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China's social security shortfall nears $100bn

Pension and health insurance funds require massive government assistance

Frustration with the high cost of medical care in China could create hurdles to raising premiums or cutting benefits to stabilize the insurance system.

BEIJING -- China's pension, health insurance and other social programs saw shortfalls expand 70% in 2016 as the country's population grew older, foreshadowing a cost surge that could put a heavy strain on government finances.

Payouts from seven funds powering the programs exceeded the amount paid in by 605.8 billion yuan ($96.5 billion) in 2016, according to the Ministry of Finance. That is 250 billion yuan more than the year earlier.

Though receipts by these funds exceeded expenses in 2011 and 2012, that balance tipped into the red in 2013 and has remained there since, forcing the government to close the gap. Shortfalls have grown year after year as the number of beneficiaries has grown. More people are drawing pensions as the population ages, and enrollment in social programs is rising among groups such as farmers, freelancers and migrant workers in urban areas.

Of China's seven funds, the basic pension fund for company workers, supported by employee contributions, is particularly bad off, with a shortfall of some 300 billion yuan in 2016, compared with 110 billion yuan in 2015. In 2011, 3.16 workers were contributing to the fund for every one person drawing a pension. By 2016, that had fallen to 2.8 to 1, as China's one-child policy, in place through 2015, slowed the flow of new enrollment. At the end of 2016, the fund had enough cash to pay pensions for 17.2 months. That is 2.3 months less than five years prior.

The severity of the situation varies geographically, as pensions are administered on the provincial level. In seven Chinese regions -- the provinces of Hebei, Liaoning, Jilin, Heilongjiang, Hubei and Qinghai, as well as Inner Mongolia -- pensions experienced a shortfall even when government assistance was factored in. Heilongjiang's reserve fund for paying pensions has been exhausted. The stagnant economy there has pushed many young people to move elsewhere, compounding the impact of population aging.

A residency-based health insurance fund, paid into by freelancers and migrant workers, has the largest deficit of the seven. Expenses exceeded receipts by 404.6 billion yuan in 2016, around 60 billion yen more than in 2015. This insurance program depends on government assistance for three-quarters of its funding, due to the unsteady incomes of many enrollees.

Overall, China's central and regional governments provided roughly 1.1 trillion yuan to cover social security shortfalls in 2016 -- around 80 billion yuan more than in 2015, and double the 2011 figure. Such assistance accounts for 6% of total government expenditures, a figure that is expected to surge in the future. Births declined in China from 2016 to 2017, while the number of people over 60 grew to account for 17.3% of the population.

For foreign companies operating in China, the deteriorating fiscal state of social security could mean higher costs if social insurance fees included in employee compensation go up.

China announced in November that it would transfer shares in state-owned companies to the country's social security funds, supplementing receipts with payments such as shareholder dividends in a bid to shore up these programs' finances. If that does not do the job, China could weigh raising the age for pension eligibility and cutting health insurance benefits. Premiums could also be increased, a step that would add to companies' labor costs.

But resistance from the growing elderly population and urban residents fed up with already-high health care costs and crowded clinics could stymie attempts at reform.

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