No.75-The Role of Public Pensions in Income Inequality among Elderly Households in China 1988–2013

Li, Jinjing; Wang, Xinmei; Xu, Jing; Yuan, Chang
Published: 2018/12/15 20:17:42    Updated time: 2018/12/15 20:19:14

Abstract: Using data from the Chinese Household Income Project surveys for 1988, 1995, 2002 and 2013, we investigate the role of public pensions in income inequality among households with elderly members across two decades of pension policy reforms. We examine the distribution and role of public pensions at a national level. We analyse the evolution of the contribution of public pensions to national income inequality across a much more extended time period than earlier studies, which have generally focused on regional changes over short periods. Our findings suggest that public pensions have become the most important source of income for households with elderly members on average in China, but the distribution of pension income is highly unequal, with a Gini coefficient of 0.74 in 2013. Public pension income has been the largest source of income inequality for elderly households since 2002 and contributed to more than half of total income inequality in the most recent year of the survey. This finding is robust against variations in the income inequality measures used. Additionally, our analysis suggests unequal distribution of pension benefits is the primary driver of pensioners’ income inequality. Among several hypothetical policy changes, ensuring a minimum pension benefit for all existing pensioners seems to be the most fiscally effective option in reducing income inequality, with a 0.8% reduction in the Gini coefficient for a 1% increase in public pension expenditure.
Keywords: income inequality; public pension; Gini decomposition

Authors:

Jinjing Li (National Centre for Social and Economic Modelling, Institute for Governance and Policy Analysis, University of Canberra, Australia)

Xinmei Wang (Institute of Population and Labor Economics, Chinese Academy of Social Sciences)

Jing Xu (School of Public Economics and Administration, Shanghai University of Finance & Economics)

Chang Yuan (Business School of Beijing Normal University)

 

1. Introduction

China has seen a substantial increase in income levels in recent decades. About two-thirds of  the population were living in poverty in 1990 according to the World Bank's international poverty  line ($1.90USD per day), but this ratio had dropped to 1.4% by 2014 (World Bank, 2018). At the  same time, the country has been experiencing a rapid growth in income inequality, with the Gini  coefficient increasing from 0.30 in the 1980s to around 0.50 in 2010 (Xie & Zhou, 2014;  Molero-Simarro, 2017), making China one of the most unequal countries in the world in terms of  income (Li & Luo, 2011).

Along with the dramatic changes in income distribution, China is also experiencing rapid  demographic ageing. China’s old-age dependency ratio – the population of those aged 65 years and  above as a proportion of the population aged between 15 and 64 years – increased from 8.6% to  13.3% between 1990 and 2015, and is expected to reach 44% by the end of 2050 (United Nations,  2017). The growth of this demographic can be attributed to a variety of factors including the low  fertility rate due to the government’s population policy1, and a general increase in longevity, which  rising living standards have supported.

The elderly population is often perceived as one of the more vulnerable social groups in many  countries, as older people tend to have lower capacity to generate private income than the younger  population, because of both the physical effects of ageing and the greater likelihood of this cohort  having mismatched skillsets in the labour market (Banister, Bloom & Rosenberg, 2012). Pension  income is one of the most important sources of income for elderly people. In China, pension  income is mainly dependent on public policy, which dictates who is eligible for a pension and the  amount of any pension.

Frequent policy reforms in recent decades have led to substantial change in the income sources  of elderly households and the role of public pensions has steadily increased. Public pensions have  become one of the most important components of the social security system in China (Feldstein,  1999). However, policies often vary, and are rolled out at different paces, for different regions,  industries and occupations. This results in numerous discrepancies in implementation. Several  papers have been dedicated to studying the changes in income distribution due to pension reforms in  China. He and Sato (2013) examined the redistributive effect of social security reform in urban  private sectors using 1995 and 2002 data. Palmer and Deng (2008) examined elderly well-being  using data from the Chinese Household Income Project surveys (CHIPs) between 1988 and 2002,  using separate income classifications for urban and rural areas. Li, Zhao and Gao (2013) analysed  the horizontal and vertical inequalities of public pension income in urban areas between 1988 and  2007 by comparing pension payout levels for different pensioners by occupation status. Zhu and  Walker (2018) highlighted the impact of the stratification of the pension system in recent years. Cai,  Giles et al. (2012) examined income support for rural elderly households in China and argued the  need for public intervention in the welfare of the elderly, especially for those who were not covered  by the pension system.

Existing literature however, does not provide an estimate of the impact of public pension  reform on the income distribution nationwide. Previous studies often focus solely on rural or urban  areas, as pension reforms are often region-based in China. By focusing on rural or urban areas  alone, the results ignore the dynamics of population mobility in China, where more than one-third of  the entire working population are ‘rural migrant workers’, who move from rural areas to work in  cities (National Bureau of Statistics of China, 2018). Additionally, no research has estimated the  longitudinal change in the income distribution due to the changes in public pensions. Challenges in  undertaking this type of research have included the lack of consistent income classification across  time and difficulties in obtaining data over a sufficiently long period.

This paper addresses this gap in the literature by examining the role of public pensions in  shaping income distribution in China, particularly among households with elderly members, between  1988 and 2013. As many pension reforms extend over this lengthy period, this study can better  describe the full impact of these reforms. Additionally, this paper is one of the few that uses a  longitudinally adjusted and consistent income classification across the entire country over an  extended period. This involves a range of corrections and classification matching for both rural and  urban areas. Substantial efforts have been made to separate incidental income from regular income,  which in turn reduces the measurement error of pension income. Finally, we investigate the role of  public pension income along with other social benefits, market incomes and private transfers in  income distribution through the Gini decomposition method and examine the marginal inequality  effect of the key elements in China’s public pension policy design. This derivation of the marginal  impact of alternative policy designs enables a fair budget-neutral comparison of the income  redistribution impact which previous literature has not explored. It offers a more realistic  interpretation of the public pension impact compared with simply contrasting income inequality with  and without public pensions.

The rest of the paper is structured as follows. Section 2 describes pension coverage and changes to  public pension policy in China. Section 3 describes the data and the adjustments we have made to  it. This is followed by the methodology section. Section 5 presents results from both the inequality  decompositions and simulations. Section 6 concludes.

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1 The fertility restriction has been changed in recent years. The one-child policy, however, was in place during the period of analysis (1988–2013).