Li Zhen, Zhao Qing: Does Urban Pension Insurance System squeeze into the residents' consumption? Towns and time series analysis based on panel data

"Journal of Public Administration", 2015 No. 4

Li Zhen, professor of social security institute of SPAP of Renmin University of China

Relationship between pension and the consumer / saving as a controversial topic has not yet reached a conclusion. Based on the hypothesis of absolute income, life cycle hypothesis, precautionary saving hypothesis and other cutting-edge consumer function theory, to build China consumption function model based on experience, combined with China's pension insurance system from the traditional pension system transition to a social insurance focusing on   different  impact of pension before and after the reform on consumer spending, and the relationship between modern social pension insurance system and urban residents' consumption behaviour.

The empirical results show that the impact of consumption of urban residents pension insurance does not validate our life-cycle based, permanent income and precautionary saving envisaged theory. Empirical data from1987 to1996 showed that the pension system actual was pushed out from household consumption, despite during the process on shaping the improvement of social insurance system (1997-2012), the pension played a weak role in consumption. More reliable inter-provincial panel data analysis after reform showed that the impact of the level of social security pension insurance on household consumption is not significant, and increase in coverage reduce the current consumption of residents in some extent. The main factors affecting the current consumption level of urban residents are household disposable income of urban residents per capita annual, which has shown significant positive effects in time series and panel models.

Similarly, empirical results of "Whether pension can effectively reduce household savings or not," by Li Xue, Zhu Chong-Shi (2001) show that the most important factor at this stage to affect the savings rate of Chinese residents is inertial force from household savings behaviour, and the effects of pension insurance and demographic factors in influencing household savings rate is relatively limited. In other words, pension's effects on the other side of the family saving - consumption - are not very clear. The conclusion in this paper, on pension insurance and household savings / consumption "neutral theory" is closer to international research: Barro (1979) research indicates that PAYG social pension is just a kind of legal public transfer from current young to current elderly. This financial system should have no effect on the crowding-out effect of private savings. World Bank Report,1994, " prevent the ageing crisis: to protect older and promote growth," demonstrated that PAYG pension empirical investigation from industrialized and developing countries, from which pension insurance has minimal negative effect (or a positive impact on private consumption) on private savings.  

From that, the relationship between social security system, the core of the pension system and residents' consumption / savings is complex. Factors that affect consumer resident savings patterns include social security system, and others unobserved variables such as culture tradition also play important roles, but the most important factors are initial distribution of income levels and average state, which determines the level of state and average consumption.

This finding allows us to note that considering pension system as a demand management tool (that is, by increasing the pension replacement rate and coverage levels to expand consumption) is still questionable. Indeed, unemployment insurance, social assistance and other projects in social security system associated with economic cycle have automatic adjustment function, so during recession they really can effectively expand domestic demand, contributing to economic recovery. But pension system involving social insurance tax (fee) payment collection and treatment, and its effect on consumption-savings behaviour is more complex. That "pension can promote consumption" is not validated by the data analysis of Chinese urban experience in the paper. Therefore, taking use the pension system as a tool for expanding domestic demand, should be used with caution.

For functional orientation of pension insurance, we think we should return to its essence: to achieve a certain level of income replacement in order to avoid falling into poverty in old age. It has profound implication in rational development of public policy in the current pension policy: the goal of social pension insurance system is to protect the residents can enjoy basic income security for the elderly, in order to avoid the occurrence of poverty in old age - taking this target as a starting point, the policy to improve security level and extend the coverage through scientific calculation is reasonable. If just take the expansion of domestic consumer demand as the purpose to exaggerate the economic function of pension-related public policy, it is likely to have unintended adverse social consequences under the rigidity influence of welfare.