Sharing High Growth Across Generations: Pensions and Demographic Transition in China

Friday, June 1, 2012

A major dilemma facing China is the extent to which the bene…ts of high growth can be shared more equally within and across cohorts. China will experience a sharp increase in the old-age dependency ratio which may undermine the sustainability of its pension system, arguably the most important institutional vehicle of inter-generational redistribution. In this paper, we analyze the welfare e¤ects of alternative reforms of the Chinese pension system, with the aid of a dynamic general equilibrium model which incorporates the salient structural factors, namely, the population dynamics (including internal migration) and productivity growth. We show that the current system is unbalanced and that either higher taxes or lower bene…ts are necessary to restore its intertemporal balance. However, delaying such a reform by a few decades has a major positive impact on the welfare of (poorer) workers retiring in the next few years, and imposes only a small additional cost on (richer) future generations. In contrast, a fully funded reform has negative welfare implications on the earlier generations, and yields small gains to the generations retiring in the far future. The high wage growth predicted by our model is key for these normative results.

Yikai Wang
Kjetil Storesletten
Zheng Song
Fabrizio Zilibotti

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