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Despite these major strides, a number of challenges remain which will need to be addressed during the 12th 5YP period and beyond. Some are areas for further policy reform and development, others relate to increasing the coherence of an SP system which has undergone such rapid recent change, while still others relate to the critical area of implementing recent reforms. Each of these challenges will also be affected by ongoing reforms outside the SP system, but to which it is closely linked, in particular hukou reform. Three key themes in this evolution of SP and LM policy and systems stand out:
1) Enhancing coherence and extending coverage. While the policy framework for SP and LM programs is increasingly in place, there remains much fragmentation across programs, space and people. As a result, the system is still more an accumulation of programs rather than a coherent SP system. The most striking example is the urban pension system. Furthermore, while coverage of SP programs has been increasing, they remain heavily focused on the urban formal sector. Expanding coverage to the rural population, self-employees and the growing urban informal sector (which accounts for just under one third of the urban labor force) remains a major challenge, though the national rural pension pilot and localized initiatives on urban residents' pension programs have begun to address it.
In the area of pensions, possible elements of reform include: (i) establishing a universal "social pension" for urban and rural people; (ii) expanding a reformed contribution-based urban scheme to cover all segments of the urban labor force; and (iii) deepening the ongoing scale up of voluntary rural pensions. In the area of social assistance, reforms could include: (i) costed first steps to cover rural migrants who are long-term urban residents in urban minimum living standard guarantee (dibao) schemes; (ii) exploring more systematic and inclusive processes for identifying the poorest in urban and rural dibao schemes; (iii) further increases in dibao funding to support reductions in exclusion errors; and (iv) expanding piloting and evaluating experience of social support for the "near poor".
2) Establishing appropriate financing arrangements. Three challenges stand out. First, how to ensure financial sustainability in a setting of high "legacy costs" of the urban pension system, expanding programs and a rapidly ageing population? Second, in a highly decentralized environment, how to define financing roles for central, provincial and local governments to promote greater equity while also striking a balance between spatial redistribution and incentives for local financing effort?[14] Third, how to strike the proper balance between protection and labor competitiveness? While overall expenditure on social protection as a percent of GDP remains low for a country at China's level of development, the current very high contribution rates place heavy burdens on employers and workers, while also encouraging informalization of the labor market and under-reporting of wages.
Possible reform elements include: (i) hiving off the "legacy costs" in urban pensions (for separate resolution) to allow lower contribution rates: (ii) sustaining recent initiatives to standardize management of social security funds and bring them within full budgetary oversight; (iii) extending provincial level pooling to all provinces (preferably with a common approach to pooling);[15] (iv) developing more systematic approaches to indexation; and (v) pursuing a more fundamental reform of inter-governmental fiscal relations and systems (including to lessen the discretionary dimension of local level budgeting). Many of these reforms affect a wide range of agencies, and would thus need to be driven through a government-wide approach.
3) Reforms to facilitate rural-urban integration and development of a competitive labor market. The spatial transformation of economic activity and employment will remain a central feature of China's development and a continued source of economic growth. Sustained urbanization will be coupled with large migration flows. Deeper rural-urban integration will shape the job opportunities in particular regions. Continued industrial upgrading and a "rebalanced" growth model will further shift the structure of activity within and across locations and sectors. The success of these deep transformations will require significant labor mobility and labor market flexibility. Furthermore, there is a strong equity case for such reforms.
Possible reforms to support a more mobile and flexible labor force include: (i) building on recent guidance from the national level, making further efforts (beyond provincial level pooling) to operationalize the portability of pension, health and other social insurance entitlements; (ii) establishment of supportive administrative systems which can handle the required flows of information, services and finances; and (iii) continued expansion and improvement of options for migrant workers to acquire skills demanded in the market. In addition, there is a need to further coordinate policies for social assistance to ensure that migrants do not fall into "policy gaps".
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