly and children on a family basis is not only a question of moral and ethical concept, but also is a system which is determined by the economic developmental level, production methods and lifestyles, and so it should continue to be carried forward. On this basis, various other methods of supporting the elderly can be developed in light of the actual conditions of various localities, and the rural security system should be perfected. For example, this system can be integrated with community support. In places where conditions permit, pension based on the accumulation of personal deposits can be introduced in accordance with voluntary participation of farmers. Using the urban worker pension method for reference, the social insurance system which integrates social pooling with personal account should be established. The reform task at the present stage is to gradually expand the selected areas for rural pension. Along with rural economic development, the ultimate goal is to universally establish in rural areas an pension scheme system based mainly on self guarantee and integrated with support from the collective and the state. The rural pension system must be based on the rural reality and facilitate the stability and perfection of the basic system the system of contracted responsibilities on the household basis with remuneration linked to output and the dual management system which combines unified and independent management. It should be stressed that the rural pension system should be based on the farmers' voluntary participation and should facilitate rural economic development, The practice of compulsion, unpaid for appropriation of farmers' resources and apportioned charges must be avoided.

2. Reform of the unemployment insurance system

The emphasis is currently placed on establishing an enterprise unemployment insurance system and, in coordination with the establishment of a modern enterprise system, on properly solving the problem of providing living guarantee for the enterprise unemployed workers.

(1) Expanding the scope of application of unemployment insurance. Unemployment insurance which is currently limited to state owned enterprises should expand to cover workers in urban state owned, collective, shareholding and private enterprises and Chinese workers with foreign funded enterprises.

(2) Unified collection and management of unemployment insurance funds. Unemployment insurance funds shall be raised from society under a unified standard and in accordance with the principle of basing revenue on expenditure and setting aside an appropriate amount of reserves. The current plan is that unemployment insurance premium is paid in accordance with 0.6 1 percent of the payroll of all enterprise workers. Because each worker is likely to encounter unemployment risk due to personal reason or reasons of enterprises and society, therefore an individual should also pay a small amount of unemployment insurance premium.

(3) Readjusting the structure for the use of unemployment insurance funds. The overwhelming majority (at least over 80 percent) of the funds should be used in the unemployed workers and their families. Social supervision over the use of funds should be strengthened.

(4) conscientious efforts should be made to do a good job of the unemployment relief work. For workers participating in unemployment insurance, those who cease working not on a voluntary basis and have worked for a full year before unemployment can, after performing unemployment registration, receive unemployment relief funds according to regulation and enjoy unemployment insurance treatment. The standard for issuing unemployment relief funds can be appropriately raised. Unemployment relief funds are currently issued according to 120 150 percent of social relief funds. Future plans call for a changeover to the method of issuing unemployment relief funds in accordance with 70 80 percent of the local statuary lowest wage, so as to promptly readjust the level of unemployment relief funds along with readjustment to the lowest wage standard. The time limit of unemployment insurance pay shall be divided into different grades in accordance with the length of one's service before unemployment, but the longest period shall not exceed 24 months, thereafter, unemployment insurance pay will be changed into social relief.

(5) It is necessary to make a good connection of unemployment relief and social relief. Workers who have not been re employed after the expiration of unemployment relief and are eligible for social relief shall be provided with social relief by the civil affairs department in accordance with the social relief standard. In view of the fact that the number of these personnel has gone beyond the scope of the object for relief issued by the civil affairs department, therefore the needed relief funds shall be allocated and paid by the financial department.

(6) Enterprises and society should open up various employment channels so as to promote reemployment of the unemployed personnel. We should encourage the use of social forces to develop training for employment, job recommendation, and the use of unemployment insurance funds to extend compensated support to production enterprises, which are suited to the market need in their practice of providing for and engaging in production. Attention should be paid to economic efficiency and social effect in the use of funds which should be subject to social supervision.

