Studies On The Participation Incentive Of Basic Pension Regimes

Since its establishment,China's basic old-age pension system for urban workers has undergone many reforms and improvements and has played an important role in ensuring workers'fundamental life after retiring,supporting state-owned enterprise reform and stabilizing economic and social development.However,without proper settlement of separating legacy cost,setting payroll tax rate and adjusting contribution base,the basic pension system is faced very low participation incentive of enterprises and employees,especially the low-income groups.The insufficient participation incentive of enterprises and employees cause a sharp drop of dependency ratio and contribution compliance of the basic pension system,which means a severe threaten of pension system's solvency and sustainability.China's basic old-age insurance system has a high contribution rate and the nominal contribution rate ranks the highest in the world.More importantly,there exists a minimum contribution base which is linked to the average wage.Generally,60%of the average wage of workers in urban non-private sector in the preceding year is set as the minimum contribution base for pension contributors.In China,only the non-private sector is used to calculate minimum contribution base,plus the wage of works in non-private sector is significantly higher and growing faster than the private sector,resulting in a much too high minimum contribution base which actually exceeds the total income of many worker in private sector or informal employment sector.The excessive contribution base makes the real premium of low-income households higher than the nominal contribution rate.And as the average wage grow much faster than wages of low-income households,the contribution burden is still becoming heavier and heavier.Although more contribution means higher benefit after retirement,excessive contribution base may distort low-income households'consumption smoothing over life cycle due to the liquidity constraint which means the low-income households cannot borrow money against the future pension benefit to improve current consumption.The imbalance of inter-temporal consumption leads to the loss of welfare for low-income insured households and stifles the participation incentives of low-income groups.Thus,the state council issued a special documentation in 2016,which required the government to include the wage of workers in urban private sector into statistical range of contribution base,in order to form an appropriate contribution base for social securities and house provident fund and avoid crowding the low-income group out of the social security system.Based on the above observations and considerations,this dissertation takes the household consumption as the basic analysis object and examines the impact of pension insurance on household consumption to infer the participation incentives of basic pension system.If pension insurance can enhance the current consumption of insured households,it means that the basic pension system reduces households' precautionary savings,improves the life cycle resource allocation efficiency and may promote the household's contribution insurance incentive.In turn,if the pension insurance cannot improve the current consumption of the insured households,it means that the basic pension system may impose tight liquidity constraints on the insured households and distort the inter-temporal resource allocation,thus lowering households' incentive to participate in the basic pension system.From the perspectives of micro-mechanism and macro-manifestation,employing theoretical and empirical models,this dissertation takes the household consumption as the basic analysis object to study the impact of average wage,contribution base and real premium on workers' incentive of participating in the basic pension system.In the part of theoretical research,this dissertation establishes a life cycle model to study the impact of pension insurance contribution system on the current consumption and lifetime utility level of insured persons from the perspective of liquidity constraints,so as to provide a theoretical foundation for understanding the participation incentive of the basic pension system.In the part of empirical research,this dissertation firstly use the household survey data to examine the impact of insurance and real premium on different types of households'consumption from the perspective of liquidity constraint,so as to provide a micro-level evidence for understanding participation incentive of the basic pension system;then this dissertation use provincial panel data to test the impact of average wage increase on the number of insured employees and the contribution compliance,and provides empirical evidence of the impact of increasing actual premium on the solvency of the system due to the rise of average wage.The main contents and conclusions of the core chapters are summarized as follows:Chapter 3 of this dissertation analyzes the typical facts of basic pension system's contribution regimes,the minimum contribution base,the real premium burden of low-income groups and the insufficient participation of basic pension system.This chapter finds that the nominal contribution rate and minimum contribution base are both much too high which may suppress the participation incentive of enterprises and their employees.The average wage of urban non-private sector is significantly higher and growing faster than the private sector and urban households.It means the real premium rate of low-income households higher than the nominal contribution rate as the minimum contribution base is only linked to the average wage of urban non-private sector.And as the average wage grows,the contribution burden is still becoming