A seemingly technical judicial ruling from China’s Supreme People’s Court has become a lightning rod for national debate. On August 1, the court issued a binding interpretation that bans employers and workers from privately agreeing to waive mandatory social insurance payments – China’s version of payroll taxes covering pensions, medical care, unemployment, and other benefits.
From September 1, any such arrangement will be considered invalid. More consequentially, workers will have the legal right to unilaterally terminate their contract and claim compensation if employers fail to make the required contributions.
While intended to bolster China’s social safety net, the new rule significantly raises the legal and financial risks of noncompliance. In a slowing economy, this could reshape labor incentives in ways policymakers may not fully anticipate. One likely result: a growing number of young people retreating from the job market and back into the family home – a deepening of China’s already visible “boomerang youth” phenomenon.
The court’s ruling zeroes in on a long-tolerated gray zone. In labor-intensive sectors like manufacturing, logistics, and hospitality, it has been common for firms and workers to privately agree to forgo social insurance payments in exchange for slightly higher take-home wages. Though technically illegal, regulators have generally been willing to ignore such arrangements to ease business burdens and preserve employment.
That tolerance is now gone. With the court’s new interpretation, workers can now trigger legal penalties and seek restitution if employers fail to contribute as required. For small and medium-sized enterprises (SMEs) that are already struggling, this could prove a breaking point.
Since 2019, China has capped employers’ basic pension insurance contributions at 16 percent of wages. Full compliance across all social insurance schemes – healthcare, unemployment, and more – would increase employers’ labor costs by 30-40 percent and reduce employees’ take-home pay by 10-15 percent. For SMEs already navigating weak demand and tight margins, the risk of backpay lawsuits or penalties could lead to tough choices about hiring, layoffs, and business survival.
To understand why this regulatory tightening is happening now, one must look beyond labor policy. China’s pension system faces a looming demographic crunch. By 2035, China’s national pension fund is projected to run out of money, driven by a shrinking workforce and rising retiree population. Policymakers are thus under pressure to expand the contribution base, especially on the employer side.
But in attempting to solve a long-term problem, the court ruling risks introducing short-term dislocations. As labor costs rise, companies may alter how they hire, favoring part-time, temporary, or contract-based workers over traditional full-time staff. Some may turn to retirees, who can often be rehired without triggering social insurance obligations.
These shifts might help firms remain afloat, but they erode job stability for younger and mid-career workers. Many job postings in China still include explicit age caps, such as “under 35 preferred,” reflecting employers’ preferences for younger, cheaper, and more flexible labor. For mid-career professionals, the narrowing of options could push them out of the formal labor force entirely.
In this context, families have quietly become fallback providers. In much of urban China, where homeownership is widespread and multigenerational households are culturally accepted, the financial cost of moving back in with parents is relatively low. Faced with job insecurity or low pay, young adults increasingly return home – temporarily at first, and then indefinitely.
The result is the normalization of “啃老” (kenlao) – literally “gnawing on the old” – a phenomenon where adult children rely on their parents for housing, daily expenses, and emotional support, while contributing little financially. Once viewed as a personal failure, it is now widely accepted as a rational, even necessary, choice under economic duress.
This growing trend is reinforced by the digital economy, where informal gig work offers flexibility but few benefits. For many young people, especially those in second- or third-tier cities, moving home and relying on family becomes the default rather than the exception.
Left unaddressed, this dynamic could calcify. Intergenerational support flows may reverse permanently. Instead of having the working-age population support their parents, parents continue subsidizing their adult children. This not only strains household finances but also undercuts broader efforts to boost productivity and long-term consumption.
What’s emerging is a clear causal chain: stricter social insurance enforcement raises labor compliance costs, forcing firms to cut back on full-time hiring; job opportunities for younger and mid-career workers shrink, forcing more people to move back home and making kenlao become a structural norm. Once this chain sets in, reversing it will be difficult and costly.
The solution is not to abandon the ruling, but to accompany it with mitigating measures. Local governments could offer grace periods or contribution subsidies for SMEs transitioning to full compliance. More importantly, flexible workers – including part-timers, gig workers, and contractors – need better benefit portability and access to vocational training.
Meanwhile, mid-career workers deserve targeted reskilling programs and anti-discrimination enforcement. Without interventions on these fronts, the current policy will push vulnerable groups further to the margins, eroding both workforce participation and family resilience.
Sound social insurance enforcement is a worthy goal, but it must not come at the expense of employment stability or generational balance. As China adjusts its labor and welfare regimes, policymakers would do well to remember that economic behavior is shaped not just by laws but by incentives. Structural trends like kenlao rarely announce themselves as crises – until they are already too late to reverse.