3. Reform of the worker medical insurance system

The goal for reform of the worker medical system is to establish a social insurance system which combines medical social pooling with personal medical account, and enables it to gradually cover all urban labourers. Like pension scheme, the scope of medical insurance also only guarantee basic medical care, it is not and cannot undertake the responsibility for the treatment of all diseases. The expenses on the treatment of certain diseases, body building and prolongation of life should be covered by commercial insurance.

The main contents of the trial reform of the medical system now going on in Jiujiang and Zhenjiang are: Responsibility for medical insurance expenses rests with the state, work unit ( employer ) and individual. The medical insurance expense paid by a worker himself (accounting for 1 percent of the worker's wage income) and most (over 50 percent) of the medical insurance expenses paid by the employer for the workers shall be written into personal account, the remaining belong to funds raised from society. Medical expenses should first be disbursed from personal account; when this is not enough, the individual shall be responsible for a small part of it, while most part is paid out from the funds raised from society. The Opinions About Experiment of Jiujiang and Zhenjiang present reform measures in regard to strengthening restraint on medical units and improving medical service, strengthening management and supervision over medical insurance funds.

The medical system reform is very complicated, it not only affects the vital interest of each worker, but also involves reform of the entire medical and health system, in addition to reform of the method for the collection and payment of medical insurance funds, it also includes solving problems regarding the hospital system, the allocation of medical resources, medical treatment price, hospital management, the establishment of a restraint mechanism for both doctors and patients, as well as how medical and health department should meet the requirements of a socialist market economic structure. Through experiments carried out in the two cities of Zhenjiang and Jiujiang, we will further improve the plan for reform of the urban worker medical insurance system, expand the scope of the trial reform of the medical insurance system, and gradually establish a medical insurance and medical and health system suited to China's national conditions.

Rural cooperative medical service refers to the rural medical and health care system of various forms under which rural residents are the objects, funds are raised and managed by different methods, medical and health special funds are jointly raised by the collective and individual, the expenditures on medicine and disease-prevention and health care by farmers are compensated according to a specified proportion. Reform of the rural cooperative medical system must proceed in light of the realities of different rural areas. The objective of reform is: beginning from now till the end of this century, primary health care should be comprehensively implemented in China's rural areas, and the cooperative medical and health care system should be basically set up in most regions. In implementing the rural medical and health care system, we should not follow the old road of getting the collective to undertake the responsibility for everything, nor should farmers' medical and health care funds be charged, misappropriated and misused indiscriminately. In establishing a rural cooperative medical and health care system for the new period, we should adhere to the working principle of ``government leadership, collective support, raising funds through multiple channels, suiting measures to local conditions, acting according to our capabilities, exercising scientific management and democratic supervision''.

4. Reform of the urban enterprise employee industrial injury insurance system

The main contents of reform include rationally determining the remuneration standard, guaranteeing the basic life of workers injured at work and those contracted with occupational diseases, as well as their families, and providing economic compensation for workers suffering from injury while working. Industrial injury insurance premium should be collected in accordance with the principle of basing income on expenditures and setting aside an appropriate amount of reserves to form an industrial injury insurance fund subject to the regulation of funds from social pooling and decentralize industrial injury risk. The work of appraising disable resulting from industrial injury, payment of remuneration and personnel management should be shifted gradually from the enterprise to society. Industrial injury insurance should be combined with the prevention of accidents and recovery from occupational diseases. In collecting industrial injury insurance premium, the differential rate shall be fixed in accordance with accidental risk of the trade and the degree of damage to the occupation, at the same time, evaluation of safety achievement and the floating rate of annual expenses of various enterprises should be conducted, economic means and administrative supervisory means should be used to do a good job of the prevention of industrial injury. Recovery from occupational diseases, which is the continuation of medical care, should be included in reform of the medical system. Regarding the scope of medical insurance, we should break the old pattern featuring ``implementation by all people and taking reference by the collective'', a unified industrial injury insurance system should be enforced among all urban enterprises and all their employees.

