The multi-track pension system in urban China: an overview

Among the three pension schemes in urban China, URSPI is newly installed, in 2012, while PGPI and WOI have a long history that can be traced back to the socialist era. Moreover, PGPI and WOI are more comparable with each other because they both concern employees. In light of these distinctions, we first introduce and compare PGPI and WOI, followed by the description of the basic characteristics of URSPI.

In urban China, a formal pension system was launched in the 1950s (1951 for state-owned enterprises and 1955 for civil servants and public institution employees). As part of the comprehensive work unit system,Footnote ³ this pension scheme for public institutions was non-contributory, but with defined benefit (Wu, Reference Wu2013; Dong and Wang, Reference Dong and Wang2016): it was funded entirely from the government budget, and the pension benefits depended on the pensioners’ salaries during their working years. At this point, there was no WOI or URSPI.

The distinction between PGPI and WOI was established in the late 1980s and the 1990s, when China started to transit from the central planning economy to the market-oriented economy (Dong and Wang, Reference Dong and Wang2016). One reform measure of this wave of marketisation is to establish a unified pension scheme for enterprises of different ownerships. After some pilot projects, an old-age insurance was formally implemented by the State Council in 1997. In this study, we follow the national standard of social insurance terminology and call it WOI. According to WOI, the pension scheme is contributory, consisting of a mandatory pay-as-you-go basic pension, a mandatory contribution from employees’ personal account and a voluntary enterprise-based pension (Chow and Xu, Reference Chow, Xu and Finer2003). Enterprise employees can receive pension benefit only after making 10–15 years’ contribution, and the level of pension benefits is determined not by the salaries before retirement, but by the city-specific average salaries before one retires.

Relative to these initiatives for enterprises, however, the pension scheme for government and public institutions, that is, PGPI, was largely untouched in the wave of reform in the late 1980s and the 1990s. It preserves the non-contributory defined-benefit model. Being still fully subsidised by the government budget, the employees of government and public institutions can receive pension benefits after retirement, with the level of benefits to be based on the pensioner's previous salaries. This pension scheme, clearly, constitutes an arresting contrast with that of WOI (Zheng, Reference Zheng2015).

Specifically, the foremost contrast between PGPI and WOI concerns the level of pension benefits. As discussed above, the pension benefits are computed based on the pre-retirement salaries for PGPI, but on the pre-retirement city-level average salaries for WOI. Since salaries of public-sector employees are usually higher than the average level, the pension benefits of PGPI are accordingly higher than those of WOI. For instance, the monthly pension benefits for enterprise retirees, public institution retirees and government retirees were 455, 634 and 656 Yuan, respectively, in 1998. The extent of disparity deteriorated to be 734, 1,369 and 1,534 Yuan, respectively, in 2005 (Zhang, Reference Zhang2012).Footnote ⁴ This pension benefit disparity suggests a considerable gap of replacement rate between PGPI and WOI. For PGPI, the replacement rate is usually over 80 per cent, but that for WOI, according to the report released by the government, was only around 67 per cent in 2014.Footnote ⁵

In addition to pension benefits, the two tracks of pension schemes also differ greatly in the extent of pension security and stability, where PGPI is undoubtedly much more advantaged than WOI. Indeed, the pension for public employees is fully funded from the government budget, so the employers barely have financial pressures. Also, because of the publicity nature, the employers are more likely to abide by the legal requirements that protect the welfare of employees (Wu, Reference Wu2013). Compared with public institutions, it is not uncommon for enterprises to try to avoid paying for employees’ pensions, despite such contributions from enterprises being required by law. This is due partly to the cost-saving consideration and partly to the precarious economic situation of enterprises in the market. As a result, it comes as no surprise that the coverage rate differs greatly between PGPI and WOI, where the coverage rate of PGPI can be 100 per cent, while that for WOI is lower than 50 per cent (Salditt et al., Reference Salditt, Whiteford and Adema2008; Zhang, Reference Zhang2012).

The disparities in pension stability are also embodied by the pension adjustment mechanism (e.g. Guo, Reference Guo2008; Cai and Cheng, Reference Cai and Cheng2014). According to current practices, the adjustment of pension benefits of PGPI is made on the basis of the salary growth rate of the currently employed, while the pension adjustment method of WOI is to increase pension income by a certain percentage of the monthly average pension income of all enterprise retirees.Footnote ⁶ Understandably, the average pension income is lower than the average salaries of the currently employed, so the adjustment de facto enlarges the gap of pension benefits between PGPI and WOI (Zheng, Reference Zheng2015).

In addition to PGPI and WOI, a third type of pension scheme that was launched in urban areas in 2012 is URSPI. Unlike PGPI and WOI, URSPI is the insurance programme for non-employees in urban areas who are 16 years old and over. URSPI is composed of individual contributions and government subsidies. The level of individual contributions, as voluntarily chosen by the pensioners, varies from 100 to 2,000 Yuan per year. Pension benefits of URSPI consist of two parts. One part refers to the basic pension, which is 55 Yuan per month. The other part depends on the savings amount of the personal account, and the monthly pay is the total savings amount divided by 139. Clearly, the pension benefits from URSPI are rather limited, much less than that of either WOI or PGPI. However, due to the partial support from the government, URSPI is a rather stable type of old-age insurance.

