How the Supreme Court’s Ruling Sparked a New Wave of China’s Social Security Debate

Stricter enforcement boosts compliance but leaves unresolved who pays, how much, and whether to embrace more market‑driven investing

China’s Supreme People’s Court has ruled that side agreements allowing employers and workers to skip social-security contributions are invalid, a clarification that set off a national debate over costs, equity, and the future of the country’s pension system.

The August 1, 2025, judicial interpretation was instantly branded online as a “new social-security rule.” Critics warned that stricter enforcement could squeeze already thin margins at small and micro enterprises and individual businesses. Supporters framed it as a long-delayed step toward plugging holes in a fraying safety net.

To be clear, this is not a new policy. The Labor Contract Law and Social Insurance Law have long required participation and contributions; private “no-contribution” pacts have never had legal effect, and courts have generally ruled accordingly. The interpretation clarifies and harmonizes enforcement. In other words, it changes compliance expectations, not statutory rates or obligations.

A gray zone remains. The rise of platforms—from ride-hailing to food delivery—complicates whether a relationship meets the legal test for “employment.” A 2021 multi-ministry Guiding Opinion urged firms that exercise labor management, even where a full labor relationship isn’t established, to sign written agreements defining rights and duties. That did little to ease small-business anxiety. Expect sharper scrutiny of de facto employment and more disputes over who must contribute.

Costs collide with behavior. Under the urban employee system, employers typically contribute 16% of wages to pooled accounts and employees 8% to personal accounts. To cut costs—or boost take-home pay—many small firms have long relied on informal deals to skip contributions. The gig boom has widened the practice: many flexible workers choose cash now over coverage later.

Demographics, however, are pushing in the opposite direction. A rapidly aging population—baby boomers from the 1950s and 1960s are retiring—collides with chronically low birthrates, shrinking the base of contributors. Compounding the pressure, China’s system began relatively late and still carries “empty account” legacies from earlier reforms, limiting the government’s room to reduce rates without deepening deficits.

“Population aging is already severe,” said Feng Jin, a distinguished professor at Fudan University, in an interview with LatePost. “With past transition costs and chronic underpayment by some employers, further rate cuts are hard to sustain. As new forms of employment expand, growth in employee-pension participants is slowing. After the 2019 cut of four percentage points for employer rates, additional reductions would put real pressure on fund balance.”

Equity is the other fault line. China’s dual-track architecture—Urban Employee Basic Pension Insurance城镇职工基本养老保险 versus Urban and Rural Resident Pension Insurance城乡居民基本养老保险—bakes in large disparities. Employees in formal jobs contribute far more and receive substantially higher benefits; residents without stable employment, including most farmers, pay far less and get a modest basic pension supported by government subsidies. That divide reflects history: China did not create a modern pension until 1991, and while years of service for state-sector workers and civil servants were credited as “deemed contributions,” farmers received no equivalent recognition.

“On average, employee contributions are 15 times those of residents, while benefits differ by about 20 times,” Feng noted. “From a balance perspective, the gap has logic. From a fairness perspective, it’s troubling. The older generation of farmers supported urban development—government should prevent old-age poverty among them, including through fiscal subsidies or long-term bonds.”

Former central bank governor Zhou Xiaochuan, in “Framework and Path of Pension Reform,” describes China’s design as a hybrid: a pay-as-you-go social pool with defined-benefit features, plus individual accounts modeled on defined contribution—at least on paper. In practice, individual accounts are often nominal, and in some places overdrawn. The second pillar—enterprise and occupational annuities—remains thin: as of 2023, it covers 31 million workers, about 4.2% of total workers in China, concentrated primarily within SOEs, including electricity, telecommunications, petroleum, and aerospace.

The result is “first-pillar dominance,” with weak DC elements and a barely visible third pillar of voluntary savings. Returns are another drag. Portfolios skew heavily to deposits and government bonds, with limited equity or alternative exposure. Oversight bodies are cautious and fragmented, inhibiting professional, market-driven strategies that could lift long-term performance.

Zhou proposes a more market-oriented reform; his remedy includes injecting competition among managers, accepting age-based risk-taking to pursue higher, sustainable returns, and globalizing portfolios consistent with the scale of pension assets. Performance, he argues, should be the north star.

However, such reform has far from reached consensus. While many agree the government should lower contribution rates to ease the burden on both enterprises and individuals, skeptics warn that tilting further toward markets could inject turbulence into a system built for certainty, especially with fragmented governance and still-maturing capital markets. Labor advocates fear a performance-first mandate could sideline adequacy and weaken social security’s goal for promoting equity, while local governments resist ceding discretion to stronger national pooling and centralized investment.

