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Historical Debt: A Critical Issue in Financing Policy on Unemployment Insurance and Pension under Economic Transition

Author: WEI YU
Published in IJED, Vol. 1 No. 4

This paper examines problems in financing pension and unemployment insurance under China’s economic transition. Before the economic reform, the state government provided social safety programs that were financed through an economic plan. Contributions to these social programs were implicitly transferred to the State through profit of state-owned-enterprises (SOEs). The economic reform shifts financial responsibility of these programs from the government to enterprises. Because many SOEs are unable to finance pension and unemployment insurance, middle-aged and retired SOE employees lost benefits from those programs although they contributed before the economic reform. This created a historical debt. This paper shows that historical debt is the key to solve financing problems in unemployment insurance and pension. Without wealth redistribution through both central and local governments, a large number of middle-aged and retired SOE employees would become victim of the economic reform.

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