Chinese-style modernization that takes the path of peaceful development needs the support of an effective social security system, and social security is closely related to the arrangement of the fiscal system. Among them, fiscal decentralization is an important factor affecting the level of social security expenditure, but there is no consensus in the literature on the specific relationship between the two. After constructing a theoretical framework from the perspective of new structural economics, it is found that the impact of fiscal decentralization on the level of social security expenditure depends on the size and direction of the “income effect” and the “substitution effect”, and these two effects are related to the stage of economic development. Therefore, the theoretical hypothesis is proposed. At this stage, China’s fiscal decentralization has a significant negative impact on the level of social security expenditure, but this impact will weaken with the improvement of economic development level. Subsequently, based on the provincial panel data in China from 1998 to 2020, the double fixed-effect model was used for empirical testing, and the results confirmed the above theoretical hypothesis. After endogeneity, dynamism and robustness tests, the conclusion is still robust. In addition, considering the differences caused by industrial division of labor, the upstream provinces of the industry are affected by central transfer payments, and fiscal decentralization has less negative impact on social security expenditure. The results of the downstream provinces are consistent with the regression of the whole sample. “Three provinces and one city” are in the transition stage of medium and high income, and the negative effect is not significant. Further, considering regional differences in development levels, fiscal decentralization in the central and western regions has a negative impact on social security expenditures, while the eastern regions have less significant impact due to higher income levels. Based on this, we must persist in promoting fiscal reform and improve the degree of fiscal decentralization,optimize the performance appraisal system of local governments, and appropriately increase the assessment weight of “people’s livelihood” indicators.