Effects of Social Security Spending on Income Distribution and Poverty Reduction in China

Yue Ximing and Zhong Cong
School of Finance, Renmin University of China, Beijing, China

Abstract: Reasonable income distribution and eradication of rural poverty are vital for building a moderately prosperous society in all respects in China. This paper primarily examines the income distribution and poverty reduction effects of social security spending. Market income and redistribution policies are two determinants of income gaps. Based on CHIP2018 household survey data, we find that inadequate income redistribution policies have contributed to yawning income gaps, and that social security spending is more redistributive than personal income tax and social security contributions. After estimating the redistribution effects of social security spending and itemized incomes, we find that pension payments have contributed the most to household income gaps, and that subsistence protection and rural pension payments help improve income distribution. With respect to the poverty reduction effects of social security spending, we have estimated China’s current poverty incidence and the poverty reduction effects of pension payments, healthcare, and educational allowances with CHIP2018 data, and discover that an increase in social security spending may effectively reduce rural poverty. In building a moderately prosperous society in all respects, China should increase social security spending, focusing on specific target groups, and promote the role of social security spending in regulating income distribution and offering social protection to rural residents.

Keywords: income distribution, market income, personal income tax, social security spending, poverty reduction through social protection

JEL classification code: D33, H23, I31
DOI: 10.19602/j .chinaeconomist.2020.01.04

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