Benefit incidence of public transfers: Evidence from China (Shen Ke, Wang Feng, and Cai Yong)

Over the past three decades, China’s economic hyper-growth has been accompanied by an equally rapid increase in the level of inequality. In response to concern about rising inequality, the Chinese government has made great strides in increasing public transfers in education, healthcare and pensions to benefit citizens, especially the young and elderly population and other disadvantaged groups. Utilizing the framework of the National Transfer Accounts, this study systematically examines how public transfers have recently been distributed across generations and across income groups in China.

Our analyses are based on micro-level data from the 2010 wave of the China Family Panel Study as well as macro-level data from the System of National Accounts and government financial statistics. We estimate age profiles of per capita total public transfers, including education, healthcare and pensions, and then further disaggregate age profiles of public transfers by sector and by income quartiles.

The results show that current public transfers largely tilt towards the elderly: per capita total public spending per person aged 65 and above is twice the spending per child below age 19. Disaggregation of public transfers by sector and income quartiles provides further insights. Three lower-income quartiles follow a similar age profile of per capita public education transfer, while the top quartile receives more government transfers for pre-primary and college education largely due to higher enrollment rates. Although public healthcare transfers are almost equally distributed across income groups under age 60, they are skewed in favor of the richer groups at senior ages. Among the elderly, richer groups, most of whom are urban dwellers and were engaged in the formal sector before they retired, tend to be covered by more generous health insurance, which would significantly increase their utilization of public health services. The incidence of per capita public pensions is strongly regressive, with older people at the top of the income distribution enjoying much higher pension benefits than others. This is attributed to both higher contributions before retirement and more generous pension packages for wealthier groups.

The results from this study highlight the challenges faced by the Chinese government in its effort to deliver essential and equitable social services. Generational imbalances in benefit incidence should be corrected. Otherwise, expansion of elderly populations, combined with higher levels of spending on the elderly than on children, will exert heavy pressure on government fiscal budgets in coming years. Furthermore, the currently fragmented health insurance and pension systems need to move towards unification to reduce inequalities in benefits across income groups.

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