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Leaving Money on the Table? Decisions to Enroll in the New Rural Pension

Tuesday, June 14, 2016
Lobby (Annenberg Center)

Author(s): Xi Chen

Discussant:

Faced with the unprecedented challenge of population ageing, China launched a large-scale social pension program in rural China – the New Rural Pension Scheme (NRPS) in 2009. The NRPS now covers more than 400 million Chinese, arguably the largest pension program in the world. Compared to the previous rural pension program in China, the NRPS is highly subsidized by different levels of government. However, young rural residents do not show sufficient incentive to participate or only choose the lowest level of premium, leading to low replacement rate that may not be able to sustain their basic life after retirement age. This paper aims to investigate their decisions to enroll in the NRPS. We explore their potential incentives and disincentives at multiple levels that explain why they may decide to leave this significant pension benefit on the table.

Utilizing a national sample of China Family Panel Studies, we explore the decisions to enroll in the newly implemented NRPS program. We attempt to identify potential suboptimal pension enrollment behavior in multiple ways. Further, through key falsification tests, we consider important but often ignored factors that may drive pension enrollment, such as trust in government and perception of social security issues.

We find salient evidence of suboptimal pension enrollment decisions. First, a large percent of respondents could benefit by simply switching from the previous unsubsidized public pension program (the default program) to the highly subsidized and dominant NRPS program. Second, adult children with parents eligible for free basic pension could benefit more from the program than those with no eligible parents, but we do not observe significantly more pension enrollment for the former group. Third, among children with parents eligible for free basic pension, the younger parents are, the more benefit they could receive upon enrollment. However, adult children’s pension enrollment seems not sensitive to parental age profiles. Fourth, for counties subject to the family binding policy, the two generations fail to benefit from the program via an intra-family transfer, though free basic pension received by elderly parents is much higher than children’s paid premium. Fifth, the poor do not pay the small premium to enroll while spending lavishly on parties.

Results also show that young respondents are more likely to enroll as they approach the pension eligible age 60. Generally, people in lower income categories are more likely to enroll in, as their old age support often relies on the public pension program. However, the poorest households are no more likely than their richer counterpart to enroll in, probably due to their budget constraint. Both own education and children’s highest education promote enrollment, suggesting that educational policies may improve financial literacy and therefore the understanding of the NRPS. Trust in government, perspectives of social security issues, and the successful implementation of the new cooperative medical scheme (NCMS) in early 2000s all play an important role in affecting pension enrollment.