18 Reforms and challenges of the social security system

The Chinese social security system is undergoing a series of reforms. These reforms are often the government's short-term responses to imminent financial and social pressure. The long-term impacts, especially those on economic efficiency, are often ignored. The background of the Chinese social security system reform is unique. Like many other countries (mainly more advanced economies), China is facing an unprecedented demographic transition-an aging population. However, population aging in China is taking place at a much lower level of GDP per capita (Peterson 1999). In the meantime, China is undergoing transition to a market-oriented economy. This is a challenge for the old Chinese social security system and is likely to remain a challenge for many decades. The old Chinese social security system originated from the command economy era, when the Communist government's development strategy was based on rapid industrialisation. This strategy taxed the agricultural sector, which included 80 per cent of the Chinese population, to cross-subsidise the industrial sector (Wen 2000). The social security system formed at the time was a dual system: a rural system, based on the People's Communes,1 that was very elementary, and an urban system that was much more generous and was based on the work unit system.2 In rural areas, farmers were organised into People's Communes, and the commune was responsible for providing minimum subsistence to each member. Heavy agricultural taxation, and the need to provide this minimum living, led to a relatively