International Journal of Economic Development,
1(4), 1999: pp. 431-450.
FAMILY INSURANCE OR SOCIAL
INSURANCE POLICY OPTIONS FOR
CHINA’S SOCIAL SECURITY REFORM
Ling Li
Towson University
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.
Family Insurance
432
China is experiencing rapid population aging. The one-child policy
and significant impro