For years Chinese factories failed to enroll workers onto the country’s social insurance scheme. But things could be about to change. From January next year responsibility for collecting payroll taxes will pass from the local social security bureau to local tax authorities, who have the capability and corporate tax data to ensure much better levels of compliance.

Social insurance is often the only safety net for workers with few savings or protections and, by not joining, workers also miss out on employers adding into their pension pot. Social insurance covers workplace injury, retirement, unemployment, maternity cover and medical insurance.

Higher social insurance enrolment means factories benefit from a healthier, more stable workforce that is less likely to seek employment elsewhere. In recent years technological progress in China’s apparel industry has not been matched by labour management improvements, and skilled workers have been left without security for their health and their future. Compulsory social insurance will go some way to solving this problem.

Getting workers on-board

For factories and their customers, 100% enrolment rates will bring three short term challenges.

The first is higher short-term labour costs, since total social insurance contributions by employers can add up to nearly 30% of payroll. Factories may pass these on to customers or attempt to claw the cost back from workers in other ways that could create other labour rights issues.

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The second challenge will be overcoming worker objections. Despite recent improvements, complex payment structures, difficult claimant systems, and problems transferring pension pots to other provinces put workers off investing up to 8% of their salary into the scheme. This can be overcome with targeted communication with workers, including making sure factory staff can answer detailed questions about payments and benefits.

The third challenge will be managing the administration workload, and the increase in support needed for workers who will find the complex system difficult to navigate. Upgrading management systems for social insurance can be combined with improving communication with workers about social insurance.

Brands and retailers sourcing from China have only months left to prepare for this change, but few are actively working with their factories to manage this transition to a new tax-era.

China’s social insurance scheme

1: Pension

If payments have been made for 15 years, workers receive a pension based on the amount saved in their personal account and the local average wage.
2: Medical insurance
Out-patient treatment has an annual payout limit that varies by location based on worker contributions, while in-patient treatment is paid for from a government pot.
3: Work-related injury insurance
Treatment for work-related injuries are covered, workers do not use their medical insurance limit, or have to contribute towards the cost.
4: Unemployment insurance
Employees must pay in for one full year in order to claim, must not voluntarily leave work; and unemployment must be registered.
5: Maternity insurance
Includes medical treatment for childbirth and a monthly allowance during maternity leave.
Social insurance challenges

Local government sets social insurance targets

Currently, local officials ask factories to meet unofficial worker enrolment percentages according to what they think is realistic, and their own tax revenue goals. How this will change with the tax bureau in charge is yet to be seen.

There are “hidden” benefits for workers to join social insurance
In some cities, other local policies are tied to enrolment in social insurance; for example qualifying migrant workers’ children to attend local schools.

Social insurance is not worthwhile for all
After workers understand the benefits of social insurance, they generally want to join the scheme. However, for some older workers covered by good injury and healthcare insurance, social insurance may not be worthwhile.

Factories use social insurance to attract workers, but not to keep them
Some factories include social insurance in their job advertising as a way to attract new workers. However, few factories think of social insurance as a way to encourage workers to stay longer.

Factories do little to help workers with social insurance
Factory managers consider social insurance to be a large cost, and an administrative burden, and find it difficult to keep up with local and national policies. They don’t help workers join social insurance or help with managing or transferring benefits.

About the author: Tristan Edmondson is a senior partner at business management consultancy Carnstone. He has developed and implemented responsible sourcing programmes and projects for pharmaceutical companies, apparel brands, construction firms, supermarkets and technology companies. He lived in China for eight years – establishing Carnstone’s Shanghai office in 2014 – and is now based in London.