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Reforming China’s public pension system: Fiscal sustainability and the challenge of formality-based inequality

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  • Gao, Han
  • Lu, Bei

Abstract

This paper examines the design of China’s public pension system, addressing two major challenges: fiscal unsustainability caused by population aging and significant pension disparities between formal and informal workers. Using a dynamic quantitative model with long-run macro and demographic trends, we assess the effects of the ongoing reforms and offer several options to deepen the reform: indexing pension benefits solely to the CPI, raising the resident pensions, and replacing pension financing from payroll tax with consumption tax. Our findings indicate that the delayed retirement policy announced in September 2024 could substantially mitigate fiscal deficits in the coming decades. Among the options evaluated, raising resident pension alleviates the formality-based pension inequality but increases fiscal burden; altering benefit indexation or the tax base for pension financing enhances both fiscal sustainability and welfare outcomes; the effects of consumption tax are particularly pronounced in the long run.

Suggested Citation

  • Gao, Han & Lu, Bei, 2025. "Reforming China’s public pension system: Fiscal sustainability and the challenge of formality-based inequality," Economic Modelling, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:ecmode:v:153:y:2025:i:c:s0264999325003311
    DOI: 10.1016/j.econmod.2025.107336
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    Keywords

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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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