By resorting to short-term fixes to China’s pension system and other economic woes, Xi Jinping and the CCP are sowing the seeds of larger crises.
China’s economy has come under severe strain in recent years due to the impact of global trade tensions, a seemingly endless property sector slump, three years of “zero-COVID” lockdowns, and other factors. A deteriorating economy has exacerbated people opting out of state pension plans, a more than decade-long phenomenon that is colloquially known in China as the “social insurance contribution dropout wave.”
Beijing recently sought to address the pension boycott through a judicial ruling mandating employers to make social insurance contributions. While the move could bolster Communist China’s ailing pension fund in the short term, it will also place more pressure on struggling small and medium-sized enterprises and detrimentally affect the economy in the long run.
Opting out of the pension system
China’s “social insurance contribution dropout wave” began in the early 2010s after the CCP authorities implemented pension reforms. Ostensibly meant to address challenges posed by a rapidly aging population and to build a more sustainable and equitable pension system, the “five insurances and one fund” saw social insurance contributions account for up to 46 percent of total wages.
To reduce strain, many companies and individuals made pension contributions based on the minimum standard instead of actual wages. This led to the so-called “empty account” problem, where a significant gap arose between the recorded contribution amounts in individual pension insurance accounts and the actual funds available to support those accounts. The “empty account” problem affected the willingness of individuals to make contributions. In 2013, about 23 percent of employed individuals opted out of pension insurance contributions. By 2017, this number reached 38 million, and by 2022, 81 million people had discontinued or withdrawn from the pension system.
The disruption in social insurance contributions exacerbated during the COVID-19 pandemic years and beyond as the Chinese economy severely worsened. Young and “flexible” workers, particularly those in the gig economy, noted that pension payments would eat up a sizable portion of their salary (20 percent or more). Those workers are also concerned that they may never get to receive their pension given the delaying of the official retirement age and the pension fund — which serves about 460 million urban business workers — potentially running dry by 2035 even with backing from Beijing, according to the Chinese Academy of Sciences.
Additionally, the workers believe that there is deep unfairness in the social insurance system, with government and military personnel entitled to generous payouts and the average worker receiving a mere fraction. Such disparities were on display in official pension data from Chengwu County in Shandong Province that Chinese netizens recently shared online and went viral. The Chengwu data showed that in 2023, 8,778 retirees from government and public institutions received 785 million yuan, 13,220 retirees from various enterprises received 369 million yuan, and 119,400 retirees who are regular urban and rural residents received 251 million yuan. The pension ratio of 43:13:1 highlighted how the average taxpayer bears the heavy burden of funding generous pensions for retired civil servants.
Beijing’s pension troubles
The “social insurance contribution dropout wave” poses several problems for Beijing.
Pension subsidies are now one of the fastest-growing items in China’s budget, with pension spending exceeding healthcare and education individually in some localities. As more people opt out of the pension system and China’s aging population increases, Beijing would be forced to allocate greater amounts towards pension subsidies. The CCP authorities’ ability to keep subsidizing the pension system would be sorely tested if GDP growth and fiscal revenue slow.
Beijing has to keep the social insurance coffers from running empty lest it result in social and political challenges. Already, the younger generation is becoming disillusioned with the CCP’s perceived inability to guarantee their retirement payouts. Persistent disillusionment would erode the Party’s credibility and threaten its political legitimacy further down the road.
Beijing also faces the risks of greater public unrest and other sources of social instability as China’s economic situation worsens. In particular, workers who opted out of the pension system and lack savings do not have a social “safety net” to tide them through tough times, and are more likely to lash out against the regime over their predicament.
Backfire
On Aug. 1, 2025 the PRC Supreme People’s Court released part two of its interpretations of issues concerning the application of the law in handling labor dispute cases (henceforth referred to as the Interpretations). The Interpretations, which take effect on Sept. 1, seek to further address practical judicial needs, protect workers’ rights and interests, and maintain harmonious and stable labor relations, per the framing of official mainland media.
The Interpretations contained several articles that essentially make pension contributions mandatory. These include voiding worker-employee agreements to waive social insurance contributions, addressing social issuance issues arising from affiliated operations or subcontracting, and ensuring that employers of “flexible” workers must not evade pension contribution obligations in any way.
Official mainland media said that the Interpretations are expected to increase the number of insured individuals by over 20 million annually, significantly alleviating the pressure on pension payments. They estimated that the implementation of the Interpretations would delay the depletion of the social insurance fund from 2035 to at least 2043.
While the Chinese pension system’s problems could be somewhat mitigated by making social insurance contributions mandatory, the move is likely to do more harm than good for Beijing on the whole. For one, SMEs could see their costs go up by as much as 10 to 30 percent to accommodate greater pension contributions. This places further strain on SMEs, which are already struggling with pressures from the Sino-U.S. trade war and China’s deteriorating economy. As more SMEs fold and unemployment rises, pension contributions would drop off and social welfare spending would go up while the CCP authorities see reduced revenue.
There are currently about 53 million SMEs in China contributing 60 percent of the GDP (about 80.94 trillion yuan), 60 percent of tax revenue (12 trillion yuan), and 80 percent of employment (376 million jobs). Based on this, if the SME bankruptcy rate rises by just 10 percent, it could lead to a GDP reduction of 8.09 trillion yuan; tax revenue reduction of 1.2 trillion yuan; a rise in unemployment by 37.6 million; increased social relief burden of 0.38 trillion yuan; a reduction in social insurance revenue of 0.6 trillion yuan; and drop in the CPI by 0.5 percent. By resorting to short-term fixes to China’s pension system and other economic woes, Xi Jinping and the CCP are sowing the seeds of larger crises.