Lu Quan, Secretary-General of the China Social Security Society and professor at Renmin University of China, is one of the critics. In an interview conducted by The Intellectual知识分子, he shared his analysis of the Supreme Court’s rule and the current Chinese social security system. Thanks for the kind authorization from the editor and Dr.Rao Yi, one of the founders of The Intellectual. I’d be able to share the whole piece.

Social Security Contribution Rates Should Be Gradually Reduced

The Intellectual: Under strict compliance with social security contribution regulations, would the employment costs for micro and small enterprises increase significantly, thereby adding to their pressure?

Lu Quan: Small and medium-sized enterprises indeed face considerable cost pressures, and the overall social insurance contribution rates are currently quite high. However, we must also consider the protection of workers' rights. If different enterprises have varying employment costs—where one company legally pays social insurance while another doesn't—this undermines fair market competition and damages workers' fundamental rights.

Therefore, the ultimate question shouldn't be "whether to pay social insurance," but rather how to achieve a balance between protecting workers' rights and supporting enterprise development.

Of course, we also need to consider the financial sustainability of small and medium-sized enterprises. In the long term, the solution lies in gradually reducing social insurance contribution rates.

Currently, China's employee pension insurance has an employer contribution rate of 16% and an employee contribution rate of 8%, totaling 24%. From a global perspective, this rate is relatively high.

Additionally, current social insurance contributions are based on total wages—a system design rooted in the industrial era's production logic, where labor was the core production factor. However, with the development of informatization, digitization, and platform economies, production methods have fundamentally changed. Labor-intensive enterprises that employ large numbers of workers create substantial employment opportunities for society. If we continue using total wages as the contribution base, they bear a heavier contribution burden. In contrast, some enterprises have highly digitized and automated production with few assembly line workers, contributing less to employment. If they still pay based on total wages, their contribution burden is relatively light.

From a medium to long-term perspective, we need to establish a new social insurance financing mechanism better adapted to digitized, informatized production methods and primary distribution patterns. This might include new contribution bases, such as collecting social insurance based on corporate profits or operating revenues rather than relying solely on total wages.

The Intellectual: Some voices argue that for employees of small and medium-sized enterprises and flexible workers, determining the minimum contribution base through average social wages is too high. For example, Shanghai's social insurance base is 7,384 yuan per month, which exceeds many people's wages.

Lu Quan: Data shows that increasingly more insured individuals have actual wages below 60% of the average social wage, which doesn't align with the original expectations when this standard was set.

Our initial purpose in setting a minimum contribution base was to guarantee pension levels and avoid the problem of excessively low pension benefits due to overly low contribution bases. However, current average social wages are growing rapidly, and many people feel their wages have been "averaged up."

Given this situation, there are currently two reform approaches.

The first is to lower the minimum contribution base—for instance, reducing it from 60% to 40% or even aligning it with minimum wage standards. This approach could indeed reduce the burden on low-income earners, but it might also create moral hazard, where high-income earners might contribute at minimum standards. To avoid this problem, we need a comprehensive labor income verification mechanism.

The second approach is to adjust the statistical methodology for average social wages—expanding from non-private sector units to include all sectors (both private and non-private units) while further incorporating flexible workers and other laborers, making contribution bases better match workers' actual incomes.

From international experience, some countries implement social insurance contribution exemptions or tiered rates for low-income groups. We could learn from these practices, such as further reducing rates for low-income earners or considering eliminating upper limits on contribution bases, making high-income earners bear more responsibility. However, regardless of reform direction, the key is establishing an accurate income database while balancing burden reduction and preventing moral hazard.

How to Balance Social Insurance System Sustainability and Intergenerational Equity

The Intellectual: Under the pay-as-you-go model, pensions continue to increase annually, making some young people feel this is unfair. How should we balance social insurance sustainability and intergenerational equity?

Lu Quan: Over the past decade-plus, while pension levels have continuously increased, average social wages have also grown. However, in recent years, although pension growth rates have gradually declined, some workers face wage stagnation and youth unemployment has become quite serious, making intergenerational conflicts particularly prominent.

First, we need to establish a more reasonable pension growth mechanism. Generally, pension growth should be linked to price indices. Furthermore, we could study indices for elderly people's basic living costs. For example, in comprehensive price indices, housing price growth might contribute significantly at the margin, but for most elderly people, housing price increases don't affect their living costs.

More importantly, we must ensure continued growth in workers' incomes, which is essentially about economic development and primary income distribution. The concepts of "support capacity" and "dependency ratio" I mentioned in related articles can illustrate this issue.