In summary, there are three types of pension schemes in urban China which provide differential extents of support for pensioners, which have great implications for older people's subjective wellbeing, as discussed in the following section.Footnote ⁷

Hypothesis and mediators

Based on the discussions in the previous section, the differences in the three pension schemes imply disparities in terms of both the amount of pension benefits and the extent of security. In this regard, there are good reasons to expect the relative (dis)advantages of pension schemes can be convertible to some form of stratification of pensioners’ life satisfaction. Among these three types of pension, PGPI is undoubtedly advantaged over the other two, and URSPI, due to its limited support, could be inferior compared with WOI. Hence, we hypothesise:

• • Hypothesis 1: Other things being equal, the average level of life satisfaction is highest among the pensioners of PGPI, followed by those of WOI, and lowest among the pensioners of URSPI.

If this hypothesis holds, the next research question would concern the potential mediators between pension schemes and life satisfaction. Two mediators are examined in this study. The first mediator is the monetary pension income. In light of the strong reliance on pension income for maintaining wellbeing among urban older residents, we suspect that the disparities in pension benefits by pension schemes serve to bridge pension scheme type and stratification of life satisfaction.

• • Hypothesis 2: The differential monetary pension benefits are a mediator between pension schemes and life satisfaction.

Arguably, Hypothesis 2 follows a resource-centred perspective that approaches the inequality of subjective wellbeing of older urbanites by setting focus on the differential amount of accessible resources. However, the three pension schemes distinguish from each other in terms of not only monetary resources, but also the extent of stability and certainty. In this regard, previous studies have shown that a stable income source, not the amount of income per se, can be an important mechanism to nurture self-efficacy – a kind of optimistic belief in ‘causality, agency, or control’ (Gecas, Reference Gecas1989: 293). Self-efficacy subsequently serves as a desirable disposition that gives rise to the status of life satisfaction by increasing one's sense of competence and autonomy (Deci and Ryan, Reference Deci and Ryan2000). Altogether, we propose the following hypothesis:

• • Hypothesis 3: The differential of self-efficacy is a mediator between pension schemes and life satisfaction.

It is necessary to mention that self-efficacy stands for a different construct from life satisfaction, where the former emphasises individuals’ agency, mastery and control, while the latter concerns an overall evaluation and judgement of life status.

Research design and methods

Method

Given the ordered categorical nature of the dependent variable, we use the ordered logistic regression model to examine the relationship between the type of pension one is subject to and the level of life satisfaction, net of the other control variables.

Following the ordered logistic regression model, we conducted the mediation analysis using the method proposed by Karlson et al. (Reference Karlson, Holm and Breen2012) (Karlson, Holm and Breen method (KHB)). One merit of the KHB method is to circumvent the heterogeneous error-variance problem in coefficient comparison between generalised linear models (Mood, Reference Mood2010). To see this, a latent continuous measure of life satisfaction is denoted by LS* and two models are fitted, as follows:

(Model 1)$${\rm L}{\rm S}^{\rm {^\ast}} = {\rm \alpha} _{\rm F} + {\rm \beta} _{\rm F}{\rm Pension\;\ scheme} + {\rm \gamma} _{\rm F}{\rm Mediator} + {\rm \delta} _{\rm F}{\rm Covariates} + {\rm \epsilon} _1. $$

(Model 2)$${\rm L}{\rm S}^{\rm {^\ast}} = {\rm \alpha} _{\rm R} + {\rm \beta} _{\rm R}{\rm Pension\;\ scheme} + {\rm \delta} _{\rm R}{\rm Covariates} + {\rm \epsilon}_2.\, $$

Model 1 is the full model and Model 2 is the reduced model, as noted by the subscripts ‘F’ and ‘R’, respectively. If Models 1 and 2 are the ordinary least-squares (OLS), the mediation effect of the mediator would be captured by the difference between β_R andβ_F, that is, the change of coefficient before and after taking into account the mediator (MacKinnon et al., Reference MacKinnon, Fairchild and Fritz2007). However, this approach cannot be used for the generalised linear model due to the heterogeneous error-variance problem. Specifically, the latent variable LS* is unobservable, but measured with an ordered categorical variable (the observed variable of life satisfaction). In this case, the estimated coefficients – denoted respectively by b _R and b _F – are the ratio of the real coefficients and the variance of the error terms (denoted respectively by σ _R and σ _F), as in

$$b_R = \displaystyle{{{\rm \beta} _{\rm R}} \over {{\rm \sigma} _{\rm R}}}\,{\rm and}\,b_F = \displaystyle{{{\rm \beta} _{\rm F}} \over {{\rm \sigma} _{\rm F}}}.$$

Therefore, direct comparison between b _R and b _F is inappropriate since σ_R is usually not equal to σ_F.

