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.
China’s Social Inequality
In recent years social welfare in China has become polarized. Most people feel that welfare has gradually shifted from supporting the working class to serving only a small privileged group.
On one end of the social spectrum are millions of migrant workers without guarantee of normal off days, overtime compensation, or welfare insurance. On the other end are government officials and people working in state-owned enterprises (SOE) receiving allowances, subsidies, and many benefits. They may also have private insurance plans in addition to their regular welfare benefits. Government officials enjoy all kinds of hidden perks that ordinary people can only dream of, such as food, clothing, housing, transportation, health care, education, pension, and more.
People’s Daily recently published an article titled, How Much Money is in Your Welfare Account? It showed how welfare benefits for SOE employees are completely out of control. For example, the after-tax annual income of a mid-level employee at a state-owned financial institution is about 700,000 yuan (US$107,716). But only 50 percent comes from his salary and bonuses, the rest is comprised of a variety of benefits. His annual pension income is about 50,000 yuan, housing subsidies and pension fund is more than 70,000 yuan, commuting and gas subsidy is 24,000 yuan, additional annual medical expense reimbursement 5,000 yuan, library card and travel fees 20,000 yuan. Additionally, there is commercial insurance to compensate any sudden income decline after retirement.
I want to tell the Chinese government: “Don’t drain the people’s social welfare savings! Social welfare belongs to the people; it is the people’s life-savings and something they should be able to count on! It should not be vague and unpredictable.”
Is China Rich or Poor?
When there is talk about reforming or raising welfare benefits, some government officials respond by saying the country is going through financial difficulties. But when making speeches about China’s rise, the government suddenly seems to be super-rich. Over the years, China has invested in large-scale infrastructure development, resulting in overcapacity and an inventory problem. In addition, we donate money to poor countries and even invest a lot of in developed countries.
So, when addressing China’s social welfare, the country is said to be poor, but when it comes to domestic and foreign investment, the country is rich! In my view, it is not that the country does not have money, but that the government does not care about people’s welfare and ignores the principle that the purpose of government is to provide security for the people.
Insufficient domestic consumption is caused by people lacking disposable income. In fact, the Chinese people are not really poor, it’s just that they need to save their money for medical care, education, and retirement. If the government would increase welfare spending, people could reduce personal spending in these areas and would have more money for consumer goods, etc.
China could do with fewer high-rise buildings and a little more welfare. Don’t use people’s social welfare money to put up an image of a powerful country. A good social welfare system is the key to social stability, harmony, fairness, and justice. Welfare reform is imperative for China.
Fan Di is an independent economist and part-time professor of Peking University and Sun Yat-sen University. He obtained a Ph.D. at the University of California, Berkeley, supervised by Li Yining of Peking University and Nobel Prize winner George Arthur Akerlof. Fan has been a senior executive and consultant at major banks, financial firms, and large companies. This is an abridged translation of an article posted on April 12, 2016 to his public WeChat social media account.
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