Public pension and household saving: Evidence from China

In this paper, we associate domestic saving to pension reform, to go into detail about the high household saving rates in urban China from a different viewpoint. We make use of the exogenous – strategy induced – variation in pension wealth to explicitly calculate the affect of pension on domestic saving, and have a major offset effect of pension wealth on household saving. Our assessments indicate that pension reform improved the domestic saving rate. The outcomes additionally suggest that falling pension wealth lowers spending on education and health more than on other consumption items.

China’s domestic saving rates soared consistently throughout the mid-1990s. Determined by official statistics, the urban household saving ratio increased from 17% in 1995 to 20% in 2000 and to 23% in 2004. Simultaneously, China’s public pension system for urban employees continues to be in the process of reform. By far the most crucial pension reform began in 1995, first in a number of provinces and ultimately throughout the country. The reform is actually a multi-pillar system. Apart from the Pay-as-you go (PAYG) pillar, individual accounts were set up. Nevertheless, the overall replacement ratio dropped.

Source: Institute for Economies in Transition, Bank of Finland

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