Social Security, Human Capital And Growth: A Theoretical Framework And Empirical Analysis Of China

Since1980s, two research frameworks on human capital investment have been established based on two main models:the Overlapping Generations Model (OLG)(Samuelson,1958, Samuelson&Diamond,1975) and the Two-Sector of Growth (See Lucas,1988). One theory, using the OLG framework, primarily analyzes the impact of different social security systems on human capital accumulation in countries with established social security systems Docquier&Paddiso,2003; Cruz&Amaia.Iza,2006; et.al). The other focuses on how investment in education influences human capital, technological innovation and other factors thus stimulating economic growth (Blankenau&Simpson,200,Cruz&Amaia,2006and Volker&Grossmann,2007et.al)From the studies discussed above, we observe that research in the first category emphasizes more on the mechanism between a social security system and human capital accumulation from a theoretical perspective instead of empirical studies on educational investment under a particular social security system. In comparison, research in the second category is concerned with educational investment in human capital and its effect on economic growth, although it can not distinguish between government and non-government funding sources and their respective contribution to human capital accumulation and economic growth.This paper proposes a new research framework based on Lucas (1988) and Kemnitz&Wigger (2000), in which educational funding sources for human capital accumulation are bifurcated into government and non-government funding sources. Based on this framework, our theory categorizes educational investment in individual human capital into government funding and non-government funding, assuming that the process of human capital investment starts with government funding, which provides the initial labor pool. Accumulation of human capital continues upon the initial pool entering the labor market, which, if and when additional educational investment is needed, is primarily funded by non-government sources. In the same time, we analyzed and compared both the government funding sources and their respective long-term impact on economic growth under a security system using both theoretical models and an empirical study based on panel data in China.The theoretical analysis demonstrates that, in equilibrium without social security, the premium on human capital cannot be fully internalized when individuals seek to optimize their time investment in production and human resources, thus individuals in such a society tend to allocate more time in physical capital accumulation in order to increase current savings for retirement protection than in human capital accumulation, resulting in less investment in education. However, under a pay-as-you-go social security system, not only the government, in an effort to increase social economic return and maximize public utility, will invest in education to increase the level of human capital accumulation among current labor pool, but also enterprises and individuals will increase investment in human capital in order to enhance their enterprise output and individual economic return. Nevertheless the ratio of government educational investment to non-government educational investment varies greatly among different countries in the world. In general, higher level of non-government educational investment is not necessarily better. To determine the optimal level of non-government educational investment in a society, full consideration should be taken in the output elasticity of such non-government educational investment as well as the output elasticity of the physical capital. Furthermore, assuming equal balancing conditions, it is only when the output elasticity of per capita non-government educational investment per capita equals that of the physical capital that balanced growth can be sustained.Since the early1980s, China's educational investment ratio has been increasing rapidly. In the same time, the Chinese government introduced a systemic reform in its social security system named "Universal Planning" However, in operating the system, many individual accounts are running in deficit due to various reasons such as the effective debt burden by the local government resulted from bearing the reform cost and the management confusion resulted from co-mingling of assets in the personal accounts with assets in the Universal Planning accounts. Consequently, pension payments from the Universal Planning accounts often rely heavily on subsidy from the local government at all levels for a long period of time. Retirement pension accounts operating under deficit has become a long-term problem, whose existence is key in concluding that China's current social security system is essentially a pay-as-you-go system. In order to examine the theoretical conclusion described above, we conducted an empirical analysis using panel data in China from the period of1998to2009. The result indicates that the expenditures by the government for the cost to establish such a social security system had a negative impact on China's economic growth. In addition, in the past20years in China, compared to government educational investment, the percentage of private educational investment has been trending up year over year with significant positive effect on human capital accumulation, which demonstrates that the current output elasticity of the non-government educational investment exceeds that of the physical capital, thus increasing such non-government educational investment will positively impact the long-term economic growth.