Chinese people are known for their high savings rate, and for years Western businesses have been wishing they would spend more and save less. But there is a reason why Chinese are so good at saving: the unpredictability and inequality of China’s welfare system.
In most countries people have two financial fallbacks. One is their personal savings and the other is social welfare provided by the state.
Personal savings may be needed for large purchases, taking vacations, a child’s education, to supplement one’s future retirement income, or to cover unexpected medical expenses and emergencies. Social welfare is supposed to provide for you in times of unemployment, illness, and old age. With a generous social welfare system in place, people need not put aside so much money for emergencies.
In the past, Chinese people used to make fun of Westerners’ low savings rate and living from paycheck to paycheck. It seemed that Westerners were less wealthy than Chinese and didn’t know how to save. Actually, it’s not that they don’t know how to save, rather, that they have ample sums in the form of social welfare.
In most developed countries, social welfare is ubiquitous. People have retirement accounts, a variety of insurance plans, including life, health, education, and elderly care plans. These are benefits they can count on enjoying.
In China, people rarely regard social welfare as personal income because it is hard to know what social welfare they have other than that there isn’t much of it and that it can’t be depended upon as a substitute for personal savings.
Taxes Should Fund Welfare Programs
Of course, the state does not create wealth and cannot take care of the people singlehandedly. All countries rely on taxes to pay for a variety of administrative expenses. Taxpayers feed the country, not vice versa. The primary and fundamental purpose of taxation is not to support a bureaucracy, but to provide social welfare to the people.
In developed countries, the greater portion of social welfare is to provide education and health care, in addition to housing subsidies, tax breaks for employers, and retirement plans. In the U.K., this kind of spending is significant: it accounted for 33 percent of annual expenditure in 2014 and 2015, or 12.5 percent of GDP.
