Abstract
It is of vital importance to examine the relationship between pensions and household consumption/saving because this forms a link between social policy and economic development. Based on theories of absolute income, permanent income, and the life-cycle hypothesis, this paper constructs panel data models to investigate the effect of public pension participation and benefit level on household consumption. Evidence from the China Health and Retirement Longitudinal Study (CHARLS) 2011 and 2013 survey data shows that, compared with those not covered by any public pension program, individuals enrolled in the public pension system tend to consume more within respective income-quantile groups. Moreover, for the retired population, we found lower income groups have a higher marginal propensity to consume than higher income groups. In other words, lower income groups are likely to spend a higher proportion of any increase in pension benefit on consumption than higher income groups. To achieve a virtuous cycle between public pension, household consumption, and economic growth and, thus, a social-economically sustainable development, we suggest that China’s pension system should be extended to cover all in the lowest income group, and the benefit level should be increased gradually to secure a stable expectation for the future and motivate current consumption.
Highlights
The dynamic relationship between social security and macroeconomics has long been the concern of scholars as well as policy-makers [1], since a desirable and sustainable social policy should serve for the goals of equity and fairness and have a sound interaction with the socio-economic ecology in which it is embedded
The public pension system, which takes a large proportion of social spending and covers the majority of the population, has a profound interaction with household consumption or saving and, with macroeconomics
Curtis et al (2015) construct a model of overlapping generations (OLG), in which individuals live for 85 years; individuals make no decisions and depend on their parents for consumption before age 20; individuals from 20 to years old work, raise children, and transfer a portion of their labor income to current retirees by the pay-as-you-go public pension system; retirees above years old live off their accumulated assets, pensions, and family transfers [30]
Summary
The dynamic relationship between social security and macroeconomics has long been the concern of scholars as well as policy-makers [1], since a desirable and sustainable social policy should serve for the goals of equity and fairness and have a sound interaction with the socio-economic ecology in which it is embedded. The public pension system, which takes a large proportion of social spending and covers the majority of the population, has a profound interaction with household consumption or saving and, with macroeconomics. The relationship between social security and household consumption or saving is still a matter of debate. David Blake indicates that a national pension system has a positive impact on individual consumption and generates a strong substitution effect on individual saving [5]. Leimer and Lesnoy question Feldstein’s results and re-estimate the model, finding a much weaker effect of the public pension on household saving [6]. Modigliani and Sterling apply a life cycle model to examine the effect of pensions on saving rates of 21 OECD countries from 1960 to 1970, discovering the net effect approximates to zero [8]
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