Separating government and enterprises in the reform of social security system is a wise move, says a commentary in 21st Century Business Herald. An excerpt follows:

Scandals concerning the misappropriation of social security funds have popped up in several places recently. At the same time, the Ministry of Labour and Social Security announced the expansion of the pilot programme solidifying individual accounts from two provinces to eight.

On the one hand, there are many problems with the management of social security funds. On the other hand, the reform of fund accumulation and distribution has met many difficulties. China started accumulating pension funds in 1993. However, those who had retired or started working before then had not accumulated pension funds previously. Their contribution has been directly turned into State assets. Therefore, the State owes them historical debts, which were estimated to be about 2 trillion yuan (US$253 billion) in 2000.

This has led to a high insurance premium rate as well as empty individual accounts. The payment shortfalls in the social security system have increased year by year. The reform of the social security system has remained a quandary.

China has stressed safety over appreciation in the management of social security funds. The State Council ruled in 1991 that the pension fund should only be deposited in banks or used to purchase national bonds. However, the system became more flexible two years later, when the State Council allowed a certain portion of the funds to be put out through State banks and investment companies.

Soon the situation got out of control and many problems emerged. The government had to put an end to the disorderly investment trend and banned all kinds of investment of pension funds soon after.

The construction of China's pension system cannot be achieved overnight. Past experiences show that unstable or immature policies can also produce pension fund misappropriation. Also, local governments' intervention in pension fund management will lead to increasing risks and corruption.

For these reasons, it is a wise step to separate government administration and enterprise management in the process of reform.

(China Daily November 30, 2006)