IDEAS home Printed from https://ideas.repec.org/p/wiw/wiwrsa/ersa15p182.html
   My bibliography  Save this paper

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

Author

Listed:
  • Nicolaas Groenewold

    ()

  • Anping Chen

    ()

Abstract

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. We construct a small theoretical model of two regions (coast and interior) having some Chinese characteristics. We distinguish between an informal sector in which workers have no pension coverage and a formal sector in which some workers are covered. In addition we distinguish between skilled and unskilled workers. There are two levels of government: a central government and two regional governments. Behaviour is based on utility maximisation by households and profit-maximisation by firms, with governments being exogenous. The model is solved numerically with parameter values based on recent Chinese data. Within this framework we model the effects of various shocks to the retirement age, the initial effects of which are changes in the labour supplied by skilled households. In the base case we find that in the short run an equi-proportionate increase in the retirement age in the two regions elicits substantially different labour supply responses in the two regions. These differences flow through to relative wage changes, output changes and, eventually, welfare changes. Effects through the budgets of the two regional governments are also important transmission channels. We find that welfare increases in both regions, with the improvement being substantially greater in the interior than in the coast, reflecting the greater relative importance of SOE and government employment in inland provinces. In the long run skilled labour is allowed to migrate from one region to another with the result that inter-regional differences are generally ameliorated.

Suggested Citation

  • Nicolaas Groenewold & Anping Chen, 2015. "An Increase in the Retirement Age in China: The Regional Economic Effects," ERSA conference papers ersa15p182, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa15p182
    as

