The Inter-relation Between Capital Market And Pension System

The reform of the pension system is drawing worldwide attention as a major reform with economic, social and political impact. Since its inception more than a century ago, the establishment, development and changes of pension system have never been an individual evolution in an isolated field, but rather a miniature of the evolution of the overall economic and social system, now and ever. It is especially so in the 21st century, when the pension system is more closely intervolved, penetrating and interacting with other factors of the social and economic development. There is an unprecedented influence from such factors as population, capital market and labor force. The inter-relation between capital market and pension system will be a subject with great value and significance.The present pension system evolution around the globe shows a distinct trend, which is a gradual transformation to a full-funded system based on the existing pay-as-you-go system. The interaction between pension system and capital market, in this process, will be the key to a successful evolution. Through an analysis of the social and financial qualities of the pension system and adopting both macro and micro points of view, this paper seeks to set up an interacting framework between the evolution of pension system and capital market and to find out the channel and extension of such effect. The paper also tries to put forward a suggestion for the optimization of pension system and the promotion of capital market after some empirical research.The paper tries to explore on two levels:One is the macro and theoretical level. The paper seeks to set up an analytical framework for the interaction of pension system and capital market and their effect channels through an analysis into the social and economic basis of the pension system. The pension system has both social and financial qualities. The social quality points to the fact that pension system serves as the foundation of political system with its fundamental goal of promoting social equality and stability. Therefore, among all features of pension system, reallocation is its primary function. Meanwhile, the overlapping impact of pension system upon all other fields of the society has to be given full consideration. The financial quality points to the fact that pension system has given rise to pension funds that holds financial assets, the value of which needs to be preserved and increased. Against the two qualities arises a demand for the capital market. On the one hand, the betterment of capital market will drive the growth of economy and provide a favorable environment for the evolution of pension system. On the other hand, capital market provides a channel and medium for pension funds to preserve and increase their value. In other words, it is a vehicle for pension fund to realize its financial features. The financial features of the pension system, of course, also ameliorate the structure of the capital market and promote its growth, another evidence of the interaction of the two.The other is the micro and practical level. Through an empirical study of the interaction of evolving pension system and capital market, the paper tries to find out the rule of influence in between and the extent of such influence. The paper also puts forward a suggested management pattern of pension funds to fit well with capital market after an analysis on the interaction between the management pattern of pension funds and the capital market. The study on the micro level is focused on the following points: 1) interest rate and return on investment are important transmission mediums for both pension system and capital market; 2) interest rate and return on investment affect the balancing point of the pension system as well as the direction and extension of its change; 3)the risk-adjusted return on investment is the key leash for all players in the capital market; 4)the continuous growth and betterment of the capital market will definitely bring about sustained and stable return on investment, which will be the prerequisite for a successful evolution of the pension system.。The paper includes the following major study and conclusions:(1)The study of pension system reform. It sets out with an introduction to the origination and evolution of the pension system, followed by an observation of various systems around the world. This part tries to summarize the vital rules in the evolution process of the pension system. Then, through an analysis of pension system with macro and micro economic theories, the paper seeks to build up the theoretical foundation and research framework for the evolution of pension system. The paper points out that the pension system is born with a public nature and is set to be used for public allocation. Reallocation, therefore, is pension's primary function by nature. The ultimate goal of pension system is to achieve social equality and to maintain social stability through reallocation. The paper also seeks to establish the theoretical link between pension system and capital market from two points of view, namely, the social and financial qualities of the pension system.(2) A framework study into the interaction between pension system reform and capital market on both macro and micro levels. On the macro level, the effect channel is that pension system reform and capital market improvement are both positive stimulus for economy and thus exercise positive drive to each other. On the micro level, the effect channel is that capital market affects the running of pension funds through regulation of all players in the market, and as a result improves the benefits of the pension system.More specifically, the effect of pension system on capital market is transmitted through the effect of savings and interest rate, where capital stock and interest rate are the mediums for transmission. On the other hand, the effect of capital market on pension systems is transmitted through the effect of return on investment, economic growth and governance structure, where ROI serves as the medium for transmission.(3) An empirical study into the interaction between the pension system reform and capital market. By setting up a regression model for the interaction between pension system evolution and the capital market, the paper explores the in-depth connection between pension system and capital market. The accuracy of the model is testified by using US data. The paper then sets forth on a macro level the environmental conditions required for a mutually beneficial interaction between pension system and capital market and explores the current situation and channels of interaction between pension system and capital market in China. The rule of interaction is then reached based on the foundation of the regression model. It argues that pension systems co-exist with the capital market, especially under the full-funded system where the existence of pension system completely depends on the existence of capital market.(4) A research into the interaction between the management patterns of pension systems with capital market. The key to the integration of pension system with capital market lies in proper operation and management mechanism to minimize investment risks and to maximize the return. A complete and mature operation mechanism is crucial to a pension system under capital market, a difference from the traditional pension system. The paper put forwards a suggested management pattern for pension systems based upon capital markets. There is a two-tier trust inherent in the pattern. The trustors and trustees have to be specified. The supervisory obligation and security responsibility also need to be clarified.(5) The realistic options for China's pension system and their interaction with capital market. In light of the evolution of China's pension system and the current needs, the paper puts forward a suggestion for the reform in the next stage. It argues that the important part of the reform for China's pension system should be to make individual accounts concrete by taking affordable measures. The paper also analyzes the interacting factors between China's pension system, which is individual account oriented, and the capital market. It points out the preconditions for the safety of the individual accounts including adequate internal and external supervision and a fund management system in line with the requirements for capital market operation to ensure a market-oriented running of the pension funds and their return rate.The paper shows a creativeness in the following aspects:First, by observing the relation between a balanced pension system and its maximized social and economic benefits, the paper uncovers the inherent mechanism of and external drive for the balance of pension systems and their the fundamental interactive factors and conditions. The paper concludes that the origination and evolution of pension systems have their roots in the pursuit for maximized social benefits. A pension system failed to perform such function would lose the drive for further transformation. It is the pursuit for social benefits that makes the pension system keep on changing to achieve a new balance.Second, the paper has the exploration of social and financial qualities of the pension system as the starting point to establish a theoretical inter-relationship and interacting framework between pension system and capital market and, furthermore, to analyze the channel and extension of that interaction. Such approach opens up a new viewpoint for the study of the interaction between pension system and capital market.Thirdly, the interaction between pension system and capital market is vital to the success of pension system reform. The paper sets up the interaction model, makes empirical research into the interaction on a macro level and comes up with the rule of interaction, and finally reaches the conclusion that capital market has a decisive influence on the evolution of pension system. Fourthly, the paper puts forward a policy suggestion for the reform of pension system and for the growth of the capital market. It concludes that the interaction between pension system and capital market is far from mature in China. Therefore, making individual accounts concrete through affordable measures should be the important part of the present reform. Creativeness lies in uniqueness and highlights the paper's theoretical and practical value.