Research On The Individualized Amelioration Of China Pension's Individual Account

In an environment that all countries around the world have planned some kind of pension reforms, China also steps on the road of pension reform. China implemented its pension reform from the 90's in the twentieth century and decided to introduce the personal account into the pension system, established a national uniform social pooling account and individual account integrated pension system, i.e., establish the mandatory individual account on the basis of maintaining the social pooling account to realize personal old caring purpose via capital accumulation in individual account to prevent pension payment crisis when the population ageing peak time arrives. Hence the current basic social insurance system consists of social pooling account and individual account and pertains to the partial funding accumulation system. The pooling account is based on cash accounting for the objective of maintaining short-term funds balancing, which pertains to the defined benefits system. The individual account is based on full funding accumulation, defines the contribution rate as per actuary formula and pension payment is determined by contribution and investment return of the fund, which pertains to the defined contribution system.For the moment China pension's individual account system faces several serious problems. Firstly, pension fund administration institution lacks of efficient supervision, which results in serious embezzlement and appropriation of the pension fund and negatively affects the participants'confidence in individual account system. Secondly, the investment return rate of the pension individual account's fund is too low to realize effective value-keeping and value-adding, which results in the false belief that contributing to pension individual account is worse than self-saving for retirement. This challenges the validity of the existence of pension individual account. Lastly, farmer workers and individuals with flexible employment are excluded from the current pension insurance system, which makes it difficult to expand the pension coverage. At present one of the most unreasonable factors in China Pension's Individual Account is that the participants'rights and responsibilities are severely asymmetric. In the current China's 'pooling and account'combined pension system, fund from the individual account comes completely from the contributions of the participant, hence the individual account is each participant's private property. But there exists severe imbalance of rights and responsibilities in the current pension individual account:all responsibilities are borne by the participant while participants do not enjoy full rights on their private properties. On the one hand the participant has to carry out his responsibilities strictly to make contributions to the individual account as per relevant regulations, on the other hand the participant does not enjoy any freedom of choice, cannot have right to freely choose the pension administration companies or have right to decide the investment of his fund in the individual account or choose the contribution rate of his individual account, let alone supervise the value-keeping or value-adding of his fund in the individual account.On the prerequisite that the investment of the fund in the pension individual account can be market-oriented, the author proposes the idea of individualized amelioration in the individual account, i.e., offering the participant certain individualized rights of choice in pension administration companies, investment products and contribution rates etc. while keeping the current mode of pooling-account combined pension system unchanged.Since the contribution process of China's mandatory pension individual account can be viewed as a mandatory saving process of a participant, and the individualized amelioration of the individual account allow us to view a participant as an investor, therefore the concerning research problem can be translated as a dynamic programming problem of maximizing the utility of a representative customer on the basis of consumption and investing decisions. The best suitable model to solve this kind of problem is life-cycle model. Hence this paper uses the life-cycle model to analyze the individualized amelioration of the pension individual account. Since the life-cycle model we use must reflect the characteristics of pension individual account, we therefore modify the standard life-cycle model to reflect the most significant features in China's pension system, particularly in the individual account.This paper's structure is as follows. The first chapter proposes the research problem, gives the literature review, defines some basic concepts, explained research method and structure of this paper as well as the innovations of this research.The second chapter introduces the basic concepts of the individualized amelioration of the pension individual account and the judgment criterion of individual welfare, points out the weakness of the Pareto criterion and briefly introduces other welfare judgment criterion.The third chapter mainly gives detailed description of the China's pension insurance system, and particularly the relevant regulations of individual account. It also analyzes from the view of economic perspective the reform history of the current pension individual account and the drawbacks of the pension individual account. It also points out that there exists the main problems of the widening of pension fund gap, low investment return of pension fund, failure to realize the targeted replacement rate, low coverage of pension insurance, conflicts of rights and responsibilities in pension individual account.The fourth chapter mainly describes the operation status of mandatory pension individual account in other countries around the world and concludes the experiences and lessons from them. The representative countries or regions in terms of successful pension market reform are selected to describe. The international experience shows that an important trend in pension individual account is to allow the fund investment to be market-oriented, i.e., allowing the pension fund administration companies to manage the pension fund and to organize its investment. Reforms of pension individual account in many countries are in accordance with this idea. Many countries stipulate that the participant can freely choose to open his pension individual account in whichever pension companies