Building a Social Safety Net

• Author: Steve Barnett and Nigel Chalk
• Position: a Deputy Division Chief and is a Senior Advisor in the IMF's Asia and Pacific Department.

THE global financial crisis had many casualties. Banks failed. Markets seized. Recessions ensued. Out of this chaos, however, has emerged one potentially positive development: a concerted effort by China to strengthen its social safety net.

When the global economy collapsed and external demand for Chinese products dried up, especially from advanced economies, the Chinese government looked inward for domestic sources of demand. It put in place a major program of fiscal expansion with a heavy emphasis on infrastructure spending. But a not insignificant amount came from policies aimed at improving China’s pension system and putting in place a better, more effective health care system aimed at covering all of the Chinese people. China’s recent steps were but the beginning of its renewed efforts to put in place a social safety net that lessens income inequality and improves the livelihoods of well over a billion people. China’s reforms come at a time when advanced economies, including the United States and much of Europe, are grappling with their long-term pension and health care costs.

Reducing the need for Chinese saving

Just about everyone in China saves (see Chart 1). Corporate saving is high. The government is a net saver. And households save. Not only do households save, it is the young and the elderly who are the biggest savers—age groups that, by contrast, are usually the least prone to saving in advanced economies (see Chart 2). A large part of the saving by older Chinese has been linked to a strong precautionary motive, borne out of concern that, given the long lifespan of the average Chinese, either living costs or health care costs may exhaust a person’s means and leave them destitute in their old age. Even younger households face the risk of a costly catastrophic or chronic illness. Because the market for private health insurance and private annuities is underdeveloped, it is very difficult for Chinese citizens to insure against such individual-specific risks. Households, therefore, have a strong incentive to save more than they need to, in order to self-insure. A stronger social insurance system would reduce the need for this type of precautionary saving and thereby boost private consumption. The boost to consumption is in many respects a beneficial by-product to reforms that are justified in their own right to protect the poor and improve livelihoods. Moreover, it would also have positive spillovers to the rest of the world: some...