Delay the Pension Age or Adjust the Pension Benefit? Implications for Labor Supply and Individual Welfare in China

41 Pages Posted: 3 Jun 2021

See all articles by Yuanyuan Deng

Yuanyuan Deng

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Katja Hanewald

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

Shang Wu

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Date Written: May 30, 2021

Abstract

We develop and calibrate a life-cycle model of labor supply and consumption to quantify the implications of alternative pension reforms on labor supply, individual welfare, and government budget for China’s basic old-age insurance program. We focus on urban males and distinguish low-skilled and high-skilled individuals, who differ in their preferences, health and labor income dynamics, and medical expense processes. We use the calibrated model to evaluate three potential pension reforms: (i) increasing the pension eligibility age from 60 to 65, but keeping the current pension benefit rule unchanged; (ii) keeping the pension eligibility age at 60, but proportionally lowering pension benefits so that the pension program’s budget is the same as under Reform (i); and (iii) increasing the pension eligibility age to 65 and simultaneously increasing the pension benefits so that individuals of both skill types attain the same individual welfare levels as in the status quo. We find that relative to the baseline, both Reforms (i) and (ii) can substantially improve the budgets of the pension system, but at the cost of substantial individual welfare loss for both skill types. In contrast, we find that Reform (iii) can modestly improve the budget of the pension system while ensuring that both skill types are as well off as in the status quo. We find that Reforms (i) and (ii) slightly increases, but Reform (iii) slightly decreases, the overall labor supply.

Keywords: pension reform; labor force participation; welfare; life-cycle behavior; China

JEL Classification: H55, D14, D15, J22

Suggested Citation

Deng, Yuanyuan and Fang, Hanming and Hanewald, Katja and Wu, Shang, Delay the Pension Age or Adjust the Pension Benefit? Implications for Labor Supply and Individual Welfare in China (May 30, 2021). PIER Working Paper No. 21-014, Available at SSRN: https://ssrn.com/abstract=3858898 or http://dx.doi.org/10.2139/ssrn.3858898

Yuanyuan Deng

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

223 Anzac Parade
CEPAR, Building L5, Level 3
Kensington, NSW 2052
Australia

Hanming Fang (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Katja Hanewald

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

Shang Wu

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

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