Demographic change, pension reform, and household saving in urban China.

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


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


0.1

.2.3

per

capi

ta s

avin

g


cohort 1930-34 1925-29


Change in saving pattern (3) (regression)

0.1

.2.3

savi

ng

rate


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


Budget share of medical exp by cohort/age

02

46

budg

et s

hare

of m

edic

al e

xpen

ditu

re


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


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


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


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


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.

Demographic change, pension reform, and household saving in urban China.

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