Demographic change, pension reform, and household saving in urban China

Motivation Growth, demographic and institutional changes China has had the fastest income growth in the world over the last two decades, especially in urban areas. China has had a significant demographic change due mainly to the introduction of the one-child policy in the late 70s.demographic change In the mid to late 1990s a significant reform which switches a fully funded government pension system to an individual account system in urban China.pension system In the mid to late 1990s, many other reforms, such as education, medical care, and housing, were introduced in urban China which replaced the old social welfare system with an system where individuals take the major responsibility.other reforms Such significant income growth, demographic and institutional changes should bring about changes in urban household saving behaviour.saving behaviour

Demographic changes (1): population pyramids in various years

Pension reform Introduced gradually from the early 1990s Between 1995 and 1997 formally introduced the individual account system : Theoretically, part of employer and most employee contributions go to individual accounts Different cohorts have different schemes : 1. “Old people” (those retired before 1997) enjoy fully funded system, their pension are indexed to average wages. 2. “Middle people” (those who entered labour market before pension reform and are not at retirement age yet) enjoy partial fully funded and partial individual account 3. New people’s pension will only be funded out of the individual account In reality it is a PAYGO system. Individual accounts so far are empty. There is great concern regarding the finance of the new system.

Other social welfare reforms Housing reform: Pre-reform, public housing at a subsidised rent In the 1980s, increase rent In the early 1990s, small scale selling publicly owned apartments From the mid 1990s, most households started buying publicly owned apartments at highly subsidised price After 2000, all the new apartments are sold at market price Education reform Pre-reform, everything was free In the early 1990s primary and secondary schools started charging in the name of donation and voluntary contributions Since the mid to late 1990s, university fees have been introduced. Medical reform Pre-reform, medical services and medicine were almost free of charge In the 1980s, individuals were made responsible for a small proportion of the charges From the mid 1990s, a new individual account system was introduced whereby individuals in the public sector are responsible for 30 to 50 per cent of the charges and individuals in the private sector have to pay full fee or using private insurance.

Question How different cohorts behave differently with regard to their saving patterns when facing these changes? Do Chinese urban household saving pattern follows the “Life Cycle Hypothesis”?

Data Repeated cross-section data Urban household Income and Expenditure Survey conducted each year by NBS 1986 to 2004 (19 years) Sample size: 12,000 to 31,000 households each year Detailed income and expenditure data Saving: Consumption=expenditure-durable-housing Saving rate=log(income)-log(consumption)

Complication of households vs. individuals Saving is at household level In the literature, age of the household head is used to represent a household “life cycle” Thus, different household formations may have different “life cycles” In our sample, “couple only” and “Parents with children” households account for more than 80% sample households.80% sample To reduced complication between households composition and household “life cycle”, our analyses are focused on these two type of households.

Demographics: household type

Change saving patterns by cohort (ln(inc)-ln(cons) or saving rate)

Life-cycle saving: the US Attanasio, JHR, 1998

Life-cycle saving: Taiwan Deaton and Paxson, 1999

Four cohorts CohortAge in 1986Age in 1995 (reform) Age in 2004 Young (new entrance) Middle young (onechild P) (middle aged) Middle old (apprch retirement) Old (Retired) 70-79

Change in saving patterns by cohorts (2)

Change in saving pattern (3) (regression)

Why do old people save more?

Why do old cohorts save more? Rainfall from economic growth

Why do old cohort save more?

Why do old cohort have higher income increase?

Increase in medical expenses for aged

Middle cohort: Demographics: Household size Cohort Cohort One-child parents, cohorts Born and there after

Middle cohort: dependency One-child parents

Middle cohort: Increase in children’s education cost for middle aged One-child parents cohort

Why younger cohorts save more? (1)

Young people pay higher housing price Housing price determinants (log(buying price)) Age of head (0.002)*(0.001)*** Years of schooling of head (0.008)(0.005)**(0.007)*** Size of the housing (0.001)*** (0.000)*** Has a private kitchen (0.084)***(0.085)(0.058)*** Has a private bathroom (0.057)***(0.040)**(0.024)*** Year bought the house (0.005)***(0.000)*** provincial dummiesYes Observations R-squared

Are “young household heads” representative of young generation?

Summary Old people save more because They gained a great deal from income increases (while their habit have not caught up with the increase in income?) Increase in medical expenses Middle aged are not saving as much because of the increase in cost of living, in particular, children’s education Young cohorts who are living alone are saving more because of housing cost. However, more and more of them are living with parents at the end of their 20s.

Why do people save? Age Age Age Age Age Age >=70 First important reason children education for my old age for unexpected risk buy housing Second important reason children education for my old age for unexpected risk buy housing Third important reason children education for my old age for unexpected risk buy housing

Conclusions Household saving behaviour in China is a complicated issue, perhaps, simple regressions will not reveal a great deal of information. This is because: 1. saving is a household behaviour, whereas household composition and demography has changed significantly in China 2. Many reform measures have been introduced during a short period and it is hard to figure out what reform has affect household saving in what ways. What’s next? To find a better way to summarize the rich data and complicated story. To predict whether the middle cohort is saving enough.