The dependency ratio is a quantitative concept reflecting the trend of increasing elderly population and decreasing young population—a trend that's difficult to change. Support capacity, however, reflects the relationship between wage levels and elderly people's living costs. Against the backdrop of accelerating population aging, if economic development and resulting income growth are sustained, this can partially offset the challenges that population aging brings to pay-as-you-go pension insurance systems. But if population aging is accompanied by economic decline, it will intensify intergenerational conflicts. In summary, solving this problem can't rely solely on pension systems—the key is finding economic development models that adapt to population aging.

The Intellectual: What other international experiences exist for addressing social insurance sustainability challenges? For example, does Singapore's mandatory savings model/Central Provident Fund system offer feasible lessons for our country?

Lu Quan: Globally, social insurance systems can be roughly divided into three models: The first is the social insurance model represented by continental Europe, with funding primarily from employer-employee contributions following mutual aid and pay-as-you-go principles. The second is the welfare state model represented by Britain and Nordic countries, using taxation as the funding mechanism with benefits following equalization and universalization principles. The third is the liberal model represented by Chile and Singapore, emphasizing individual responsibility and fund accumulation.

Currently, some domestic scholars favor the liberal model, even suggesting that China's social security should introduce market mechanisms or follow so-called incentive principles. This contradicts social security's fundamental principles. Social security is meant to compensate for market mechanism inadequacies—how can market mechanisms be introduced into social security itself? Historical lessons in this regard deserve attention. In the 1980s, Chile and other Latin American countries, along with some Eastern European transition countries, influenced by liberal ideology and international institutions like the World Bank, completely transformed pay-as-you-go systems into accumulation systems. Practice proved these transitions were failures. Fully funded pension systems must be closely linked to capital markets.

However, China's capital markets are currently imperfect. Once financial and capital markets experience volatility, pension systems will inevitably be impacted, creating enormous social and even political risks. Simply put, we cannot place public pension systems—which prioritize certainty—at the mercy of risk-filled capital markets. Of course, this mainly refers to public pensions, i.e., basic pension insurance. Other supplementary pension tiers, such as enterprise annuities and individual pensions, need to fully leverage market forces.

Here, we need to particularly clarify a common misconception: the view that pay-as-you-go systems have inflation risks is completely wrong. Under pay-as-you-go systems, current pensions are paid by current workers' contributions, so there's no inflation risk from time gaps. Real inflation risk only exists in accumulation systems because funds require long-term accumulation. Singapore's model is special because the government assumes investment risks, but its population size and economic characteristics enable it to bear such risks—China cannot simply copy this approach.

The Intellectual: Some young people think, "Rather than paying pension insurance, I'd rather save or invest myself." What causes this attitude? How do you view this trend of declining trust and participation?

Lu Quan: This thinking is actually quite normal, because social insurance systems are designed to use "institutional long-term rationality" to overcome "individual short-term rationality." Since Germany created social insurance systems, mandatory participation has been used to solve individual shortsightedness. China's social insurance system was established relatively recently—reforms only began in the mid-1980s—so public understanding of its long-term nature isn't deep enough.

Currently, public attitudes toward social insurance show polarization: young people's insufficient trust in social insurance systems is one aspect; another is that people approaching retirement feel that protection is inadequate. This stems from pension systems' characteristic of "long-term obligations, short-term rights." Someone might contribute from age 30 to retirement at 60—during the contribution phase, they want to pay less, but upon receiving benefits, they discover that paying less when young resulted in insufficient retirement benefits. By then it's too late for remediation, because pension rights are the result of long-term accumulation.

Due to lack of national education about social security, the public often has misconceptions about it. For example, some views suggest commercial insurance is more cost-effective than social insurance—this violates basic common sense. Social insurance involves three-party contributions (individual, employer, government) with single-party benefits; commercial insurance involves single-party contributions with multi-party benefits (including insurance companies). Comparing the two, social insurance is obviously more cost-effective. This reflects insufficient public trust in public policies.

Long-term, we need to strengthen national education about social insurance, establish intergenerational dialogue and balance mechanisms, and gradually build confidence in social insurance systems among all citizens, especially young people. On the other hand, we must continue deepening social security system reforms to truly eliminate participants' worries.

Is Social Security a "Fee" or a "Tax"?

The Intellectual: The Social Insurance Law clearly states that social insurance should cover everyone. Why did the Supreme People's Court recently emphasize again that "refusal to pay is invalid"?

Lu Quan: The statement that the Social Insurance Law requires social insurance to cover everyone is not legally accurate. Actually, the Social Insurance Law clearly stipulates that all workers who have signed labor contracts with employers—i.e., "employed workers"—have obligations to participate in social insurance. For flexible workers, individual business operators, and other groups, the Social Insurance Law doesn't mandate their participation; under current law, these groups are voluntary participants.