To resolve this problem, the KHB method starts from regressing the mediator on the predictor and covariates, and then uses the model residual instead of the original observed measure to fit Model 1, as in Model 3:

(Model 3)$${\rm L}{\rm S}^{\ast} = {\tilde {\rm \alpha}} _{\rm R} + {\tilde {\rm \beta}} _{\rm R}{\rm Pension} \;{\rm scheme} + {\tilde {\rm \gamma}} _{\rm R}{\rm Mediato}{\rm r}_{{\rm residual}} + {\tilde {\rm \delta}} _{\rm R}{\rm Covariates} + {\rm \epsilon}_3. $$

The variances of ε₃ and ε₁are equivalent (i.e. denote the variance of ε₃ to be ${\tilde {\rm \sigma}} _{\rm R}$, so that ${\tilde {\rm \sigma}} _{\rm R}\,$  σ_F). Also, ${\tilde {\rm \beta}} _{\rm R}\; $=β_R. Hence, we have

$${\tilde b}_{\rm R}-b_{\rm F} = \displaystyle{{{{\tilde {\rm \beta}}} _{\rm R}} \over {{{\tilde {\rm \sigma}}} _{\rm R}}}-\displaystyle{{{\rm \beta} _{\rm F}} \over {{\rm \sigma} _{\rm F}}} = \displaystyle{{{\rm \beta} _{\rm R}-{\rm \beta} _{\rm F}} \over {{\rm \sigma} _{\rm F}}} = \displaystyle{{{\rm \gamma} _{\rm F}} \over {{\rm \sigma} _{\rm F}}}b$$

A test statistic for the null hypothesis of ${\tilde b}_R-b_F = 0$ can be constructed using the delta method, and we have

$$\sqrt N ({\tilde b}_R-b_F)/\sqrt {\left( {\displaystyle{{\gamma_F} \over {\sigma_F}},b} \right){\bi \Sigma} \left( {\displaystyle{{\gamma_F} \over {\sigma_F}},b} \right){\rm ^{\prime}}} \sim N\lpar {0,{\rm \;} 1} \rpar ,$$

where ${\bf \Sigma} $ is the covariance matrix for γ_F and b. If the test statistic is significant, the mediation effect exists. In this study, the estimation of ${\tilde {\rm b}}_{\rm R}\; $ and b _F is based on the ordered logistic regression model.

Missing data were handled using multiple imputation, but note that the substantive conclusions do not change before and after imputation.

Concluding remarks

This study examines the implications of the multi-track pension system in urban China for the life satisfaction of older residents. By analysing the urban sample of CLASS 2014, we find a significantly higher level of life satisfaction among those receiving PGPI benefits relative to those who have access to the pension benefits of WOI or URSPI. Further analyses suggest that this association is mediated not through the resource-based factor such as the amount of pension benefits, but through the non-material dispositional factor of perceived self-value for the society.

Following the resource-centred line of thinking, previous studies examine the pension system in urban China by setting focus on the disparities in material and economic resources. This study, however, suggests that monetary disparities driven by pension scheme difference is not so critical for older people's psychological wellbeing. What matters are dispositional factors related to the institutionally stratified pension stability and security, which is a non-monetary social force that affects the extent to which older adults have confidence in their everyday existence, live a socially meaningful life and possess the ability to cope with the unpredictability of everyday life. In a sense, this is especially important for societies like China, where shrinking family support and limited public support are insufficient to compensate for the wide range of challenges of ageing that negatively affect their sense of security, e.g. the decline of health status, change in intergenerational relations, dwindling social networks and so forth.

Theoretically, the highlighted non-material stratification across pension tracks responds to the capability approach of Sen (Reference Sen1999). According to this theoretical approach, an institutional system that is designed for maintaining and promoting people's wellbeing is not a straightforward function of resource possession, but depends more on whether or not this system enables people to act or function. One important enabling and functioning factor, in this regard, is self-perception of individual values that is examined in this study. In this case, the pension scheme distinction relates to the disparity of individual capabilities in Sen's sense, and this disparity subsequently stratifies older people's life satisfaction.

Some limitations of this study should be acknowledged. The cross-sectional design of CLASS determines that the detected relationship between pension scheme and life satisfaction, strictly speaking, is correlational instead of causal (Hu and Mustillo, Reference Hu and Mustillo2016). To ascertain a causal link, more data are needed. For instance, more could be learned if longitudinal data exist to allow us to look at people before and after pension coverage begins, and look at the related changes in life satisfaction between those two periods. Also, the measures of the key variables can be refined. For instance, a more nuanced distinction between civil servants and public institution employees can reveal the subtle variations within the public sector. More importantly, more background variables related to employment history are needed to show the net link between pension scheme and subjective wellbeing.

With that said, this study, for the first time, explores the socio-psychological consequences of the multi-track pension system in urban China. Our findings, although being based on the case of one country, contribute to a broader argument about the (in)adequacies of private welfare systems to function as equivalents to public welfare systems, thus being enlightening for scholars and policy makers of other societies.