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Implicit pension debt, transition cost, options, and impact of China's pension reform : a computable general equilibrium analysis

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  • Yan Wang
  • Dianqing Xu
  • Zhi Wang
  • FanZhai

Abstract

The main problems with China's pension system--the pension burdens of state enterprises and the agency of the population--have deepened in recent years. Using a new computable general equilibrium model that differentiates between three types of enterprise ownership and 22 groups in the labor force, the authors estimate the effects of pension reform in China, comparing various options for financing the transition cost. They examine the impact that various reform options would have on the system's sustainability, on overall economic growth, and on income distribution. The results are promising. The current pay-as-you-go system, with a notional individual account, remains unchanged in the first scenario examined. Simulations show this system to be unsustainable. Expanding coverage under this system would improve financial viability in the short run but weaken it in the long run. Other scenarios assume that the transition cost will be financed by various taxes and that a new, fully funded individual account will be established in 2001. The authors compare the impact of a corporate tax, a value-added tax, a personal income tax, and a consumption tax. They estimate the annual transition cost to be about 0.6 percent of Gross Domestic Product (GDP) between 2000 and 2010, declining to 0.3 percent by 2050. Using a personal income tax to finance the transition cost would best promote economic growth and reduce income inequality. Levying a social security tax and injecting fiscal resources to finance the transition costs would help make the reformed public pillar sustainable. To finance a benefit of 20 percent of the average wage, a contribution rate of only 10 percent-12.5 percent would be enough to balance the basic pension pillar. Gradually increasing the retirement age would further reduce the contribution rate.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2555.

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Date of creation: 28 Feb 2001
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Handle: RePEc:wbk:wbrwps:2555

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Keywords: Pensions&Retirement Systems; Environmental Economics&Policies; Banks&Banking Reform; Economic Stabilization; National Governance;

References

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  1. Feldstein, Martin & Samwick, Andrew A., 1992. "Social Security Rules and Marginal Tax Rates," National Tax Journal, National Tax Association, vol. 45(1), pages 1-22, March.
  2. Edward M. Gramlich, 1996. "Different Approaches for Dealing with Social Security," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(3), pages 55-66, Summer.
  3. Corsetti, Giancarlo & Schmidt-Hebbel, Klaus, 1995. "Pension reform and growth," Policy Research Working Paper Series 1471, The World Bank.
  4. Disney, Richard, 1999. "Notional accounts as a pension reform strategy : an evaluation," Social Protection Discussion Papers 21302, The World Bank.
  5. Martin Feldstein & Andrew Samwick, 1996. "The Transition Path in Privatizing Social Security," NBER Working Papers 5761, National Bureau of Economic Research, Inc.
  6. Wang, Zhi & Kinsey, Jean, 1994. "Consumption and saving behavior under strict and partial rationing," China Economic Review, Elsevier, Elsevier, vol. 5(1), pages 83-100.
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  8. repec:fth:inadeb:322 is not listed on IDEAS
  9. Kenneth A. Lewis & Laurence S. Seidman, 2002. "Funding Social Security: The Transition in a Life-Cycle Growth Model," Eastern Economic Journal, Eastern Economic Association, vol. 28(2), pages 159-180, Spring.
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  17. Schwarz, Anita M. & Demirguc-Kunt, Asli, 1999. "Taking stock of pension reforms around the world," Social Protection Discussion Papers 20533, The World Bank.
  18. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
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Citations

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Cited by:
  1. Nong Zhu & Heng-fu Zou, 2006. "Reform of Social Security System in China," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 565, China Economics and Management Academy, Central University of Finance and Economics.
  2. Chen, Vivian Y., 2004. "A Macro Analysis of China Pension Pooling System: Incentive Issues and Financial Problem," Discussion Paper, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University 195, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  3. Li, Shiyu & Lin, Shuanglin, 2011. "Is there any gain from social security privatization?," China Economic Review, Elsevier, Elsevier, vol. 22(3), pages 278-289, September.

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