The Effects Of Basic Pension Insurance System On Consumption Of Urban Residents

This paper employs a simple Overlapping Generations model to analyze the impacts of China’s basic pension insurance system, formed as a "hybrid" pattern, on the consumption and social welfare of China’s urban residents. The model suggests that the "hybrid" pattern, as a combination of "fully funded" and "pay as you go", the basic pension insurance system exerts its repercussions with two expectation effects that contradict each other---the change in expected age structure of population and the expected costs of funds. Individuals’expectation for an aging population undermines the facilitation of pension system on consumption, while an expected increase of costs of funds makes a loss on residents’lifetime wealth inhibiting consumption. Owing to the time-variant age structure of population, the effects of basic pension system on consumption embraces time heterogeneity. Empirically probing into the inter-provincial panel data from 2004 to 2012 in China, the paper confirms aforementioned time heterogeneity, and holds that with the shifting time and an aging population, pension expenditure on the urban retirees has heterogeneous impacts on urban residents’consumption, with a transition from positive impact to negative and the latter being ever-increasing.Furthermore, seeing right through the altering consumption of residents can conversely deduce changes in their expected lifetime wealth, and help us assess the effects of changes in age structure on the pension system equilibrium and social welfare. It concludes that an aging population in China has started curtailing the social security function of our basic pension insurance system and we should from the point of view of social welfare rethink the reasonability of the existing system.