The Impact of Expected Pensions on Consumption: Evidence from China

ARC Centre of Excellence in Population Ageing Research (CEPAR) Working Paper No. 2020/03

35 Pages Posted: 4 May 2020

See all articles by Wei Zheng

Wei Zheng

affiliation not provided to SSRN

Youji Lyu

Peking University - School of Economics

Ruo Jia

Department of Risk Management and Insurance, School of Economics, Peking University

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR)

Date Written: April 8, 2020

Abstract

We study how pension participation and expected pension benefits affect the consumption of working-age adults based on a nationally representative dataset from the China Health and Retirement Longitudinal Study during the period 2011–2015. We find that working-age adults covered by the Employees’ Basic Pension, a compulsory public pension scheme for employees in the formal sector, have a consumption rate (total consumption to permanent income) that is 29.9 percentage points higher than those who do not participate in any public pension scheme. However, the Residents’ Basic Pension, a low-benefit voluntary public pension scheme for other residents, only promotes the consumption of working-age adults with a low income. Focusing on pension participants, we find that if working-age adults’ expected replacement rate (expected pension benefits at retirement to permanent income) increases by one percentage point, their consumption rate will increase by three percentage points. Working-age adults who are older, poorer, or live in a rural area increase their consumption more in response to the expected replacement rate. Nondurable consumption is more responsive to the expected replacement rate than durable consumption. Overall, our findings suggest that pension expectations are critical to the consumption decisions of working-age adults and can, therefore, affect total consumption.

Keywords: Pension, Replacement rate, Consumption, Retirement, Aging

JEL Classification: D12, G52, H55

Suggested Citation

Zheng, Wei and Lyu, Youji and Jia, Ruo and Hanewald, Katja, The Impact of Expected Pensions on Consumption: Evidence from China (April 8, 2020). ARC Centre of Excellence in Population Ageing Research (CEPAR) Working Paper No. 2020/03, Available at SSRN: https://ssrn.com/abstract=3571068

Wei Zheng

affiliation not provided to SSRN ( email )

Youji Lyu

Peking University - School of Economics ( email )

Beijing
China

Ruo Jia

Department of Risk Management and Insurance, School of Economics, Peking University ( email )

Yiheyuan Rd. 5
Haidian
Beijing, 100871
China

Katja Hanewald (Contact Author)

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

School of Risk & Actuarial Studies
UNSW Sydney
Sydney, New South Wales NSW 2052
Australia

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