Abstract:

An anomaly in China' s Urban Employees'  Basic Endowment Insurance System lies in the fact that in half of China' s provinces, enterprises would be experiencing revenue expenditure imbalance when financial subsidy is deducted from the basic endowment insurance fund despite ever greater payment power due to rapid fund increase. The great difference among provinces in financial situation can be explained in terms of historical liabilities, system maintenance rate, economic development level, and spatial distribution of labor mobility. Overall planning of the fund at the national level would be the ultimate solution for this asymmetry in half of China' s provinces. It would help to cover current payment shortfall in 14 provinces because the shortfall can be "internalized" by the rapid increase and unprecedentedly strong payment power of the fund itself. However, overall planning at the national level might entail moral hazard and adverse choice, thus incurring major financial risks for the endowment insurance system. That is why planning at the county or city level remains the standard practice while provinciallevel planning is implemented only in four to five provinces. Based on this understanding, the imbalance in half of China's provinces can only be redressed with financial transfer payment, which would result in steady increase of the insurance fund on the one hand, and low investment return for the financial capital on the other, due to the outmoded investment system and low rate of return. Therefore, it is urgent to reform the investment system of the endowment insurance fund.