Introduce Old Age Insurance in China and provide examples from Guangzhou

Historically, old-age insurance in China was divided into four categories：

• Basic Old-Age Insurance for Employees of Government Departments and Public Institutions,
• Basic Old-Age Insurance for Enterprise Employees,
• Social Pension Insurance for Urban Residents, and
• New Rural Social Pension Insurance (for rural residents).¹

In 2014, Social Pension Insurance for Urban Residents and New Rural Social Pension Insurance were merged and implemented as Basic Old-Age Insurance for Urban and Rural Residents². In 2015, Basic Old-Age Insurance for Employees of Government Departments and Public Institutions was merged with Basic Old-Age Insurance for Enterprise Employees to form Basic Old-Age Insurance for Urban Employees .³
This article only discusses these two merged categories of old-age insurance.

Basic Old-Age Insurance for Urban and Rural Residents

Basic Old-Age Insurance for Urban and Rural Residents is intended for individuals aged 16 or over who are neither student nor employees. The pension benefits are comprised of two components: the Basic Pension and the Individual Account.

• The Basic Pension is administered by the local government with the central government defining a minimum standard.

• The Individual Account is comprised of three components: Individual Contributions, Collective Subsidies and Government Subsidies.

  • Individual Contributions refer to the financial contributions made to the Individual Account, either on a monthly or annual basis. The local government establishes different grades for individual contribution rates.
  • Collective Subsidies are provided by local village or community collective economic organisations, or other social organisations.
  • Government Subsidies are provided by the local government.

These three contributions are credited to the insured person’s individual account.

Conditions for receiving pension benefits

Individuals who have reached the age of 60 and have made contributions totalling 15 years or more are eligible to receive pension benefits. The pension benefits are paid monthly, and consist of the Basic Pension, with remainder of the Individual Account divided by an allocation coefficient, which is typically 139.

An example for residents of Guangzhou

Table for Contribution Rates and Projected Pensions for the Guangzhou Urban and Rural Residents’ Pension Scheme (2021-2026)⁴

Notice: Since 1 January, 2020 the Basic Pension in Guangzhou has been 237 yuan per month.

Calculation of the Pension Replacement Rate

The Pension Replacement Rate is defined as the individual pension entitlement divided by pre-retirement earnings.

It measures the effectiveness of a pension system.⁵ It is generally recommended that a rate of between 75% and 85% be used as a guideline for determining adequate retirement income.
As the insured individuals are not employees (employees must be insured for the Old-Age Insurance for Urban Employees⁶), and official data on their earnings is lacking, it is recommended that their pre-retirement earnings for these individuals be replaced with per disposable income.
As demonstrated in the 2024 Guangzhou statistical data⁷. the per capita annual disposable income of urban residents is 83,436 yuan, whereas that of rural residents is 40,914 yuan.
The calculation of the Pension Replacement Rate is based on the average pension.

• The preliminary estimate of the replacement rate for urban residents is as follows:

• The preliminary estimate of the replacement rate for rural residents is as follows:

As the Collective Subsidies and the Government Subsidies are not mandatory and inflation is not taken into account, the actual rate could be differ.

Basic Old-Age Insurance for Urban Employees

Basic Old-Age Insurance for Urban Employees applies to employees of enterprises and the government, as well as to individuals working for individual businesses and in flexible employment.⁸ Nevertheless, the two types previously referenced are mandatory.
Insurance contributions are shared between employers and employees. The employer contributes 16% of the total employee payroll⁹, while the employee contributes 8% of their salary, paid by the employer on their behalf. If an employee’s salary exceeds 300% of the previous year’s average salary of employees in the local area, it is treated as 300% of the average salary for calculation purposes. Conversely, if an employee’s salary is lower than 60% of the average salary, it is treated as 60% of the average salary for calculation purposes.¹⁰ However, different provinces have different standards for the basic and upper contribution bases.
The employee’s contribution is credited to their individual account.

Conditions for receiving pension benefits

Individuals who have reached the statutory retirement age( 60 for the male and 50 or 55 for the female) and have made contributions totalling 15 years or more are eligible to receive pension benefits.
Notice: According the “Decision on the Implementation of a Gradual Increase in the Statutory Retirement Age”¹¹, the statutory retirement age for male employees will gradually increase to 63 years old, while that for female employees will gradually increase to 55 and 58 years old, starting from 1 January 2025. The minimum contribution period for employees will gradually increase to 20 years from 1st January 2030.
The pension benefits are paid monthly and comprised of two component: Basic Pension and Individual Account.¹²

• The Basic Pension is paid by the local government. Different provincial governments have different ways of calculating the Basic Pension.
• The Individual Account is calculated by dividing the insured person’s individual account balance by an allocation coefficient.

Examples for employees of Guangzhou

The Basic Pension in Guangzhou is calculated based on the average salary of employees in Guangdong province. The following samples are to be considered:

• Salary equivalent to 60% of the provincial average for employees,
• salary equivalent to 100% of the provincial average for employees, and
• salary equivalent to 300% of the provincial average for employees.

The calculation of the Basic Pension in Guangzhou is slightly complicated. In 2021, the Guangdong People’s Government published a document about the calculation method for the Basic Pension from 2021 to 2025¹³. It appears that the basic old-age insurance fund is to be overseen by the national government rather than the provincial authorities.¹⁴
According to the document, the calculation of the Basic Pension for individuals retiring between 2021 and 2025 is as follows:

Where:

• P = Basic Pension
• B = Pension Calculation Base which is the average salary of Guangdong employees in the previous year.
• I = Average Contribution Index which is the provincial average salary of employees in the previous year divided by the average salary of insured employees.
• Y = Contribution Years which are the pension insurance contribution period.

Guangdong Pension Calculation Base (2021–2025)¹⁵

In order to calculate the Individual Account, it is assumed that the insured pension contributed from 2006 to 2020.

Guangdong Average Monthly Salary (2006–2020)¹⁶

Notice: The average salaries from 2006 to 2016 are taken from Guangdong Statistical Yearbook, and do not take into account the differences in salaries between non-private and private enterprises.

Annual Contributions (8% of salary) from 2006 to 2020

Salary equivalent to 60% of the provincial average for employees

The Basic Pension for employees who have contributed for 15 years and whose average salary was equivalent to 60% of the provincial average salary is calculated as follows:

The monthly benefits from the Individual Account is calculated as follows:

or

The pension replacement rates are as follows:

or

Salary equivalent to 300% of the provincial average for employees.

The Basic Pension for employees who have contributed for 15 years and whose average salary was equivalent to 300% of the provincial average salary is calculated as follows:

The monthly benefits from the Individual Account is calculated as follows:

or

The pension replacement rates are as follows:

or

Salary equivalent to the provincial average for employees

The Basic Pension for employees who have contributed for 15 years and whose average salary was equivalent to the provincial average salary is calculated as follows:

The monthly benefits from the Individual Account is calculated as follows:

or

The pension replacement rates are as follows:

or

The rate may differ for the policies in different provinces.