The Underlying Stimulators of Chinese Government Spending on Pension and Welfare: A Co-Integrated Socio-Economic Model

TL;DR

This paper uses a co-integrated socio-economic model to identify long-term drivers of Chinese pension and welfare spending, emphasizing demographic factors and the need for structural reforms for sustainability.

Contribution

It introduces a genuine long-run socio-economic model revealing demographic and economic drivers of Chinese government pension expenditure, highlighting the importance of labor reforms.

Findings

China still has an exploitable demographic dividend.

GDP growth alone cannot ensure pension fund stability.

Structural labor market reforms are essential for sustainability.

Abstract

This study employs a co-integrated socio-economic model to investigate the long-run drivers of Chinese government expenditure on public pensions, addressing critical stability and sustainability challenges. Our methodology establishes a genuine long-run relationship and confirmed uni-directional causality from key socioeconomic variables to government spending. The central finding is the confirmation that China still possesses an exploitable demographic dividend (DD), which counters widespread assumptions of an immediate demographic crisis and provides a limited window for proactive policy action. However, the analysis also conclusively demonstrates that relying solely on strong GDP growth is insufficient for fund stabilization. Sustainability is fundamentally governed by the ratio of contributors to pensionaries. Consequently, the study concludes that comprehensive, structural labour market reforms are mandatory to maximize the current DD and strategically mitigate the financial imbalance caused by the eventual absence of this demographic advantage.