demographic change, pension reform, and household saving in urban china
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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. - PowerPoint PPT PresentationTRANSCRIPT
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.
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.
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.
Such significant income growth, demographic and institutional changes should bring about changes in urban household saving behaviour.
Demographic changes (1):population pyramids in various years
1964年
( 10. 0) (5. 0) 0. 0 5. 0 10. 0
0 4-
15 19-
30 34-
45 49-
60 64-
75 79-
1982年
( 10. 0) (5. 0) 0. 0 5. 0 10. 0
0 4-
20 24-
40 44-
60 64-
80 84-
1990年
( 10. 0) (5. 0) 0. 0 5. 0 10. 0
0 4-
20 24-
40 44-
60 64-
80 84-
2000年
( 10. 0) (5. 0) 0. 0 5. 0 10. 0
0- 4
20- 24
40- 44
60- 64
80- 84
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 dataUrban household Income and Expenditure
Survey conducted each year by NBS1986 to 2004 (19 years)Sample size: 12,000 to 31,000 households
each yearDetailed income and expenditure dataSaving:
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.
To reduced complication between households composition and household “life cycle”, our analyses are focused on these two type of households.
Demographics: household type
0
10
20
30
40
50
60
70
80
90
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Survey year
Ty
pe
of
ho
us
eh
old
as
% o
f to
tal
sa
mp
le
couple only2 generation with parent being head2 generation with children being head3 or more generation
Change saving patterns by cohort (ln(inc)-ln(cons) or saving rate)
0.1
.2.3
per
cap
ita s
avin
g
20 30 40 50 60 70 80age of household head
couple only and 2 generation hh with parent being hh head
saving by 5-year cohort
Life-cycle saving: the US
Attanasio, JHR, 1998
Life-cycle saving: Taiwan
Deaton and Paxson, 1999
.14
.16
.18
.2.2
2.2
4.2
6.2
8lo
g(in
c)-lo
g(co
ns),
ye
ar e
ffect
s in
clu
ded
20 30 40 50 60 70 80Age of the household head
Note: Effect computed for 2001
Four cohorts
Cohort Age in 1986 Age in 1995
(reform)
Age in 2004
Young1965-79
7-21 16-30 (new entrance)
25-39
Middle young1950-64
22-36 31-45 (onechild P)
(middle aged)
40-54
Middle old1935-49
37-51 46-60(apprch retirement)
55-69
Old1925-34
52-61 61-70(Retired)
70-79
Change in saving patterns by cohorts (2)
0.1
.2.3
per
capi
ta s
avin
g
20 30 40age of household head
cohorts 1975-79, 1970-74, 1965-69
saving by 5-year cohort
0.1
.2.3
per
capi
ta s
avin
g
20 30 40 50 60age of household head
cohorts 1960-64 1955-59 1950-54
saving by 5-year cohort0
.1.2
.3pe
r ca
pita
sav
ing
40 50 60 70age of household head
cohort 1945-49 1940-44 1935-39
saving by 5-year cohort
0.1
.2.3
per
capi
ta s
avin
g
50 60 70 80age of household head
cohort 1930-34 1925-29
saving by 5-year cohort
Change in saving pattern (3) (regression)
0.1
.2.3
savi
ng
rate
20 40 60 80age of household head
cohort 1965-1979cohort 1950-1964cohort 1935-1949
cohort 1925-1934
67
89
10
log
(rea
l an
nual
ind
ivid
ual
inco
me)
20 40 60 80individual age
cross sectional age-income profile
Why do old people save more?
Why do old cohorts save more? Rainfall from economic growth
02
46
81
0re
al i
nc
in o
ne
ye
ar
as
% o
f a
no
ther
20 40 60 80age
rinc9488rinc0494rinc0488
Why do old cohort save more?
