How private sector participation improves retirement preparation: A case from China
- 36 Downloads
This paper shows empirically how private sector participation improves the adequacy and equality of retirement preparation in a three-pillar retirement system. We develop a three-layer replacement rate approach based on the China Health and Retirement Longitudinal Study, a nationwide representative household survey of middle-aged and old aged population. Our empirical evidence shows that private sector participation increased the mean (median) replacement rate in 2013 from 35.4% (15.4%) to 69.8% (48.7%). The evidence also suggests that annuitising home equity is responsible for a large portion of this increase. Surprisingly, private sector participation also mitigates the inequality of retirement preparation between the formal and informal sectors. Our empirical findings emphasise the importance of annuitisable private savings for the retirement income security of the one-fifth of the global population who live in a representatively high-growth and rapidly ageing economy.
KeywordsRetirement preparation Pension Replacement rate Adequacy Equality China
The authors thank Christian Biener, Martin Eling, Katja Hanewald, Peng Jing, Chong Liu, Gene C. Lai, Ze Song, Yi Yao, and participants of the ARIA and APRIA conferences in 2016 for their helpful inputs and comments. This study is supported by the key grant of Chinese Ministry of Education - Commercial Pension in China: Institution and Operation (Grant No. 14JZD027), the National Natural Science Foundation of China (Grant No. 71703003), and the seeds fund of School of Economics, Peking University.
- Barr, Nicholas, and Peter Diamond. 2010. ‘Pension reform in China: Issues, options and recommendations.’ http://economics.mit.edu/files/6310. Accessed 14 January 2017.
- Benartzi, Shlomo, Alessandro Previtero, and Richard H. Thaler. 2011. Annuitization puzzles. Journal of Economic Perspectives 25 (4): 143–164.Google Scholar
- Brady, Peter J. 2010. Measuring retirement resource adequacy. Journal of Pension Economics & Finance 9 (2): 235–262.Google Scholar
- Bräutigam, Marcel, Montserrat Guillén, and Jens P. Nielsen. 2017. Facing up to longevity with old actuarial methods: a comparison of pooled funds and income tontines. The Geneva Papers on Risk and Insurance—Issues and Practice 42 (3): 406–422.Google Scholar
- Bridges, Benjamin, and Sharmila Choudhury. 2009. Examining social security benefits as a retirement resource for near-retirees, by race and ethnicity, nativity, and disability status. Social Security Bulletin 69 (1): 19–44.Google Scholar
- Brown, Jeffrey R. 2003. Redistribution and insurance: mandatory annuitization with mortality heterogeneity. Journal of Risk and Insurance 70 (1): 17–41.Google Scholar
- Cai, Fang, John Giles, and Xin Meng. 2006. How well do children insure parents against low retirement income? An analysis using survey data from urban China. Journal of Public Economics 90 (12): 2229–2255.Google Scholar
- Cai, Yong, and Yuan Cheng. 2014. Pension reform in China: Challenges and opportunities. Journal of Economic Surveys 28 (4): 636–651.Google Scholar
- Chen, Anping, and Nicolaas Groenewold. 2017. An increase in the retirement age in China: The regional economic effects. Applied Economics 49 (7): 702–721.Google Scholar
- China Center for Insurance and Risk Management of Tsinghua University. 2016. ‘Chinese Retirement Preparation Index 2016’ (in Chinese only). http://www.ccirm.org/ccirm/uploadfiles/201612201482212337.pdf. Accessed 22 January 2017.
- CHARLS. 2011. ‘Nation-wide Baseline Survey in 2011.’ http://charls.pku.edu.cn/zh-CN/page/data/2011-charls-wave1. Accessed 3 March 2016.
- CHARLS. 2013. ‘Nation-wide Follow-up Survey in 2013.’ http://charls.pku.edu.cn/zh-CN/page/data/2013-charls-wave2. Accessed 3 March 2016.
- CHARLS. 2014. ‘Nation-wide Follow-up Survey in 2014 (Life History Survey).’ http://charls.pku.edu.cn/zh-CN/page/data/2014-charls-wave3. Accessed 15 October 2016.
- CHARLS. 2015. ‘Nation-wide Follow-up Survey in 2015.’ http://charls.pku.edu.cn/zh-CN/page/data/2015-charls-wave4. Accessed 17 June 2017.
- Dessy, Sylvain, and Stephane Pallage. 2003. Taxes, inequality and the size of the informal sector. Journal of Development Economics 70 (1): 225–233.Google Scholar
- Donnelly, Catherine, Montserrat Guillen, Jens Perch Nielsen, and Ana Maria Pérez-Marín. 2018. Implementing individual savings decisions for retirement with bounds on wealth. ASTIN Bulletin 48 (1): 111–137.Google Scholar
- Feng, Jin, Lixin He, and Hiroshi Sato. 2011. Public pension and household saving: evidence from urban China. Journal of Comparative Economics 39 (4): 470–485.Google Scholar
- Forteza, Alvaro, and Guzmán Ourens. 2012. Redistribution, insurance and incentives to work in Latin-American pension programs. Journal of Pension Economics & Finance 11 (3): 337–364.Google Scholar
- Hanewald, Katja, Thomas Post, and Michael Sherris. 2016. Portfolio choice in retirement—what is the optimal home equity release product? Journal of Risk and Insurance 83 (2): 421–446.Google Scholar
- Hu, Naijun, and Yansui Yang. 2012. The real old-age dependency ratio and the inadequacy of public pension finance in China. Journal of Population Ageing 5 (3): 193–209.Google Scholar
- Hurd, Michael D., and Susann Rohwedder. 2011. Economic preparation for retirement. Working paper. Santa Monica, CA: RAND Corporation.Google Scholar
- Insurance Association of China. 2015. ‘China employee pension reserve index (PRI).’ (in Chinese only). http://www.iachina.cn/art/2015/10/12/art_389_2685.html. Accessed 20 January 2017.
