The gaping hole in social security embarrasses the country that is the symbol of communism: 20% of workers do not contribute to the public pension system.

Social security is a serious problem in a world power characterized by a significant state presence in almost every aspect of the economy. Despite many market reforms over the last half-century, the People's Republic of China has been a communist economy since 1949 , with the Communist Party of China governing the country alone . Within this economic order—that of central planning —and the importance this dogma gives to the public sector, the size of the informal economy in the country and one of its most direct consequences: the gap in social security contributions may be surprising. The gap has become so worrying that Beijing has begun to take action.

Starting September 1 , Chinese companies and their employees will no longer be able to avoid paying social security contributions . On paper, social security contributions have been mandatory since the late 1990s. However, enforcement was previously weak, and lower courts often allowed companies and employees to mutually agree not to make contributions. From now on, these exemptions will be considered invalid.

China's Supreme People's Court recently issued a landmark judicial interpretation establishing that any agreement between employers and employees to waive social security contributions will be legally invalid as of September 1, 2025. Furthermore, employees will be able to seek compensation upon termination of their employment if the employer has failed to pay social security contributions.

This measure will affect a large number of workers and companies. Analysts at Capital Economics estimate that around 480 million workers are required to pay social security contributions. However, in practice, around 20% of them do not contribute to the public pension system, and the percentage is even higher for other categories within social security (unemployment, sickness, or maternity contributions).

The court presented its decision as a protection of workers' rights and did not explicitly acknowledge the risks. The ruling "effectively protects citizens' fundamental rights, such as the right to social security, disperses occupational risks for employers, and actively addresses the problem of an aging population," it stated.

More than 20 million workers will retire each year for the next decade, and a historically low birth rate means fewer people are entering the workforce to make contributions to support retiree benefits. A 2019 study by the Chinese Academy of Social Sciences projects that the main state pension fund , which operates on a pay-as-you-go model, will run out of money by 2035. Beijing can make pension payments using state funds, but the situation worries officials.

In China, social security includes pensions, medical care, unemployment benefits, occupational accident benefits, and fertility benefits. The highest contributions are for pensions and medical care, with employers typically contributing 16% and 8% , respectively, of a worker's reference salary. The exact amounts vary depending on local government regulations, economists Michelle Lam and Wei Yao explain in a report by Société Générale (SG).

However, both analysts explain, these payments are not strictly enforced , especially among SMEs: "It is not uncommon for employers and employees to agree to waive employer social security contributions due to the high burden on employers or because employees prefer to receive a higher salary." In fact, they add from SG, the social security contribution rates of Chinese companies are relatively high compared to OECD countries. To prove this, only 379 million people participated in the employee pension plan (excluding retirees), compared to a total of 734 million employees (approximately 50%), the French bank's report expands.

Companies' actual contributions tend to be lower than the required rates. According to the 2024 White Paper on Social Security for Chinese Enterprises, less than 30% of the sampled companies fully complied with social security contribution rules last year, based on recent wages rather than, for example, the minimum wage.

One of the main challenges to increasing contribution participation comes from the rise in flexible employment , which has now exceeded 200 million (30% of total employment), including delivery workers, taxi drivers, and small businesses run by individuals. There is a type of pension plan for the flexible workforce, in which contributions are also more flexible. However, many workers are not interested in participating, as they would have to allocate part of their income to make these contributions (at a rate of 20%).

If Beijing goes all out with this new provision, the effects on the economy will be clear . "This will pave the way for increased payments in the medium term, but risks triggering a short-term demand shock," predicts Julian Evans-Pritchard, chief China economist at Capital Economics. Using available ratios along with data on contributions to each scheme in 2024, the British analyst firm estimates that a 100% compliance rate would entail an additional cost for workers and businesses of 2.9% of annual GDP .

In practice, Evans-Pritchard points out, the effect is likely to be smaller for two reasons. First, she explains, workers who do not currently contribute to the plans mostly work for small private companies and are likely to earn less than current participants. In the extreme case where everyone earned less than 60% of the local average wage and therefore paid the minimum contributions, the additional costs would be reduced to just 0.7% of GDP.

Second, compliance is unlikely to reach 100% . Although companies now face penalties if they are found not paying social security, it is unclear how strict enforcement will be. "Some companies may be willing to take the risk in the hope of flying under the radar or that local officials will turn a blind eye. Other companies may choose to pay social security but underreport wages to limit their costs," analyzes the Capital Economics expert.

Taking all this into account, Capital Economics' best estimate is that the court ruling will increase contributions by around 1-1.5% of GDP. According to its analysis, this will bolster the short-term finances of China's social security system, as spending will only increase by 0.1% of GDP this year. It should also give authorities a little more leeway to further expand benefits over the medium term.

"Although a larger number of participants means increased future obligations, as well as higher contributions, the net effect should still be positive, especially since some new entrants will struggle to meet the 15-year service requirement to receive accrued retirement benefits. However, while the ruling is positive from an institutional perspective, it represents fiscal tightening that will hurt economic activity in the short term. Even before the legal change, it seemed that the favorable momentum from the previous fiscal easing would disappear during the second half of the year. Now it seems likely that the trend will reverse," Evans-Pritchard explains. Most worrying , concludes the Capital analyst, is the impact all this could have on the labor market : "There are signs that some companies are preparing for rising costs by laying off workers."

SG analysts agree on this point. "If social security laws are strictly enforced, costs will undoubtedly increase for employers who have avoided making contributions in the past, likely leading to layoffs or salary cuts to minimize the impact on their revenues. The impact will likely be concentrated on SMEs," Lam and Yao write.

The French bank's research department is also doing the math. In line with Capital's, its estimate is that the measure could increase costs for employers and workers by approximately 1% of GDP, assuming that 10% of Chinese employment did not previously contribute to the social security system and will have to start doing so from now on, at least taking some minimum wage as a reference.

"If the impact turns out to be significant, we believe the government will delay the implementation date or implement easing measures to cushion the impact on SMEs, such as offering discounts if employment is maintained, something that was done during the pandemic. The bottom line is that the government should strengthen macroeconomic policy coordination across departments to support the economy at a time when deflationary pressures are already significant. Another shock to the labor market is the last thing policymakers would want to see, so this should trigger a policy readjustment," Lam and Yao conclude.

These concerns were palpable on social media . In a video with more than 30,000 views on the local social network Weibo, a sort of Chinese X (formerly Twitter), a restaurant owner announced that he planned to close when the new rules came into effect because he couldn't afford to pay. A popular Weibo post by user Awuxiaoxie read: "This measure will simply force employers to deduct money from employees' salaries to make mandatory payments."

Many workers have expressed their desire to receive higher salaries instead of an uncertain pension in the future. "The money I pay now goes to the elderly, but if no one has children, who will pay social security to support me?" asks another Weibo user. "Now, if contributions are cut, pensions stop. And if the company goes bankrupt and I can't find a job for a while... it's one pit after another I'm forced to jump into," writes another user.