02
46
8re
al in
c in
one
ye
ar a
s %
of a
noth
er
1920 1940 1960 1980birth year
rinc9488
rinc0494rinc0488
Real income growth for each cohort
Why do old cohort have higher income increase?0
200
04
000
600
08
000
100
00lo
g(a
nnu
al in
c/tr
ans
fer/
pens
ion
inco
me)
50 60 70 80individual age
Real income, transfer, and pension by cohort
Increase in medical expenses for aged
0.0
5.1
.15
.2bu
dget
sha
re o
f med
ical
exp
endi
ture
20 30 40 50 60 70 80age of household head
Budget share of medical exp by cohort/age
02
46
budg
et s
hare
of m
edic
al e
xpen
ditu
re
20 30 40 50 60 70 80age of household head
med share 1994/1988
med share 2004/1994
Change in medical share overtime by age
Middle cohort: Demographics: Household size
Cohort 2
34
56
hous
ehol
d si
ze
20 30 40 50 60 70 80age of household head
couple only and 2 generation hh with parents being head
Life cycle household size
One-child parents, cohortsBorn 1950-54 and there after
Middle cohort: dependency
12
34
mea
n nu
mbe
r of
chi
ldre
n liv
ing
at h
ome
20 30 40 50 60 70 80age of household head
couple only and 2 generation hh with parents being head
Number of children 0-18
12
mea
n nu
mbe
r of
eld
ers
livin
g at
hom
e
20 30 40 50 60 70 80age of household head
couple only and 3 generation households
Number of elders >=65
One-child parents
Middle cohort: Increase in children’s education cost for middle aged
0.0
2.0
4.0
6.0
8.1
bud
get s
hare
of e
duca
tion
exp
20 30 40 50 60 70 80age of household head
budget share of education exp by cohort/age
One-child parents1950-54 cohort
Why younger cohorts save more? (1)
0.2
.4.6
.81
% o
f ho
use
hold
s o
wn
a h
ouse
20 30 40 50 60 70 80(max) headage
Housing ownership by head cohort/age
Young people pay higher housing price
Housing price determinants (log(buying price))1995 1999 2002
Age of head -0.004 -0.009 -0.01
(0.002)* (0.001)*** (0.001)***Years of schooling of head 0.005 0.011 0.024
(0.008) (0.005)** (0.007)***Size of the housing 0.008 0.018 0.017
(0.001)*** (0.001)*** (0.000)***Has a private kitchen 0.66 0.092 0.177
(0.084)*** (0.085) (0.058)***Has a private bathroom 0.15 0.101 0.277
(0.057)*** (0.040)** (0.024)***
Year bought the house 0.086 0.001
(0.005)*** (0.000)***provincial dummies Yes Yes YesObservations 2251 2724 4928R-squared 0.25 0.27 0.38
Are “young household heads” representative of young generation?
.2.4
.6.8
Pro
port
ion
1985 1990 1995 2000 2005year
proportion living alone
proportion living with parents
25-28 years old living arrangement
.2.4
.6.8
Pro
port
ion
1985 1990 1995 2000 2005year
25-28 years old being main earners
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 20-29
Age 30-39
Age 40-49
Age 50-59
Age 60-69
Age>=70
First important reasonchildren education 39.87 73.76 68.93 28.84 13.52 11.51for my old age 10.13 6.37 12.43 38.55 60.1 63.89for unexpected risk 13.29 6.56 5.18 10.28 9.12 9.92buy housing 10.76 4.27 3.02 5.6 2.77 0.4
Second important reasonchildren education 13.23 14.72 11.93 11.29 9.83 10.08for my old age 17.74 32.62 42.94 31.91 23.39 19.33for unexpected risk 25.81 30.49 27.98 37.48 51.53 53.78buy housing 14.19 8.77 6.67 7.81 3.39 3.36
Third important reasonchildren education 6.6 3.32 3.01 4.35 8.66 8.18for my old age 11.88 18.12 16.37 11.94 7.4 5.91for unexpected risk 25.08 30.89 35.07 27.78 24.19 24.55buy housing 20.46 19.27 19.87 21.62 15.16 14.55
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.