By Han Jian

China’s welfare system is at a pivotal juncture. As the economy faces the dual challenges of a slowing property market and weak household consumption, the role of the social safety net as both an economic stabiliser and a social equaliser is more vital than ever.

As China announces much-discussed reforms to the social welfare system, in this article CEIBS Professor of Management Han Jian outlines the progress that China has made so far, the gaps that remain, and the implications for workers, businesses, and the country’s broader growth strategy.

A recent push from China’s top court to mandate social insurance contributions from employers has rippled through the country’s economy and generated a great deal of discussion. China’s social welfare system has always demanded contributions from both employees and employers, which go towards pensions, unemployment insurance, health insurance, and more; in practice, however, these payments were often waived in bespoke agreements between both parties, in order to lower total labour costs for the company and leave the worker with more cash in hand.

Now, amidst a changing economic environment, the government is looking to enforce the rules. From wealth inequality to economic growth, this move is likely to have far-reaching consequences, many of them positive for China’s overall economic trajectory.

The risks of waiving social insurance contributions

It’s true that on the surface, skipping contributions seems to mean individuals get to keep more cash in hand, and businesses save on costs. But this simple framing neglects the vital issue of pensions. China is rapidly aging, with over 200 million people aged 65 and above: 15.6% of total population in 2024. Pension payments rely on long-term contributions, so if large numbers of people stop paying, many will reach retirement age without any support, leading to elderly poverty and potentially social instability. In the OECD, a grouping of mostly rich countries, mandatory contributions are designed to prevent exactly this kind of generational breakdown.

Moreover, waiving payments in a large scale could be a suppressing consumption and domestic demand. Without reliable welfare guarantees, people feel they must rely on themselves, so they tend to save rather than spend. China is already grappling with weak consumption; according to World Bank data, Chinese household consumption accounted for only about 40% of GDP in 2023, compared with 56.5% globally, far below the likes of Europe and America. If social insurance contributions were to be reduced, people’s willingness to spend could fall even more, slowing economic recovery.

Offering public confidence amid economic strain

Over the past few decades, much of China’s household wealth has been tied up in the property market. As property values decline, the welfare system is increasingly important in giving households a sense of security.

China's economy is currently under pressure from weak consumption and insufficient effective demand in large part due to the property squeeze. The waiving of social insurance contributions on a large scale could further reduce consumption confidence, undermining the government’s strategic goal of driving growth through domestic demand.

Social programmes like pensions, health insurance, and unemployment benefits serve as alternative safety nets. By reassuring families that their basic needs will be met even if their house is devalued or if a family member becomes unexpectedly unemployed, the welfare system encourages households to spend rather than hoard savings, directly supporting economic recovery.

Another point is that the government’s effort to expand coverage beyond urban employees, to rural residents, informal workers, and even gig workers, shows their intent to reduce the wealth gap between different groups and build a fairer and more inclusive system.

The dual impact on low wage employees and small businesses

Unfortunately, the costs of more rigorously enforced contributions are likely to be felt most sharply by low-wage employees and small firms. But it’s not all bad.

For workers whose employers must now contribute, disposable income in the short run will be reduced, but in exchange for greater stability over the long term. Because social insurance contributions are calculated as a fixed percentage of wages, workers with modest salaries will see a larger share of their disposable income go toward contributions. In the short term, this will mean greater day-to-day financial pressure, but if the system delivers on its promise, these employees gain access to health care, pensions, and other protections that can reduce insecurity and provide stability later in life.

For small businesses, the decision entails higher labour costs. Many smaller firms already operate on thin margins, so mandatory contributions increase their financial burden and may reduce their competitiveness against larger companies that can absorb the costs more easily. Some may respond by reducing headcount, relying more on informal employment, or scaling back expansion.

Inequality is narrowing, but gaps persist

Over the years, the steady expansion of social insurance has been a contributor to a narrowing income gap and greater social stability in China. Yet important differences remain between urban and rural areas, formal and informal employment, and among various income groups. 

China’s welfare system reflects a clear urban–rural divide. Urban employees typically have access to a more comprehensive package of benefits, including pensions, medical care, and unemployment insurance. By contrast, rural residents and informal sector workers often contend with weaker coverage. The pension system offers a clear illustration of this structural divide. As of the end of 2023, the average monthly pension for a retired urban employee was approximately RMB 3,700, compared to just RMB 223 for their rural counterpart.

Bridging this disparity is central to the current social policy reforms, which are in part aimed at achieving more equitable and sustainable development. While contributions are set at a fixed percentage of wages, they may have a greater impact on lower-income workers. This is because for those earning modest salaries, any deduction represents a much larger share of disposable income compared to higher earners.

Taken together, the system is moving in the right direction, but further reforms and subsidies are needed to enhance greater fairness and accessibility.

What about the gig economy?

Amidst regulatory pressure, Chinese ride-hailing titan Didi Chuxing, along with competitors like Caocao and Meituan, recently announced a lowering and clarifying of commission rates for their drivers. This links directly to a broader debate on gig workers’ welfare and social insurance. For many gig workers, whose “employers” most often do not make social insurance payments, the previous higher platform fees left little margin for them to consider long-term protections like pensions or health insurance.

While incomes may be rising, deeper welfare issues surrounding pensions, medical insurance, and unemployment protection remain unresolved. The career ceiling for many gig economy roles means many workers still lack stable social mobility and long-term protection. Lower commissions may improve their short-term earnings, but will not replace institutional social insurance coverage.

From the platform’s perspective, lowering commissions directly cuts into revenue. If, at the same time, regulators push platforms to shoulder part of gig workers’ social insurance contributions, the financial pressure will intensify.

However, in long-term, the platforms may benefit from a more loyal driver base, easing their industry’s chronic driver shortages and high turnover. The recent announcement also signals a transition from “wild growth” to “regulated sustainability”, reflecting a new social contract between workers, companies, and the country as a whole. Providing social insurance may be becoming part of a company’s social license to operate, aligning with government priorities on fairness and stability.

In addition, integrating gig workers into the welfare system reduces inequality between formal and informal employment, remedying a long-standing weakness in China’s social insurance design.

Han Jian is currently a Professor of Management and serves as the Director of the CEIBS Center for Organisational Growth and Talent Development at CEIBS. Her research focuses on enhancing competitive advantage and promoting corporate sustainability through organisational and talent management.