UC Davis

The New Rural Social Pension Insurance (NRSPI) is the largest multi-pillar pension program in the world, providing comprehensive support for the rapidly increasing senior population in China. Any rural resident contributing at or beyond the minimum level for at least 15 years is eligible for NRSPI benefits after turning 60 years old. Incorporating both the social pension (basic pension) and the voluntary pension (individual account pension) components gives NRSPI its own unique identity among public pension programs. This dissertation sheds light on the determinants of individuals’ participation decisions and the effects of NRSPI on the participants’ behaviors such as private savings and personal consumption across life stages. Additionally, this dissertation provides insights into how individuals’ NRSPI participation, private savings, and consumption behaviors are likely to vary across both key demographic characteristics and program parameters, thereby providing suggestions for how the government can efficiently achieve policy objectives.

Utilizing a three-period decision model with income uncertainty, I show that life expectancy plays an important role in an individual’s decision to participate in NRSPI; not surprisingly, individuals with greater life expectancy are more likely to participate. In the absence of subsidies, no individual would contribute for more than 15 years, which is the minimum requirement to be eligible to receive pension benefits. I show that, although NRSPI contributions crowd out private savings, the program raises total lifetime consumption and, as such, NRSPI has the potential to alleviate rural poverty in China. Comparative static analysis indicates that individuals in different NRSPI participation regimes react to changes of policy parameters heterogeneously. When uncertainty about life expectancy is introduced into the model, decision-making becomes more complicated, but most qualitative results are consistent with the certainty case.

Based on the conceptual model, I conduct a simulation analysis by randomly drawing 1,000 individuals with characteristics drawn from distributions reflective of the reality in rural China. Simulation results indicate that NRSPI, as designed, is an attractive program because the predicted participation rate under current values of policy parameters is significantly higher than actual participation rates in rural China. These results suggest that the government could increase investment in education and outreach campaigns about NRSPI in order to narrow the gap between predicted and actual participation rates. Results also show that the participation rate is quite sensitive to the size of the monthly basic pension payment and the minimum total contribution, while the average contribution responds strongly to the policy-specified life span after turning 60 years old and the interest rate paid on NRSPI contributions.

The crowding out and poverty-alleviating effects derived in the conceptual framework are confirmed and quantified through the simulation model, and I further demonstrate that these effects mainly result from the basic pension component of NRSPI. From the perspective of the Chinese government, high levels of specified life span and NRSPI interest rate, and low levels of monthly basic pension payment and minimum total contribution are the most efficient way to reduce net government expenditure and maintain a high participation rate.

Results also show that increased central government support to poorer provinces would allow local governments to increase the size of the basic pension payments and reduce the currently large regional heterogeneity in participation rates. A matching subsidy has little effect on participation rates but effectively enhances the average contribution level. Moreover, the government may consider increasing the maximum contribution level since results show a portion of residents would benefit from contributing more than the maximum after turning 45 years old.

This dissertation builds the first comprehensive conceptual framework to analyze the NRSPI and, as such, can be useful in guiding future empirical analysis of the program. By grounding the simulation analysis in data reflective of the rural Chinese context, the results and policy recommendations that emerge from this analysis should be useful to the Chinese government as it seeks to improve the performance of NRSPI in the future.