Decreased Contribution Rates Increase Public Pension Fund Revenue: Evidence from China

Abstract

The basic pension plan for urban enterprise workers (PPUEW) is the primary form of public pension system in China and is managed by provincial governments. Although the federal government requires that employers contribute 20% and individuals 8%, provincial governments have the right to adjust the rate. As different rates apply in different provinces, this study assesses the effect of rates on enterprises' incentive to participate in the PPUEW, using data from the 2011 China Annual Survey of Industrial Firms. As rates increase, employers and employees pay more; however, once the contribution ratio reaches a tipping point, they try to reduce deductibles. The findings suggest that a lower contribution rate motivates enterprises to participate in the PPUEW and boosts the fund's revenue.

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