5. Reform of urban enterprise workers child bearing insurance system

The purpose of birth insurance reform is to safeguard women workers' legal rights and interests, guarantee them enjoyment of rest, medical and health care, birth allowances and other treatments during the period of birth, balance enterprise burdens on birth expenses, change the unbalanced burdens on birth expenses brought about by proportional difference of men and women workers between various enterprises, between trades and between regions, give expression to women workers' child bearing social value, and promote employment of young women.

In birth insurance, it is necessary to change the current situation of narrow coverage and low degree of socialization, so as to expand the applicable scope to cover all urban enterprises and employees. The method of raising birth insurance funds from society should be introduced, birth insurance funds should be drawn in accordance with a specified proportion to the total value of enterprise wage and in line with the principle of basing income on expenditure. The concrete proportion to be drawn shall be determined by the local government, but the highest proportion should not exceed 1 percent of the total value of wages.

6. Housing guarantee

The urban housing welfare system formed over the long past years contains many defects and therefore must be reformed. In terms of the overwhelming majority of urban and rural residents, the housing system reform is oriented toward commercialization and socialization. The state's housing guarantee does not cover all inhabitants, it can only involve medium and low income urbanites. The responsibility for housing guarantee should also rest with the three sides of the state, work unit ( employer )and individual and should be carried out in line with the regulations formulated by the government.

The State Council Decision Concerning Deepening Reform of the Urban Housing System published last year comprehensively expounds the general idea about reform of China's urban housing system. The contents of the general idea can be summed up as ``three change's and four establishment's''. ``Three change's'' means changing the old welfare system formed under the planned economic structure, including changing the system under which housing construction investment was borne exclusively by the state and work unit into a system wherein investment is rationally borne by the state, work unit and individual; changing the system under which various work units were responsible for the construction, distribution, maintenance and management of housing into a system featuring socialized and specialized operations; changing the distribution method of housing as material welfare into money wages distribution method based mainly on the principle of distribution according to work. ``Four establishment's'' means establishing a new housing system adaptable to the socialist market economic structure, including establishing an economical and practical housing supply system targeted at medium and low income families and with the social security nature, and commodity housing supply system targeted at high income families; establishing a housing public accumulation funding system; developing housing finance and housing insurance, and establishing a housing credit system characteristic of both policy and commerce; and establishing standardized real estate transaction market and housing maintenance and market management, thereby gradually realizing a virtuous cycle in the input and output of housing funds, and promoting the development of the real estate sector and related industries.

In accordance with the stipulations of the decision on housing reform, that portion guaranteed by the state finds expressed mainly in the commodity housing system featuring social security supported by the state, including the ``comfortable housing project'' implemented by the state. That is, in line with the goal of comfortably off housing in cities and towns, development and construction of economical and practical houses are carried out for medium and low income earners and families with housing difficulties, providing them with social security commercial housing suited to their bearing capabilities. Land for this type of houses relies on free allotment by the state, the housing price is equivalent to or slightly lower than the cost, with subsidies from the local financial department. The development and construction of economical and practical housing call for separation of the government from institution and are not aimed at making profits. Pilot cities charged with experimenting with the comfortable housing project should conscientiously explore a new road whereby social security can be realized in the housing field, and eventually achieving the goal of ``residents are provided with houses''

(III) Reform of Commercial Insurance Projects for Which Funds Are Contributed by the Work Unit and Individual

Commercial insurance is aimed at making profits. the insurant has full autonomy and option. Commercial insurance consists of individual insurance, insurance by enterprise and work unit, and mutual aid insurance.

Adapting to the characteristic of multi level social demands, after the establishment of the type of social insurance characteristic of ``providing somebody with timely assistance'', the demand for ``making perfection more perfect'' needs to be satisfied by commercial insurance. This represents the most important supplement to social insurance, an undertaking needed to be energetically developed in the future.

Commercial insurance has the following characteristics: first, the contractual nature of rights and duties. The insurance company and the insurant determine the payment standard and corresponding guarantee level in a contractual form. The government only grants it policy support and does not undertake direct compensatory responsibility. Second, it is highly flexible and adaptable. The insurant has free choice of the insurance level which can be high or low. The category of insurance is set up according to the specific condition of a person or locality, adaptable to different economic developmental levels and living standards, with those who insure more getting more benefits. Third, commercial insurance companies can engage in free competition within the scope of state regulations, they can improve efficiency and service quality and raise the economic compensatory level of the insurant.

