Family Insurance or Social Insurance Policy Options for China's Social Security Reform

By Li, Ling | International Journal of Economic Development, October 1999 | Go to article overview

Family Insurance or Social Insurance Policy Options for China's Social Security Reform


Li, Ling, International Journal of Economic Development


Abstract

The paper starts with a cost-benefit analysis of two alternative systems to provide support for the elderly: family insurance and social insurance. The conclusion is that when a nation's average income is high enough, the social benefits of a properly designed social insurance program outweigh its social costs. Based on the theory and experience of Western countries' social security systems, the paper provides a number of policy options for the on-going social security reform in China.

Introduction

In general, an economy can either solely rely on individual families to care for their elderly, a system we call family insurance, or establish some kind of social insurance program to provide income support for the elderly. With industrialization, urbanization, better education, and higher per capita income, there was an evolution from family insurance to social insurance in most developed countries. The majority of developing countries, however, still mainly rely on family insurance to support the elderly.

Currently, most of Western countries' social security programs are financed on a pay-as-you-go basis. According to the Samuelson-Aaron theory, current and future generations could maintain positive real rates of return on contribution as long as both the growth of real earnings and the growth of the population remain positive. In contrast, what have happened in Western countries is the pay-as you-go system couldn't fulfil the commitment between generations. The declining fertility rate, rising aging population and the incentive problems embodied in the social insurance system made most of social insurance systems in trouble to finance them.

China is experiencing rapid population aging. The one-child policy and significant improvement in the living standard accelerate the aging process and make China's aging problem more serious than any other countries in the world. According to a World Bank report, China's aging population will reach the peak by 2030 (The World Bank, 1994). There will be 0.3 billion people over 60, which will account for 22 percent of the total population. Old age dependency ratio is expected to rise from currently six workers for every retired person to only two workers for a retired by 2030. China faces the greatest challenge to support the huge aging population. In reforming its social security system, China should avoid the mistakes the Western countries have made.

The purpose of this paper is to analyze the old age family insurance and social insurance from an economic and social development perspective. It provides a general analysis of the trade-off between these two systems. Based on the theory and experiences of other countries' old age insurance systems, it argues that when a nation's average income level is high enough, the social benefits of a properly designed social insurance program outweigh its social costs. So it is inevitable that a social insurance will replace the family insurance as an economy and society developed. After analyzing the current situation in China, the paper provides a number of policy options for the on-going social security reform in China.

The rest of the paper is organized as follows. Section 2 briefly reviews the history and evolution of family and social insurance for the elderly in the West. Section 3 is a comparative analysis of family insurance and social insurance. Section 4 discusses the history and current situation of China's old age insurance system. Section 5 provides policy options for China's old age insurance reform. The last section concludes the paper.

The History and Evolution of Social Insurance for the Elderly

A nation's insurance system for the elderly is determined by the nation's economic and social development. The human society started with family insurance. Taking care of the elderly has been one of the key functions of families. However, the industrialization that started in the European countries during the later 18th century fundamentally changed the landscape of the human society. …

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