| In early1990s, the aging population issue had become more and more prominent in the developed countries, since then many countries had begun public pension system reforms. Under such background around the world, China has also begun its own public pension reform which is known as the establishment of "individual accounts". However, after more than10years, the reform has met a dilemma. In one aspect, the individual account recorded cannot be financed and its return rate is too low; on the other aspect, the Pay-as-you-go systems in different provinces in China have been in quite different financial situations, some with inadequate revenues to meet expenditures. Whether or not to abolish the "individual accounts" and the fee rates of public pension has always been in debate of the academic fields and close related with everyone in the society. Based on this, this essay aimed to reflect the economic meanings of funded pension systems and Pay-as-you-go pension systems and make a comprehensive comparison between them in the aspects of return, risk and diversification effect through a thorough analysis. After that, this essay calculated the optimal mix rates of funded pension system and Pay-as-you-go pension system in China and several OECD countries based on historical data and make comparison between optimal mix rates of different countries and between actual mix rate and optimal mix rate of each country. The research found that the actual mix rate in China is much higher than the optimal rate. If the fee rate of Pay-as-you-go system remained unchanged, the fee rate of individual accounts should be2%in China. Besides, by drawing the efficient frontiers in different scenarios, this essay proved that both in China and America, the existence of Pay-as-you-go pension system can increase return, diversify risks of the individuals’ portfolios and allocate resources among different periods more effectively. At last, this essay has reached three conclusions. Firstly, the fee rate of individual accounts should be adjusted downwards, which can lessen the burden of government to finance the individual accounts and the burden of employers and employees. Secondly, the efficiency of the Pay-as-you-go pension system should be improved via higher replacement rate or lower fee rate or both of them in order to attract more young employees to participate in the pension system and increase the coverage rate which will result in a positive cycle. Third, the individual accounts can be retained but only as a buffer in case of the Pay-you-go-system exposed to large macroeconomic or demographic risks. With the help of the research in this article, the author intended to find a reasonable mix rate of Pay-as-you-go and funded pension systems in China. Besides, this article can also provide theoretical support and empirical results for the policy design of China public pension system.The creative part of this article is the three revisions to the original models. Firstly, this article assumes that funded pensions not only invest in equity market but also invest in fixed income market and in order to simplify the model used, this article assumes that long term government debt is the only fixed income security invested. Secondly, because of the long investment horizon of the funded pension plans, government debt is regarded as risky assets here. Thirdly and lastly, since there are ongoing debates about whether Chinese individual accounts can invest in the equity market, this article does not assume that the asset allocation of funded pension plans is constant. All these revisions make the model more closely aligned with the fact. However, the flaw in this article is that it uses the mean and variance of past return rates as the ex-ante mean and variance in the future. This is because only annual residents’income data is available and the sample contains too less data which makes using models like Garch model to forecast future variance of return rates inaccurate and impossible. |
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