The ``welfare countries'' have begun to reform the social security system since the mid 80s. They have generally focused their attention on reducing welfare treatment and begun to transform part of social insurance to commercial insurance and vigorously develop the latter sector. The government encourages establishment of the enterprise annuity plan, and encourages individuals to buy private annuity insurance at commercial insurance companies, this means personal deposit insurance, as a result, commercial insurance has experienced significant development.

For example, the United States has 2,200 plus specialized life insurance companies in addition to over 1,000 comprehensive insurance companies, the country earns US$200 billion from life insurance premium annually. In addition, the United State currently has about 50 million employees working with private departments who participate in company sponsored private pension plan, that is, purchasing commercial insurance. The number of such participants accounts for 50 percent of the total number of employees with private departments, some 70 percent of the workers aged between 40 and 60 have participated in private pension plan. Private pension is seen as an important supplement to the social security old age pension funds. The assets of US private old age pension funds have currently hit US$3,000 billion, exceeding banking assets and controlling one third of the country's stocks, and becoming an important source of the domestic capital of the United States.

China's commercial insurance is currently underdeveloped and not standard, with weak competitiveness and option. There are only three national commercial insurance companies, life insurance business closely related to social security was not established until the 1980s. By the end of 1993, the total amount of income earned from life insurance premium by China's insurance enterprises was less than 40 percent of the country's total income from insurance premium. The income earned from life insurance by the People's Insurance Company of China over the past decade was only 19.3 billion yuan, which contains a large portion of the social insurance funds raised by localities. This situation is utterly unmatched to China as the most populous country in the world.

As we look forward to the development prospects of the socialist market economy, we find that commercial insurance, as the most important supplement to social insurance, has great potential for development. On the one hand, it can satisfy the different demands of different income earners for social security; on the other hand, it can apportion risk through decentralizing insurance. Encouraging qualified work units ( employer to purchase commercial insurance for their employees helps enhance enterprises' cohesive force and facilitates transformation of part of consumption funds into production funds.

In this field, it is entirely possible for China to boldly draw on the experiences gained by developed countries in setting up commercial insurance, to emancipate the mind, change conception, encourage competition, break monopoly, and develop a group of standardized insurance companies in a planned way. In old age pension, medical, life insurance, and in every aspect of people's livelihood and various fields of economic development, the country can actively initiate various insurance categories, so as to meet the needs of economic development and the various insurance demands of different groups of people with different income levels. Currently there is a tendency featuring the large scale entry of overseas commercial insurance institutions into Chinese insurance markets. We should grasp the valuable opportunity existing when foreign commercial insurance companies have not as yet occupied China's vast commercial insurance markets to energetically rejuvenate the national commercial insurance service.

Finally, particularly noteworthy is the fact that the social security system is an economic and social system designed to safeguard social stability and related to the vital interests of the people in general. Reform to be conducted in line with the social security system is the focus of reform over the next several years. Establishing a social security system suited to the requirements of a socialist market economic structure is a great practical exploration, a theoretical breakthrough and a readjustment of interests.

The establishment and perfection of China's social security system directly relate to whether the basic framework for the socialist market economic structure can be determined by the end of this century and relate to whether or not China's economic and social development can proceed in a healthy, sustained and steady manner. We should pay high attention to this ideologically and practically.

When the dual exchange rate system was created, China began to devalue the official exchange rate, which was 1.55 yuan per U.S. dollar in January 1981. By the end of 1984 the official exchange rate had reached 2.8 yuan per U.S. dollar, and the internal settlement rate had been abolished.

In 1979 the government approved the expansion of the system to the non-trade sector.

There were also separated retention rates applying to certain new types of trade. For example, the retention rate for fees from processing and assembly of foreign components was 30 percent of all earnings.

