An Increase in the Retirement Age in China: The Regional Economic Effects

China’s pension system is in need of comprehensive reform in that it is fragmented in its coverage and significantly under-funded. Attempts to improve the coverage will likely exacerbate the financial strains. Thus it is urgent to improve the financial sustainability of the system and one policy which has been proposed is to increase the retirement age. There have been similar proposals in many other countries and they are in line with improved health and life-expectancy. In China’s case the partial coverage of the system is related to industry structure with much the best coverage being for government and SOE employees. Since this structure differs considerably across the regions in China, it is likely that a change in retirement age will have significantly different effects across China’s regions. Inter-regional disparities are already very substantial in China and it will be important to know whether changes in pension arrangements will widen or narrow these disparities. It is the object of the research reported in this paper to throw light on this question. To do this we construct a small theoretical model having some Chinese characteristics. The model has two regions (coast and interior), two sectors (formal and informal) two types of labour (skilled and unskilled), two levels of government (central and regional) and captures some features of the Chinese tax-expenditure system. Pension coverage is limited to skilled workers in the formal sector and pensions are assumed to be paid by regional governments. We linearise the model and solve it numerically using parameter values derived from average Chinese data for the period 2008-2013. We run two experiments, both involving a shocks designed to mimic an increase in the retirement age from 60 to 61. The first assumes that the regional governments use the extra net revenue resulting which results from the increase in retirement age for the provision of a government- provided consumption good while in the second case it is assumed that the government uses the revenue to reduce pension premia (or increase pension payments). In both cases the increase in retirement age increases the supply of skilled workers and depresses the relative skilled wage in both regions but by more in the interior than in the coast. Output of each good increases in each region but formal-sector output increases by more (since only the formal sector uses skilled labour); the income of skilled households falls but that of unskilled households rises; welfare increases in both regions for both household types but by more for unskilled than skilled and by more in the interior than in the coast. In addition, the welfare disparity between the coast and the interior is reduced. The results are similar in sign across the two experiments but the magnitude of the effects is generally larger in the second, i.e., where the regional governments use the additional net revenue to increase pension payments or reduce pension premia rather than simply producing more government output.