An evaluation of pension differentials between Chinese private and public sectors from perspective of protection and incentives over the lifecycle

• Pension plan should serve protection and incentive functions for participants.
• As two forms compensation, pension and wage are substitutes to each other.
• Pension serves protection function to retirees across different sectors.
• Current pension system in China causes disincentive for public sector workers.

This article evaluates pension differentials between the private and public sectors over the lifecycle in urban areas in China. The aim of this study was to examine social equity in the face of increasing pressures to reform the current pension system. We developed a model to measure the protection and incentives offered by pensions in the private and public sectors. By incorporating educational cost, career length, retirement age, average years that a retiree receives the pension after retirement, growth rate of wages, interest rates and pension benefits into the model, we provided actuarial assessments. This study found that the current institutional arrangement of pensions in China results in negative incentives for workers in the public sector.