    Download full text from publisher

    File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa15/e150825aFinal00182.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fleisher, Belton & Li, Haizheng & Zhao, Min Qiang, 2010. "Human capital, economic growth, and regional inequality in China," Journal of Development Economics, Elsevier, vol. 92(2), pages 215-231, July.
    2. John Whalley & Shunming Zhang, 2011. "A Numerical Simulation Analysis Of (Hukou) Labour Mobility Restrictions In China," World Scientific Book Chapters,in: China's Integration Into The World Economy, chapter 11, pages 295-324 World Scientific Publishing Co. Pte. Ltd..
    3. Chunli Shen & Xiaojun Zhao & Heng-fu Zou, 2014. "Fiscal Decentralization and Public Services Provision in China," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1037-1063, November.
    4. Luc Behaghel & David M. Blau, 2012. "Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age," American Economic Journal: Economic Policy, American Economic Association, vol. 4(4), pages 41-67, November.
    5. Codrina Rada, 2010. "Formal And Informal Sectors In China And India," Economic Systems Research, Taylor & Francis Journals, vol. 22(2), pages 129-153.
    6. Wang, Lijian & Béland, Daniel & Zhang, Sifeng, 2014. "Pension fairness in China," China Economic Review, Elsevier, vol. 28(C), pages 25-36.
    7. Zheng Song & Kjetil Storesletten & Yikai Wang & Fabrizio Zilibotti, 2015. "Sharing High Growth across Generations: Pensions and Demographic Transition in China," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 1-39, April.
    8. Shuming Bao & Örn B. Bodvarsson & Jack W. Hou & Yaohui Zhao, 2011. "The Regulation Of Migration In A Transition Economy: China'S Hukou System," Contemporary Economic Policy, Western Economic Association International, vol. 29(4), pages 564-579, October.
    9. Woodland, Alan D. & Yoshida, Chisato, 2006. "Risk preference, immigration policy and illegal immigration," Journal of Development Economics, Elsevier, vol. 81(2), pages 500-513, December.
    10. Tsunao Okumura & Emiko Usui, 2014. "The effect of pension reform on pension-benefit expectations and savings decisions in Japan," Applied Economics, Taylor & Francis Journals, vol. 46(14), pages 1677-1691, May.
    11. Chen, Anping & Groenewold, Nicolaas & Hagger, Alfred J., 2013. "The Regional Economic Effects of a Reduction in Carbon Emissions," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(4), December.
    12. Tochkov, Kiril, 2007. "Interregional transfers and the smoothing of provincial expenditure in China," China Economic Review, Elsevier, vol. 18(1), pages 54-65.
    13. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September.
    14. Chunli Shen & Jing Jin & Heng-fu Zou, 2012. "Fiscal Decentralization in China: History, Impact, Challenges and Next Steps," Annals of Economics and Finance, Society for AEF, vol. 13(1), pages 1-51, May.
    15. Jia, Junxue & Guo, Qingwang & Zhang, Jing, 2014. "Fiscal decentralization and local expenditure policy in China," China Economic Review, Elsevier, vol. 28(C), pages 107-122.
    16. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
    17. Chen, Anping & Groenewold, Nicolaas, 2013. "Does investment allocation affect the inter-regional output gap in China? A time-series investigation," China Economic Review, Elsevier, vol. 26(C), pages 197-206.
    18. Yi Zeng, 2011. "Effects of Demographic and Retirement‐Age Policies on Future Pension Deficits, with an Application to China," Population and Development Review, The Population Council, Inc., vol. 37(3), pages 553-569, September.
    19. Pissarides, Christopher A & McMaster, Ian, 1990. "Regional Migration, Wages and Unemployment: Empirical Evidence and Implications for Policy," Oxford Economic Papers, Oxford University Press, vol. 42(4), pages 812-831, October.
    20. Wei Zhang, 2007. "Further Reform of China’s Pension System: A Realistic Alternative Option to Fully Funded Individual Accounts," Asian Economic Papers, MIT Press, vol. 6(2), pages 112-135, Spring/Su.
    21. Anping Chen & Nicolaas Groenewold, 2014. "The regional economic effects of a reduction in carbon emissions and an evaluation of offsetting policies in China," Papers in Regional Science, Wiley Blackwell, vol. 93(2), pages 429-453, June.
    22. Javier Alonso & Miguel Angel Caballero & Li Hui & Claudia Llanes Valenzuela & David Tuesta & Yuwei Hu & Yun Cao, 2011. "Potential outcomes of private pension developments in China," Working Papers 1133, BBVA Bank, Economic Research Department.
    23. Canfei He & Yehua Dennis Wei & Xiuzhen Xie, 2008. "Globalization, Institutional Change, and Industrial Location: Economic Transition and Industrial Concentration in China," Regional Studies, Taylor & Francis Journals, vol. 42(7), pages 923-945.
    24. Zhang, Xiaobo, 2006. "Fiscal decentralization and political centralization in China: Implications for growth and inequality," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 713-726, December.
    25. Marian Rizov & Xufei Zhang, 2014. "Regional disparities and productivity in China: Evidence from manufacturing micro data," Papers in Regional Science, Wiley Blackwell, vol. 93(2), pages 321-339, June.
    26. Garry F. Barrett & Milica Kecmanovic, 2013. "Changes in subjective well-being with retirement: assessing savings adequacy," Applied Economics, Taylor & Francis Journals, vol. 45(35), pages 4883-4893, December.
    27. Pei-Chien Lin & Chun-Hung Lin & I-Ling Ho, 2013. "Regional convergence or divergence in China? Evidence from unit root tests with breaks," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 50(1), pages 223-243, February.
    28. Lu Zheng & Huang Qunhui & Lu Tie & Zhou Weifu, 2007. "The Process and Problems of Industrialization and Urbanization in China: The Status of the Tenth Five-Year Plan and Recommendations for the Eleventh Five-Year Plan," Chinese Economy, Taylor & Francis Journals, vol. 40(1), pages 6-30, February.
    29. Hongxin Li & Marcel Merette, 2005. "Population Ageing and Pension System Reform in China: A Computable Overlapping-Generations General Equilibrium Model Analysis," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 3(3), pages 263-277.
    30. Robert Novy-Marx & Joshua Rauh, 2014. "The Revenue Demands of Public Employee Pension Promises," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 193-229, February.
    31. Wang, Lijian & Béland, Daniel & Zhang, Sifeng, 2014. "Pension financing in China: Is there a looming crisis?," China Economic Review, Elsevier, vol. 30(C), pages 143-154.
    32. Iris Claus & Les Oxley & Yong Cai & Yuan Cheng, 2014. "Pension Reform In China: Challenges And Opportunities," Journal of Economic Surveys, Wiley Blackwell, vol. 28(4), pages 636-651, September.
    33. Shunfeng Song, 2009. "Pension Systems and Reforms in China and Russia," Chinese Economy, Taylor & Francis Journals, vol. 42(3), pages 9-23, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    China; pension system; retirement age; regional impacts;

    JEL classification:

    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wiw:wiwrsa:ersa15p182. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gunther Maier). General contact details of provider: http://www.ersa.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.