Does old-age security promote rural residents' consumption? A decomposition based on contribution and replacement rates

Abstract

Vulnerable groups have low income and face borrowing constraints. What is the effect of pension security on lifelong consumption? Since 2011, China has been piloting old-age security among rural residents, which provides opportunities to study this issue. We numerically simulate the impact of old-age security on rural residents' consumption based on the overlapping generations framework and empirically test the findings. The empirical results show that pension security increases per capita expenditure during the working and retirement periods by 2.04% and 0.91%, respectively. The current excessively high average payment rate (exceeding the numerical simulation threshold of 0.1) has a negative moderating effect on the two consumption periods. The replacement rate, which primarily exhibiting a wealth effect, positively moderates consumption in both periods. Our research has theoretical and practical implications for optimizing social security and promoting welfare among low-income groups.