Regarding "Interpretation II," we need to clarify that judicial interpretations don't modify legal provisions but guide judicial practice. The Supreme People's Court's emphasis on "refusal to pay is invalid" mainly targets employed workers who have already signed labor contracts with employers. In actual judicial practice, there have long been phenomena where employers and workers privately agree not to participate in social insurance, but this clearly violates the Social Insurance Law, which doesn't authorize either party to exempt themselves from participation and contribution obligations through civil contracts or agreements.

Therefore, the Supreme People's Court's judicial interpretation emphasizes that during valid labor contract periods, agreements between labor and management not to participate in social insurance are invalid. This interpretation aims to ensure strict law implementation and maintain social insurance system effectiveness.

The Intellectual: Social insurance fee collection has long faced implementation difficulties. According to the "China Enterprise Social Insurance White Paper 2024" survey, over 70% of enterprises have problems with non-payment or underpayment of social insurance. After the Supreme People's Court's reaffirmation of social insurance contributions, will there be follow-up measures to ensure proper collection?

Lu Quan: Participation and contribution are two different processes. Even after participating, there may still be situations where contributions aren't made according to actual income levels or wage standards.

The Supreme People's Court's emphasis this time is on "refusal to pay is invalid"—meaning refusal to pay social insurance fees itself is illegal. This is the core of the judicial interpretation, ensuring every worker with employment relationships must participate and contribute as required. Regarding contribution base issues, "Interpretation II" doesn't explicitly address them.

The Social Insurance Law and other related regulations have clear provisions about contribution bases, usually determined based on individual actual income, but with minimum and maximum contribution base requirements. The minimum contribution base is 60% of local average social wages. However, employers and workers might not contribute based on actual wages but according to the minimum contribution base, which also doesn't comply with Social Insurance Law basic principles.

Although social insurance fee collection authority now belongs to tax departments, enabling collection agencies to access more comprehensive and accurate data, I personally believe large-scale audits or retrospective pursuit of past evasion and arrears won't occur in the short term. Therefore, from this judicial interpretation's perspective, its main purpose is ensuring participation and contribution implementation, rather than immediately imposing strict constraints on contribution bases.

The Intellectual: Does "Interpretation II" target flexible workers and new employment format workers?

Lu Quan: It doesn't target them. Individual business operators, delivery drivers, and other groups are mainly voluntary participants rather than mandatory participants under the current Social Insurance Law framework. "Interpretation II" doesn't modify the Social Insurance Law's basic principles and content, so it's not a new mechanism for flexible workers' or new business format workers' social insurance. From this perspective, calling it "new social insurance regulations" is inaccurate.

The Intellectual: For current new internet platform companies (like food delivery platforms), do they now need to mandatorily pay social insurance for employees? What impact will this have on them?

Lu Quan: Platform enterprises have greatly changed employment methods. Among them, employees meeting employment relationship criteria should participate and contribute according to Social Insurance Law requirements. For many workers without complete employment relationships, "Interpretation II" doesn't mandate platforms to participate and contribute for them.

However, from development trends, these enterprises will also need to bear certain social insurance contribution responsibilities in the future. Social insurance systems' basic logic is that all production factors participating in social production must share risks for workers, because among various production factors, only "people" face various risks. Under traditional industrial production methods, workers mostly signed relatively stable labor contracts with a single employer for certain periods, forming single-employer + single-employee contribution methods. But under digitized production methods, workers on platforms might simultaneously provide services for multiple entities. In this case, all entities and platforms, as participants in social production and distribution, should also share risks for workers.

In practice, leading enterprises like Meituan and Ele.me have already begun local practices of participation subsidies for delivery workers. Meituan has promoted participation subsidy models nationwide. Therefore, from a long-term perspective, competent departments will also issue corresponding policies to regulate new business format workers' social insurance issues.

The Intellectual: With social insurance collection unified under tax departments, should social insurance be considered a "fee" or "tax"?

Lu Quan: Social insurance collection by tax departments doesn't mean it's a "tax." The tax department responsible for social insurance fee collection work is accurately named the "Social Insurance Fee Division (Non-tax Revenue Division)." From this name, we can see it belongs to the "non-tax revenue" category. Therefore, the department collecting social insurance doesn't determine whether it's a tax.

The core difference between taxes and fees lies in the correlation between contributions and benefits. Taxes often correspond to equalized public services—meaning regardless of how much tax individuals pay, the public services or benefits they enjoy are basically the same and don't correlate with tax amounts. But social insurance is different, particularly pension insurance, where benefits are linked to individual contributions. The more you contribute, the higher the social insurance benefits you can receive in the future.

Meanwhile, the difference between taxes and fees isn't about the mandatory nature. Whether "tax" or "fee," if legally required, both have a mandatory nature and are obligations that must be fulfilled.