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)
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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