Public pension and household saving: Evidence from urban China

We relate household savings to pension reform, to explain the high household savings rates in urban China from a new perspective. We use the exogenous – policy-induced – variation in pension wealth to estimate explicitly the impact of pension wealth on household savings, and obtain evidence of a significant offset effect of pension wealth on household savings. Although the size of the effect depends on the parameter values assumed, the finding that household savings are affected by pension reform is robust. Our estimates show that, under plausible scenarios, pension reform boosted household savings rates in 1999 by about 6–9 percentage points for cohorts aged 25–29 and by about 2–3 percentage points for cohorts aged 50–59. Our results also indicate that declining pension wealth reduces expenditure on education and health more than on other consumption items.

Research highlights
► We explained the high household savings rates in urban China from the impact of pension reform on saving and consumption.
► We obtained evidence of a significant offset effect of pension wealth on household savings.
► Our results also showed that declining pension wealth reduces expenditure on education and health.