as per the investment records of the pension administration companies, freely transfer his pension individual accounts between different pension administration companies, choose investment portfolios according to his own needs. Hence we can see that the core of the management of the pension individual account in other countries is:reduce the government's interference in social life, return the functions of society to the society, respect the individuals'choice of freedom, improve the investment return of pension individual account via introducing the market mechanism to promote competition.The fifth chapter describes the econometrics model used by this research. Since the model used in this paper is life-cycle model of portfolio investment, this chapter reviews the relevant literature of the life-cycle models of portfolio investment and its suitability in analyzing the participant welfare problem of China pension system. One key feature of these models is that analytical solutions cannot be obtained and only numerical approximation solution can be obtained. Hence this chapter gives the way as how to find the solution of the model. This chapter takes the structure of module forms, each module makes up one part of final solution of the model, and the different combination of modules can be used to solve different life-cycle models of portfolio investment. This chapter also makes contribution to the literature of pension insurance researches since it describes how to use appropriate algorithms to solve numeric stochastic dynamic programming problem in life-cycle models of pension investment.The sixth chapter uses CHNS (China Health and Nutrition Survey) data provided by the University of North Carolina in the U.S. to estimate the dynamic changing features of China employee's life cycle labor income. This paper uses the empirical economic data to calibrate the economic model. As one of the major tools frequently used in defining the variables and parameters of mathematical economic models, the calibration method is extensively used in the positive research field of economics. This method defines the values of parameters and endogenous variables via empirical data and models structure features. Since the labor income of employee is one major variable of the life-cycle models of portfolio investment, in order to accurately calibrate the model the author estimates respectively the low, middle and high educated male and female's age income features and its variances of temporary and permanent income shocks.In the seventh chapter the author uses a life-cycle model of portfolio investment complying with China's situations to research the problem of individualized amelioration of the pension individual account. This model contains two economies: one is economy A and the other is economy B. The former takes the pension system completely same as that of China's current pension system. The latter takes a different pension system that allows the participant have certain rights of free choice in how to invest his pension fund in individual account and the contribution rates. The investment return of pension individual account in the former economy is fixed while that of the latter is not fixed. In economy B we specially considers that the participants have the features of bounded rational economic agents and may have differences in the financial investment knowledge, such as illiterate of financial investment or full knowledge of financial investment may have impacts on the individualized amelioration of the pension individual account. In addition, we also take the realistic taxation and risk asset investment return into consideration in our model.The eighth chapter gives the conclusion and expectation of this research and makes policy and future research proposals. This chapter also points out in order to carry out the proposed individualized amelioration of the individual account the government should take the actions to define the ownership of individual account by legislation, implement effective financial investment education, improve the compensation mechanism of low income participant and provide the good investment environment.On the basis of problem-driven principle this research mainly uses the life-cycle model combined with the practical operation of China pension individual account as a basis to compute and analyze the problem of the individualized amelioration of the individual account. This research also uses comparative analysis method to analyze and explain the difference before and after the individualized amelioration of the individual account. Since the research problem is one with strong practical application, this research uses more quantitative methods in order to make up the drawback that quantitative analysis is insufficient in this research field.There are several major innovations in this research. Firstly, theoretically this research provides a completely new thought to solve the pension individual account problem and keep its sustainable developments and it is a forward research in the reform of China's pension individual account. The individualized amelioration of the individual account proposed by the author emphasizes the rights of the participant, put the participants in the center position and allows the participant to make their own free choice according to their personal needs so as to improve the pension welfare level of the participants. Secondly, in view of methodologies this research makes innovative improvements of the standard life cycle models on the basis of bounded rational expectation. It constructs new life cycle models of portfolio investments on the basis of bounded rationality so that the model can not only reflect the special features of China's pension individual account but also the features of the participants as bounded rational economic agents so as to meet the needs of this individualized amelioration of the individual account proposed by this research. Compared with the standard life cycle model of portfolio investment, the newly constructed model has the appeal of theoretical novelty with more scientific and logical features and hence enjoys more theoretical and practical values. Thirdly, on the basis of current algorithm of stochastic dynamic programming of life cycle of portfolio investment this research proposes improved algorithm, i.e., rewrite the objective value function in terms of vector product making use of the knowledge of linear algebra to significantly improve the speed of calculation.