Social Security to Boost Domestic Demand


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If other conditions are the same, total consumption of households with urban residents’ basic medical insurance is about 10.2% higher than total consumption of those without such insurance.

For a long time, China’s economic growth has been depending on the troika of investment, consumption and export. However, investment is not the ultimate purpose of economic growth. The increase in investment can only bring about temporary economic growth. Over-investment, especially repeated investment at low technical level, is bound to result in structural imbalance and excessive capacity. In the mean time, export growth is enslaved to foreign economic environment, making it difficult to become a stable economic growth pole. Moreover, along with increased labor cost at home, the impetus role of export for economic growth will be impaired. Only household consumption can promote long-term and sustainable economic growth.

Insufficient domestic demand

With deepening reform and opening up, China has witnessed stable increase of household saving rate and a lack of consumption demand. 

According to data of National Bureau of Statistics, household saving rate of China was basically maintained above 30% during 1992-1995. Although decreased to some extent since then, it still reached as high as 25.37% in 2001. We estimated China’s household saving rate from 1978 to 2006 by method of Franco Modigliani, 1985 Nobel Economic Prize laureate and some modified measures provided in follow-up researches and we found it increased to 39% in 2006. 

Unfortunately, such a high saving rate was not due to certain statistical caliber. Ren Ruoen, Professor from Beihang University, adjusted the statistical caliber on the basis of calculation by National Bureau of Statistics, and unified the caliber of macroscopic statistics with the statistical caliber of the United States. When the difference of statistical caliber between China and the United States was eliminated, China’s household saving rate fell by 6.63% on average. Although the gap between China and the United States’ household saving rates is narrowed to some extent, China’s household saving rate still maintained at 22.7% during 1992-2001, much higher than that of the United States.

According to microscopic data obtained through financial investigation on Chinese households, China’s household saving rate in 2010 was as high as 29%, with severe uneven saving distribution — 45% households almost had no savings in that year. No matter on the basis of macroscopic or microscopic statistics and even under different statistical calibers, the same conclusion was drawn, i.e. China has an excessively high household saving rate and insufficient consumption demand. In an overall environment with over-investment and impeded export, China is currently seeking for boosting its domestic demand to further promote economic growth.

The puzzle of high saving rate

Conclusions of the high household saving rate of China are far from being formed in the academic world. At present, scholars have given several explanations as follows:

1) Precautionary saving. For example, Yuan Zhigang, Professor from Fudan University, believed that the uncertainties due to the market economy reforms in various fields have resulted in increased precautionary saving of residents. 

2) Demographic structure. According to Modigliani, based on the life cycle theory, residents tend to save money for their old ages when they are young. Therefore, age composition of China’s population may be an important cause for high household saving rates. 

3) Income difference theory. As pointed out by Gan Li, Professor from Southwestern University of Finance and Economics, due to credit constraint, the poor has no money to spend in spite of strong desire for consumption. The rich, although having enough money to spend, lacks the desire for consumption as almost all consumption desires have been satisfied. Therefore, domestic demand can never be boosted until the income gap has been bridged. 

4) Institutional and cultural diversities. Different from Western countries, China’s traditional culture has always been harboring the consumption idea of encouraging frugality and living within the means. 

5) Forced saving as the result of backward financial development of China. For example, credit consumption has just started in China, and residents need the money to buy cars and houses. In addition, there is a severe lack of financial markets in rural areas. 

All these opinions are reasonable, only different in the level of explanation for high saving rate. According to microscopic statistics, the investigation conducted on financial status of Chinese households showed that the average saving rate of the 10% households who have the highest income was as high as 66.5%, while there were 45% households had no savings in that year. In sum, China’s household savings mostly belong to the rich. For the rich, the effect of savings on boosting domestic demand is very poor. Only an income distribution policy based on the poor can fundamentally boost domestic demand.

Consumption driven by social security

The social security system is an institutional arrangement that is in favor of the poor. Sufficient social security can reassure people from the worries about consumption, significantly raise the level of consumption, and further promote the transformation of China’s economy from investment-driven mode to consumption-driven mode. 

According to financial investigation conducted on Chinese households, households with social security have a higher level of consumption than those without social security for all kinds of consumptions. The influence of old-age security is especially significant. Households with old-age security had an annual average consumption of CNY 58,000, whereas those without old-age security only had an annual average consumption of CNY 33,000. In itemized consumption, the gap in education consumption was even higher than that in total consumption. Households with old-age security spent CNY 8,000 yuan on education while those without old-age security only spent CNY 4,000 on education. 

Besides, many researches also showed that the social security system had a significant effect on expansion of household consumption. According to researches by Gruber from Massachusetts Institute of Technology and Yelowitz from University of California, Los Angeles, more available medical security and higher secured amount will reduce household savings by 17.7% and increase household consumption by 5.2%. 

As for developing countries, Wagstaff from the World Bank and Pradhan from VU University Amsterdam found that, in Vietnam, medical insurance could significantly increase the consumption of a household, especially in non-food items. 

We have also analyzed the effect of the new rural cooperative medical insurance system on consumption of rural residents. The results showed that, with individual differences of residents controlled, the new rural cooperative medical insurance system significantly increased household consumption by 5.4%. The medical insurance for urban workers started at the end of 1998 also significantly increased consumption of urban residents by 11% approximately. 

Liu Guoen, Professor from Peking University, studied the household investigation data about the basic medical insurance for urban residents of China in 2007 and 2008, finding that, with other conditions unchanged, total consumption of the households with the basic medical insurance for urban residents was about 10.2% higher than those without such insurance. In other words, if converted based on the proportions of populations of rural residents, employed urban residents and unemployed urban residents, for CNY1 input of the government on basic medical insurance, there will be CNY3 consumption increment produced. A complete social security system is not only essential for boosting domestic demand, but a good way to realize sustainable economic growth.

Deepening of social security system

In recent years, the coverage of social security has been increasingly enlarged in China, with social security level improved. Take medical insurance for example. China’s urban and rural social security systems have made historic progress in the past decade, with the realization of full coverage of the new rural social pension insurance and the urban residents’ social pension insurance, basic establishment of the urban and rural social relief system and preliminary establishment of the universal health care system. In 2012, over 1.3 billion urban and rural residents participated in medical insurance, and the coverage of basic medical insurance rose over 95%. We can say that basic medical insurance has been popularized in China, and it has become an insurance system having the largest coverage in the world. 

However, in general, the government’s input on social security is still low. In 2011, the expenditure for social security (including social security fund) only accounted for 21.2% in total fiscal expenditure, significantly lower than the United States (46.7%). Therefore, there is still a huge room for the government to improve in the input into social security. 

According to financial investigation conducted on Chinese households, the coverage of old-age security of urban residents is very high, with almost 90% householders and their spouses covered by old-age security. In contrast, the coverage of old-age security of migrant workers and rural residents is rather low, less than half of that of urban residents. For migrant workers, although working and living in cities, the coverage of old-age security is barely better than that of rural residents and even lower in terms of medical security. Therefore, migrant workers have become the group that lacks social security most. 

Meanwhile, among the groups with social security, the level of security varies greatly. The old-age security income and balance of medical account of urban residents is 3-4 times that of other groups, with the proportion of reimbursement of medical insurance reaching 45.3%, approximately 3 times that of other groups. As a result, the government shall establish a fairer social security system to narrow the gap of social security between groups, especially to improve the social security level of low-income groups.