The Impact of Rapid Aging and Pension Reform on Savings and the Labor Supply

March 18, 2019

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Hui He, Lei Ning, and Dongming Zhu. The Impact of Rapid Aging and Pension Reform on Savings and the Labor Supply, (USA: International Monetary Fund, 2019) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study, both empirically and quantitatively, the role of savings and the labor supply in self-insurance channels over the life cycle when one faces not only idiosyncratic income risks, but also changes in longevity risk and pension benefits. We pick China as a case study since China has undergone a dramatic process of rapid aging and a tremendous reduction in social security benefits for the period 1995-2009. We find that both savings and the labor supply are quantitatively important self-insurance channels in responding to changes in longevity risk and pension benefits, and the responses via adjustment to savings and labor supply have significant macroeconomic implications. Applying the model to China, we find that the pension reform and rapid aging together contribute 55 percent of the increase in the household saving rate from 1995 to 2009, and they jointly capture about 64 percent of the drastic increase in the labor supply for the same period.

Subject: Aging, Expenditure, Labor, Labor supply, Pension reform, Pension spending, Pensions, Population and demographics

Keywords: Aging, Benchmark economy, Demographic Change, Growth rate, Heterogeneous Agent Model, Household savings rate, Labor Supply, Life Cycle, Pension Reform, Pension spending, Pensions, Rate puzzle, Replacement rate, Replacement ratio, Retirement age, Roles saving, Save rate, Saving, Saving rate, WP

Publication Details

Pages:

59
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/061
Stock No:

WPIEA2019061
ISBN:

9781498302890
ISSN:

1018-5941

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