No.76-Working Longer in China: Implicit Tax or Subsidy?
Xu, Jing; Wang, Xinmei
Published: 2018/12/15 20:19:32    Updated time: 2018/12/15 20:20:49
Abstract: Using the conventional concept of implicit tax, we investigate pension incentives to retire for private sector employees in China. The social security pension consists of pay-as-you-go defined benefit (DB) and defined contribution (DC) systems. Based on Chinese official parameters and the revised OECD models, our studies conclude that the DB system discourages people from working more, but the DC system offers considerably greater incentives at the expense of financial sustainability. If the annuity factors in the DC scheme were linked to the probability of retirees’ mortality, then both constant incentives to work longer and financial sustainability could be achieved.
Keywords: implicit tax; incentives; pension wealth; social security pension; working longer


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

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


1. Introduction

Working longer is one of the most decisive solution to dealing with the fiscal pressure  under population ageing (Ogawa and Takayama, 2006). Over the past two decades, as part  of their pension reforms, many countries have strengthened the link between contributions  and benefits in order to encourage people to work longer (Whitehouse 2012).

Social security pensions in China confront the similar financial pressures as  elsewhere. China’s old-age dependency ratio 65+/(15–64) increased from 8.6% in 1990 to  13.3% in 2015 and is projected to be 44% in 2050 (United Nations, 2017, in the medium  variant).1 At present, the total expenditures on the social security pension for private sector  employees exceed contributions every year in vast majority of provinces. This is an  earning related pension program, thus the expenditures should be 100% financed by the  contributions from employers and employees in general. However, for the past 10 years,  unexpectedly about 18% of these expenditures have to be funded out of general revenues,  mainly from the central government and a small part of them from local governments (Wang  2017).

To alleviate the fiscal pressure, postponing the normal pensionable age (NPA) has  been discussed and proposed several times over the past decade. However, this proposal  sparked strong resistance from the public. Therefore, earning the support of workers will  require a well-designed mechanism to motivate people to work longer; however, little has  been explored on this topic with respect to China.

Using the typical method of comparing net pension savings at different ages of  retirement, this paper investigates pension incentives to retire for current private sector  workers in China. We assume that workers are allowed to retire and receive social  security pensions between ages 45 and 64. Then, based on official data, we calculate the  tax impacts from working longer: a financial loss or a financial benefit.

The paper is organized as follows. Section 2 introduces the design of the public  pension system for private sector employees. Section 3 explains our methodology: the  concept of an implicit tax (ITAX) and simulation modeling. Section 4 applies the  simulation results of ITAX in the baseline model. Section 5 compares the baseline model  with various other scenarios. Section 6 concludes the paper.


1 The old-age dependency ratio, here, is the number of people 65+ divided by the number of people aged from 15 to 64.



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