The rate for Guangdong and Fuijian was raised to 30 percent, and the rates for Inner Mongolia, Xianjiang, Guangxi, Yunnan, Guizhou, and Qinghai were raised to 50 percent.

In 1985, after a sharp fall in the foreign exchange reserves, the government imposed very restrictive controls on the use of retained foreign exchange and froze a large share of the retained earnings. The controls were removed in 1988.

As noted by Lardy (1992), some exporters failed to utilize all their retained foreign exchange because they were unable to obtain licenses for the imports they desired.

In February 1993 the government again imposed a price cap of 8 yuan per U.S. dollar on swap centers in an attempt to stem the year-long fall in the yuan. That price ceiling was removed in May 1993.

For details of the priority list, please refer to World Bank (1994).

From January 1994 to July 1996 foreign-funded enterprises continued to buy and sell foreign exchange through the swap markets.

Andrew Walder, “Local governments as Industrial Firms: An Organizational Analysis of China’s Transition Economy,” American Journal of Sociology, Vol. 101, No. 2 (September 1995), pp. 263-301.

Gary H. Jefferson, Thomas G. Rawski, and Yuxin Zheng, ”Chinese Industrial Productivity: Trends, Measurement Issues, and Recent Developments,” Journal of Comparative Economics, Vol.**, No. ** (October, 1996), p. **.

For example, the boards of wholly state-owned companies have no power to approve mergers, break-ups, dissolutions, increases or decreases in a firm’s capital, or the issuance of bonds. All of these powers are specifically reserved for the state.

State Statistical Bureau, Chinese Statistical Yearbook 1994 (Beijing: Statistical Publishing House, 1994), p. 83.

Barry Naughton, “China’s Macroeconomy in Transition,” The China Quarterly, No.144, December 1995, p. 1,091.

The data on economic growth in the former Soviet Union and in Eastern Europe are from European Bank for Reconstruction and Development, Transition Report 1995 (London: European Bank for Reconstruction and Development, 1995) as cited in Anders Aslund, Peter Boone, and Simon Johnson, “How to Stabilize: Lessons from Post-Communist Countries,” Brookings Papers on Economic Activity, No. 1, 1996, pp.217-291. It should be noted that most observers believe that these data, which are based on official data from each of the countries in question, overstate the decline in real output.

State Statistical Bureau, various statistical communiques. Note, however, that many western studies suggest that the official data overstate the rate of growth, perhaps by as much as one to two percentage points per year.

The income level below which a person is said to be living in absolute poverty is based initially on the income necessary to purchase a subsistence diet of 2,150 calories per day. It is further assumed that in rural areas expenditure on food absorbs three-fourths of all income. World Bank, China: Strategies for Reducing Poverty in the 1990s (Washington, DC: The World Bank, 1992).

China’s share of world trade in 1977 was six-tenths of one percent. Nicholas R. Lardy, China in the World Economy (Washington, D.C.: Institute for International Economics, 1994), p. 2. Chinese exports of $148.77 billion were 3.3% of 1995 world exports of $4,475 billion dollars.

Nicholas R. Lardy, “China’s Foreign Trade,” The China Quarterly, No. 131 (September 1992), pp. 691-720.

International Monetary Fund, International Capital Markets: Developments, Prospects, and Policy Issues (Washington, D.C.: International Monetary Fund, 1995), p. 42.

For a survey of the work completed on this topic through the early 1990s see Peter Harrold, “China: Enterprise Reform Strategy,” unpublished manuscript, August 27, 1993.

The World Bank Resident Mission in China, Economic Note, February 1997, p. 14.

Harry Broadman, Meeting the Challenge of Enterprise Reform, World Bank Discussion Paper No. 283. (Washington, D.C.: The World Bank, 1995), p. 12

Two main explanations have been advanced. One is that enterprises systematically understate (overstate) their profits (losses) in order to avoid taxes. Another is that enterprise managers authorize wage increases far in excess of the growth of labor productivity, undermining the financial position of these firms.