heavier and heavier.With high payroll tax rate and high and fast-growing average wage,the real premium burden becomes heavier and heavier for low-income households.Excessive contribution burden suppresses the participation incentive of low-income groups which makes expanding coverage become difficult,and more and more insured workers choose to interrupting contribution or shortening contribution period,resulting in insufficient contribution and severe threaten to the solvency of the pension system.Chapter 4 of this dissertation establishes a two-period life-cycle model depicting workers' participation behavior.With parameters rooting in the inconsistent time preference theory of behavioral economics,this model studies the impact of high minimum contribution base and real premium on the participation incentive of low-income groups.The high minimum contribution base of basic pension system will exacerbate the real premium burden of low-income households.Although the pension insurance will improve the life-cycle wealth of insured households,insurance may still distort the inter-temporal consumption and reduce the current consumption and life-cycle wealth of insured households due to the liquidity constraint,which will significantly lower the participation incentive of low-income households.Meanwhile,the life-cycle wealth and current consumption of high-income households may be both improve by insurance due to the higher return of basic pension and slack liquidity constraint.And due to the ceiling of contribution base,the ratio of contribution to household income and impact of insurance on current consumption of high-income household would both decline as the increase of household income.Chapter 5 of this dissertation takes family consumption as the main objective variable to examine the effect of basic pension insurance on household consumption and infer the participation incentive of basic pension system.In this chapter,I establish three empirical models,the overall model,grouping model and contribution rate model.Based on the panel data fixed-effect regression and propensity score matching estimation,the impacts of pension insurance on consumption of different types of households are estimated.This chapter finds that basic pension insurance do promote insured households' current consumption in the whole household sample.While the estimations of grouping model show that,basic pension insurance cannot improve the current consumption of low-asset,low-income households.The reason is that high payroll tax rate and contribution base exacerbates the real premium burden of those households whose current disposable income would shrink significantly due to the liquidity constraint.For the high-income households with high financial assets,the low real premium brings insufficient old-age savings which means households' current will deviate from the optimal level.Higher real premium rate would improve high-income households' old-age protection,so that households'precautionary saving would decline and current consumption would increase.While for the low-income households with low financial assets,the real premium is so high that exceeds households' appropriate saving level.Households' current consumption would decline further with the increase of real premium rate due to the liquidity constraint.Chapter 6 of this dissertation examines the macro-manifestation of insufficient participation incentives of basic pension system.Based on the collection of provincial panel data from 2006 to 2014,this chapter quantitatively analyzes the impact of average wage on the number of insured workers and the contribution compliance through the fixed-effect IV-2SLS regression with instrument based on natural experiments.The estimations show that the increase in the average wage will result in a decrease in the number of insured employees and contribution compliance,which are not significantly influenced by nominal payroll tax rate or the total population structure.The implication is that in the case of fast rising average wage,minimum contribution threshold linked to the average wage would crowd the low-income group out of basic pension system which means low-income workers may choose not to participate in or quit basic pension system,the insured workers may choose to stop paying contribution or shorten the contribution period and the dependency ratio and contribution compliance will inevitably decline.The possible innovations of this dissertation are mainly in the following aspects:Firstly,unlike the existing researches which mainly study the impact of pension regime on workers' participation incentive from the perspective of nominal institutional parameters such as nominal payroll tax rate and portability losses,this dissertation focuses on the impact of minimum contribution base,fast rising average wage and increasing real premium on low-income workers' participation incentives.Secondly,this dissertation introduces liquidity constraint into the research of the impact of pension insurance on household consumption.This dissertation studies the impact of the basic pension insurance on current consumption of households with tight and slack liquidity constraint respectively,and provides a new perspective and evidence for assessing the impact of the pension regime design on the participation incentive in China.Thirdly,this dissertation introduces behavioral economics theory into the studies of participation incentives.In the calibration section of Chapter 4,this dissertation set different time preference parameters for high-income and low-income households respectively based on the inconsistent time preference theory of behavioral economics,so that this dissertation can depict households' heterogeneous preference in inter-temporal consumption allocation.