The impact of public pension on household consumption: Evidence from China's survey data

Abstract

It is of vital importance to examine the relationship between pensions and household consumption/saving because this forms a link between social policy and economic development. Based on theories of absolute income, permanent income, and the life-cycle hypothesis, this paper constructs panel data models to investigate the effect of public pension participation and benefit level on household consumption. Evidence from the China Health and Retirement Longitudinal Study (CHARLS) 2011 and 2013 survey data shows that, compared with those not covered by any public pension program, individuals enrolled in the public pension system tend to consume more within respective income-quantile groups. Moreover, for the retired population, we found lower income groups have a higher marginal propensity to consume than higher income groups. In other words, lower income groups are likely to spend a higher proportion of any increase in pension benefit on consumption than higher income groups. To achieve a virtuous cycle between public pension, household consumption, and economic growth and, thus, a social-economically sustainable development, we suggest that China's pension system should be extended to cover all in the lowest income group, and the benefit level should be increased gradually to secure a stable expectation for the future and motivate current consumption.