Zhou Tianyong, “Debt Restructuring During the Ninth Five Year Plan Feasible,” Gaige, September 1995, pp. 30-36 in FBIS-CHI December 8, 1995.

Report on 1993 Final Accounts and the 1994 State Budget.

The decline in the share of bank loans as a percent of GDP since 1991-92 is due to the rapid rise of lending by non-bank financial intermediaries. These institutions lie outside the scope of this study. Their loans expanded from about RMB 5 billion in 1978 to RMB 1.2 trillion by 1996. In 1996 total loans outstanding, by banks and non-bank financial institutions combined, were the equivalent of almost 90 percent of GDP.

The People’s Bank of China, China Financial Outlook 1994 (Beijing: China Financial Publishing House, 1994), p. 95.

Chen Yuguang, “Banking Enterprise Debt Crisis and Inflation,” Caimao jingji (Finance and Trade Economics), No. 6, 1995 (June), translated in FBIS-Chi 95-158, places enterprise bad loans and dead accounts in 1993 at RMB 400-500 billion, 30 percent of the loans outstanding at the end of that year. Wang Xiaozhong, “Bold, New Moves Needed to Make Headway,” China Daily, January 9, p. 4 places bad debts at nearly 1 trillion RMB in 1994, 40 percent of the country’s total bank loans. These estimates are roughly consistent with the estimate mentioned earlier that RMB 1,215 billion in loans to state-owned enterprises would have to be forgiven to reduce the debt to a level that could be financed with present levels of profitability.

Ultimate recovery from the liquidation of enterprises may well be less than one-half of the value of loans. A survey of firms that had been declared bankrupt and liquidated in eight provinces by the end of June 1995 showed that their total liabilities were two and one-half times their assets. In the eight provinces there were a total of 130 firms that had declared bankruptcy, of which 70 hd been liquidated. The survey covered 59 bankrupt enterprises, of which 38 had been liquidated. Zhonggu Xinwen She December 18, 1995 in FBIS-CHI December 19, 1995, p. 62. Moreover, it is likely that the real situation is much worse since in China measured liabilities of enterprises usually exclude unfunded pension liabilities for both current workers and those that have already retired. The slow pace of bankruptcy in China in part reflects the inability to allocate the proceeds of liquidation among competing claims, especially banks and retirees.

People’s Bank of China, China Financial Outlook 1995 (Beijing: China Financial Publishing House, 1994) , p. 90.

Hong Kong: A Study in Economic Freedom, by Alvin Rabushka. University of Chicago Graduate School of Business: Chicago, 1979, pp. 18 20.

Speech by the Chief Secretary, The Honorable Mrs. Anson Chan, CBE, JP, to the 30th International General Meeting of the Pacific Basin Economic Council in Manila. May 19, 1997.

Perfidious Albion, by William McGurn. Washington, D.C: Ethics and Public Policy Center, pp. 27 28.

Laissez faire retreat: SAR to lift business role: Tung,” by Baby Sung. The Hongkong Standard. May 28, 1997, page 1.

"Chinese President horrified by extent of corruption," AFP, May 15, 1997.

"Bejing rules: China's state-owned enterprises," The Economist. May 3, 1997.

What China Must Do," by Woo Wing Thye. Far Eastern Economic Review, May 29, 1997, p. 34.

Hong Kong Trade Development Council, Hong Kong & China Economies, April 1997.

Ibid.

"Capitalist Roader," Far Eastern Economic Review. January 9, 1997, p. 5.

Made By Hong Kong, edited by Suzanne Berger & Richard K. Lester. Oxford University Press: Hong Kong, 1997, p. xii.

“You Can Go Home Again,” by William McGurn. Far Eastern Economic Review. Special Hong Kong Commemorative Issue. June 1997.

The Hong Kong Advantage, by Michael J. Enright, Edith E. Scott and David Dodwell. Oxford

University Press: Hong Kong, 1997, page 19.

AFP, op cit

"Laissez-faire retreat: SAR to lift business role: Tung," The Hong Kong Standard, May 28.