- James, Estelle. 2002. How can China solve its old-age security problem? The interaction between pension, state enterprise and financial market reform. Journal of Pension Economics and Finance 1 (1): 53–75.Google Scholar
- Knight, John, Shi Li, and Haiyuan Wan. 2016. The increasing inequality of wealth in China, 2002–2013. Working paper. Oxford: University of Oxford.Google Scholar
- Knoef, Marike, Jim Been, Rob Alessie, Koen Caminada, Kees Goudswaard, and Adriaan Kalwij. 2016. Measuring retirement savings adequacy: Developing a multi-pillar approach in the Netherlands. Journal of Pension Economics & Finance 15 (1): 55–89.Google Scholar
- Liu, Liqun, and Andrew J. Rettenmaier. 2003. Social security outcomes by racial and education groups. Southern Economic Journal 69 (4): 842–864.Google Scholar
- Ministry of Human Resources and Social Security. 2014. ‘Document 23: regulations for resident’s basic pension program’, from: http://www.jshrss.gov.cn/sy/zcfg/201501/t20150112_182237.html.
- Munnell, Alicia H. and Mauricio Soto. 2005. What replacement rates do households actually experience in retirement? Working paper, Boston College Center for Retirement Research. Boston.Google Scholar
- Munnell, Alicia H., Anthony Webb, and Luke Delorme. 2006. A new national retirement risk index. Working paper. Boston College Center for Retirement Research, Boston.Google Scholar
- Neelakantan, Urvi, and Yunhee Chang. 2010. Gender differences in wealth at retirement. American Economic Review 100 (2): 362–367.Google Scholar
- Oliveira, Jaqueline. 2016. The value of children: inter-generational support, fertility, and human capital. Journal of Development Economics 120: 1–16.Google Scholar
- Poterba, James M. 2014. Retirement security in an aging population. American Economic Review 104 (5): 1–30.Google Scholar
- Purcell, Patrick J. 2012. Income replacement ratios in the health and retirement study. Social Security Bulletin 72 (3): 37–58.Google Scholar
- Saez, Emmanuel, and Gabriel Zucman. 2016. Wealth inequality in the United States since 1913: Evidence from capitalized income tax data. The Quarterly Journal of Economics 131 (2): 519–578.Google Scholar
- Song, Zheng, Kjetil Storesletten, Yikai Wang, and Fabrizio Zilibotti. 2015. Sharing high growth across generations: pensions and demographic transition in China. American Economic Journal: Macroeconomics 7 (2): 1–39.Google Scholar
- Sun, Qixiang, and Lingyan Suo. 2007. Pension changes in China and opportunities for insurance. The Geneva Papers on Risk and Insurance—Issues and Practice 32 (4): 516–531.Google Scholar
- United Nations Population Division (2015) ‘World Population Prospects: The 2015 Revision’, from: https://esa.un.org/Unpd/wpp/Publications/Files/Key_Findings_WPP_2015.pdf.
- Wang, Lijian, Daniel Béland, and Sifeng Zhang. 2014a. Pension fairness in China. China Economic Review 28 (1): 25–36.Google Scholar
- Wang, Lijian, Daniel Béland, and Sifeng Zhang. 2014b. Pension financing in China: is there a looming crisis? China Economic Review 30: 143–154.Google Scholar
- Yang, Zaigui. 2009. Urban public pension, replacement rates and population growth rate in China. Insurance: Mathematics and Economics 45 (2): 230–235.Google Scholar
- Yuh, Yoonkyung. 2011. Assessing adequacy of retirement income for US households: a replacement rate approach. The Geneva Papers on Risk and Insurance—Issues and Practice 36 (2): 304–323.Google Scholar
- Zhang, Yue-Hua, Chu-Shiu Li, Chwen-Chi Liu, and Sheng-Chang Peng. 2013. The impact of health on work in China: A study using pilot survey data. The Geneva Papers on Risk and Insurance—Issues and Practice 38 (4): 857–870.Google Scholar
- Zhao, Yaohui, Eileen Crimmins, Hu Perry, Yang Shen, James P. Smith, John Strauss, Yafeng Wang, and Yuan Zhang. 2016. Prevalence, diagnosis, and management of diabetes mellitus among older Chinese: Results from the China Health and Retirement Longitudinal Study. International Journal of Public Health 61 (3): 347–356.Google Scholar
- Zheng, W. (2016) ‘Reverse mortgage in China’, China Finance 24: 71-72 (in Chinese only). http://www.cqvip.com/qk/96434x/201624/670968449.html.