Journal of Population Economics

, Volume 31, Issue 3, pp 671–701 | Cite as

The intergenerational education spillovers of pension reform in China

  • Cheng YuanEmail author
  • Chengjian Li
  • Lauren A. Johnston
Original Paper


Economic theory establishes that pension privatization weakens the link between old and young and so reduces the incentive to invest in public education in an economy with lower return rate of capital than growth rate of wage. However, empirical studies of the link change are few. In this paper, we investigate the effects of pension privatization and the central government’s subsidy to individual accounts on public education spending in a three-period overlapping generation model. And then, we take contemporary pension reforms in a number of Chinese provinces as offering natural experiment conditions. Using a difference-in-difference framework and 282 municipal districts panel data over years 1998–2009, we test the pension-education theoretical link change. Both our theoretical and empirical results confirm that pension privatization is adversely associated with local public spending on education in China. Private pension subsidies, moreover, magnify this effect. Our study supports the theoretical assertion and selective empirical findings of a negative intergenerational effect of pension privatization.


Pension system Fully funding individual accounts Public education spending Local public finance 

JEL classification

H52 H55 I22 



We thank the Editor Alessandro Cigno and two anonymous referees for their helpful comments and suggestions; participants of the 22nd (2016) Panel Data Conference and a Melbourne University seminar and Jie Ma for important feedback; and Hui Chen for research assistance.

Funding information

This study received financial support from a Dyason Fellowship.

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflict of interest.


  1. Abadie A (2005) Semiparametric difference-in-differences estimators. Rev Econ Stud 72(1):1–19CrossRefGoogle Scholar
  2. Acemoglu D (2009) Introduction to modern economic growth. Princeton University Press, PrincetonGoogle Scholar
  3. Arvate PR, Zoghbi AC (2010) Intergenerational conflict and public education expenditure when there is co-residence between the elderly and young. Econ Educ Rev 29(6):1165–1175CrossRefGoogle Scholar
  4. Becker GS, Barro RJ (1988) A reformulation of the economic theory of fertility. Q J Econ 103(1):1–25CrossRefGoogle Scholar
  5. Bloom DE, Canning D, Fink G (2010) Implications of population ageing for economic growth. Oxf Rev Econ Policy 26(4):583–612CrossRefGoogle Scholar
  6. Boldrin M, Montes A (2005) The intergenerational state education and pensions. Rev Econ Stud 72(3):651–664CrossRefGoogle Scholar
  7. Boldrin M, Montes A (2009) Assessing the efficiency of public education and pensions. J Popul Econ 22(2):285–309CrossRefGoogle Scholar
  8. Brunner JK (1993) Transition from a pay-as-you-go to a fully funded pension system: the case of differing individuals and intergenerational fairness. J Public Econ 60(1):131–146CrossRefGoogle Scholar
  9. Brunner E, Balsdon E (2004) Intergenerational conflict and the political economy of school spending. J Urban Econ 56:369–388CrossRefGoogle Scholar
  10. Buiter WH, Kletzer KM (1995) Capital mobility, fiscal policy and growth under self-financing of human capital formation. NBER Working paper No.5120Google Scholar
  11. Chen T, Turner JA (2014) Social security individual accounts in China: toward sustainability in individual account financing. Sustainability 6(8):5049–5064CrossRefGoogle Scholar
  12. Cigno A (2010) How to avoid a pension crisis: a question of intelligent system design. CESifo Econ Stud 56(1):21–37CrossRefGoogle Scholar
  13. Cigno A, Rosati FC (1992) The effects of financial markets and social security on saving and fertility behaviour in Italy. J Popul Econ 5(4):319–341CrossRefGoogle Scholar
  14. Cigno A, Rosati FC (1996) Jointly determined saving and fertility behaviour: theory, and estimates from Germany, Italy, UK, and USA. Eur Econ Rev 40(8):1561–1589CrossRefGoogle Scholar
  15. Cigno A, Rosati FC (1997) Rise and fall of the Japanese saving rate: the role of social security and intra-family transfers. Jpn World Econ 9(1):81–92CrossRefGoogle Scholar
  16. Cigno A, Casolaro L, Rosati FC (2003a) The impact of social security on saving and fertility in Germany. Finanzarchiv Public Financ Anal 59(2):189–211CrossRefGoogle Scholar
  17. Cigno A, Luporini A, Pettini A (2003b) Transfers to families with children as a principal-agent problem. J Public Econ 87(5):1165–1172CrossRefGoogle Scholar
  18. Donald SG, Lang K (2007) Inference with difference-in-differences and other panel data. Rev Econ Stat 89(2):221–233CrossRefGoogle Scholar
  19. Goldin C, Katz LF (1997) Why the United States led in education: lessons from secondary school expansion, 1910 to 1940. NBER Working paper No. 6144Google Scholar
  20. Gradstein M, Kaganovich M (2004) Aging population and education finance. J Public Econ 88(12):2469–2485CrossRefGoogle Scholar
  21. Harris AR, Evans WN, Schwab RM (2001) Education spending in an aging America. J Public Econ 81(3):449–472CrossRefGoogle Scholar
  22. Heckman J, Ichimura H, Todd P (1997) Matching as an econometric evaluation estimator: evidence from evaluating a job training program. Rev Econ Stud 64:605–654CrossRefGoogle Scholar
  23. Hoechle D (2007) Robust standard errors for panel regressions with cross-sectional dependence. Stata J 7(3):281–312Google Scholar
  24. Iturbe-Ormaetxe I, Valera G (2004) Social security reform and the support for public education. J Popul Econ 25(2):609–634CrossRefGoogle Scholar
  25. Johnston L, Liu X, Yang M, Zhang X (2016) Getting rich after getting old: China’s demographic and economic transition in dynamic international context. In: China's New Sources of Economic Growth, vol 1, p 215Google Scholar
  26. Kaganovich M, Meier V (2012) Social security systems, human capital, and growth in a small open economy. J Public Econ Theory 14(4):573–600CrossRefGoogle Scholar
  27. Kaganovich M, Zilcha I (1999) Education, social security, and growth. J Public Econ 71(2):289–309CrossRefGoogle Scholar
  28. Kaganovich M, Zilcha I (2012) Pay-as-you-go or funded social security? A general equilibrium comparison. J Econ Dyn Control 36(4):455–467CrossRefGoogle Scholar
  29. Kemnitz A (2000) Social security, public education, and growth in a representative democracy. J Popul Econ 13(2):443–462CrossRefGoogle Scholar
  30. Kurban H, Gallagher RM, Persky JJ (2015) Demographic changes and education expenditures: a reinterpretation. Econ Educ Rev 45:103–108CrossRefGoogle Scholar
  31. Mason A, Lee R, Jiang JX (2016) Demographic dividends, human capital, and saving. J Econ Ageing 7:106–122CrossRefGoogle Scholar
  32. Mu R, Du Y (2015) Pension coverage for parents and educational investment in Children: evidence from urban China. World Bank Econ Rev 29(4):1–28Google Scholar
  33. Ohtake F, Sano S (2010) The effects of demographic change on public education in Japan. In: The Economic Consequences of Demographic Change in East Asia, NBER-EASE, vol 19, pp 193–223Google Scholar
  34. Orszag PR, Stiglitz JE (2001) Rethinking pension reform: ten myths about social security systems. In: New Ideas about Old Age Security, pp 17–56Google Scholar
  35. Pogue TF, Sgontz LG (1977) Social security and investment in human capital. Natl Tax J 30(2):157–169Google Scholar
  36. Poterba JM (1997) Demographic structure and the political economy of public education. J Policy Anal Manag 16(1):48–66CrossRefGoogle Scholar
  37. Poterba JM (1998) Demographic change intergenerational linkages and public education. Am Econ Rev 88(2):315–320Google Scholar
  38. Rangel A (2003) Forward and backward intergenerational goods: why is social security good for the environment? Am Econ Rev 93(3):813–834CrossRefGoogle Scholar
  39. Sinn HW (2004) The pay-as-you-go pension system as fertility insurance and an enforcement device. J Public Econ 88(7):1335–1357CrossRefGoogle Scholar
  40. Smith J, Todd P (2005) Does matching overcome Lalonde’s critique of nonexperimental estimators? J Econ 125(1–2):305–353CrossRefGoogle Scholar
  41. Wang Y, Xu D, Wang Z, Zhai F (2004) Options and impact of China’s pension reform: a computable general equilibrium analysis. J Comp Econ 32(1):105–127CrossRefGoogle Scholar
  42. Yuan C, Zhang L (2015) Public education spending and private substitution in urban China. J Dev Econ 115:124–139CrossRefGoogle Scholar
  43. Zhu Y (2002) Recent developments in China’s social security reforms. Int Soc Secur Rev 55(4):39–54CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  • Cheng Yuan
    • 1
    Email author
  • Chengjian Li
    • 2
    • 3
  • Lauren A. Johnston
    • 4
  1. 1.School of EconomicsPeking UniversityBeijingChina
  2. 2.Development Research Center of the State CouncilBeijingChina
  3. 3.Peking UniversityBeijingChina
  4. 4.Melbourne Institute of Applied Economic and Social ResearchUniversity of MelbourneMelbourneAustralia

Personalised recommendations