By Xi Chen, Ph.D.
Social pensions are designed to provide the elderly population, especially those with low lifetime incomes, a basic protection against poverty in old age.
In 2009, China introduced government-subsidized social pensions, the New Rural Pension Scheme (NRPS), now covering 400 million people in rural areas and becoming the world’s largest social pension program.
The NRPS was introduced in part due to erosion of the traditional system of intergenerational cohabitation in which children would provide care for the elderly, which has been mainly caused by migration of younger generations to cities, fewer children, a growing elderly population, and their increased life expectancy. They are in need of more market-based services to compensate for their loss of family care. Many rural elders are thus increasingly likely to suffer from too little support were it not for the introduction of a rural pension system. The NRPS on average amounts to one fifth of pensioners’ earned income with large regional variations.
3 Modest pension benefits in China could benefit other generations of the extended families
Through a longitudinal study of households of elderly parents and children in impoverished China, Chen (2015) compares families with adult sons and those with adult daughters, as the former lend stronger support to their parents and therefore their co-residence decisions are more sensitive to their parents’ pension receipt. The pension benefits are noncontributory to people above 60 and do not rely on retirement decisions. Their Regression Discontinuity (RD) approach uses a jump in actual pension receipt when they are above the age 60 eligibility cut-off. This design overcomes two main challenges that plague the literature:
- That pension eligible agents can be quite different from ineligible agents; and
- That age or cohort related heterogeneity may confound the pension impact.
Results reveal that elderly parents consume more healthcare and other services, even though health insurance coverage shows no significant changes after the pension eligibility cutoff. However, they also find a sizable reduction in sons’ (but not daughters’) co-residence with elderly parents after parents receive pension. Since half of these elderly persons are below the USD 1.25 poverty line, they are very likely to be credit-constrained. The larger effect for poorer groups indicates that pension benefits may release this constraint and make services more affordable to substitute for instrumental support directly provided by their children.
Major changes in living arrangement may offset pension benefits if children reduce their direct support to parents
Their empirical findings hold important implications. They show that even modest pension benefits in China, even compared to other developing nations, could benefit other generations of the extended families. Meanwhile, we should be cautious that substantive changes in living arrangement may offset pension benefits through reduced instrumental support to parents directly provided by children.
Chen (2016) goes further to examine the implication of reduced intergenerational co-residence on career choices of the younger generation, including off-farm activities and migration. Results show a sizable increase among sons (but not daughters) to migrate out of their home county around the pension eligibility age cut-off. Adult children are more likely to migrate out if their parents are healthy. These results suggest pension may affect informal old-age support not merely through living under different roofs, but through long-distance migration. The erosion of this very important old-age support likely generates changes in health among seniors, even in the short term.
Fortunately, overall the NRPS improves well-being of the elderly besides their better healthcare utilization. Employing China’s most recent national sample, Chen and Wang (2016) find a reduction in depression susceptibility after pension income. The improvement in mental health is larger for vulnerable populations with financial and health constraints. They further argue that pension payments may affect mental health through at least three plausible channels: (1) changes to lifestyle factors, such as independent living, service consumption, leisure time, and social network connectedness; (2) health investments, such as nutritional intake and medical treatment; (3) reduced financial stress, increased self-esteem and life satisfaction, and improved confidence in the future. Even if a recent study finds that pension income weakens the non-pecuniary and pecuniary transfers from children to elderly parents, the size of the effect is very small compared to the positive income change for pensioners (Chen et al. 2016).
China’s most recent national sample shows a reduction in depression susceptibility after pension income
The NRPS had achieved universal coverage at the county level by 2012, providing a nationwide, subsidized old-age support to older population in rural China. Between 2012 and 2014, China rapidly implemented a similar social pension program for all eligible urban residents. Starting from 2014, China has set an ambitiously plan to integrate the rural and urban social pensions as one system across the country. Once completed by 2020, this unified pension system will likely serve more than 800 million residents in China.
Besides tremendous social and economic meanings for China, the study of social pensions in China may have general implications for the United States and beyond. As policymakers attempt to address the financial sustainability of the U.S. Social Security programs, it is important to evaluate the extent to which Social Security benefits may directly improve old-age health, and if increased Social Security benefits can be offset by reduced health care expenditures out of the Medicaid or Medicare program. These studies may enrich our understanding of more than 100 social pension programs in other developing nations due to the fact that a large proportion of seniors in these countries live in poverty with no formal safety net, and that both the family and the community provide strong informal old-age support.
Read the Article
Chen X. 2015. Old-Age Pension and Intergenerational Living Arrangements. Review of Economics of the Household. Page 1-22. Available at: https://doi.org/10.1007/s11150-015-9304-y
Chen X, Wang TY. 2014. Does Money Relieve Depression? Evidence from Social Pension Eligibility. IZA Discussion Paper #10037. Available at: http://ftp.iza.org/dp10037.pdf
Chen X. 2016. Old-Age Pension and Extended Families: How is Adult Children’s Internal Migration Affected? forthcoming, Contemporary Economic Policy.http://onlinelibrary.wiley.com/doi/10.1111/coep.12161/abstract
Chen X, Sun A, Eggleston K. 2016. The Intergenerational Impact of Rural Pensions: Comparative Evidence from China, American Economic Association Annual Meetings 2014. Journal of the Economics of Aging.
Funding
This study was supported by NIH/National Institute on Aging grant (1 R03 AG048920), Natural Science Fund (NSF) of China (Approval Nos. 70525003 and 70828002) and the James Tobin Summer Research Fund at Department of Economics at Yale University.
About the Author
Xi Chen, Ph.D., is an assistant professor of health policy and economics at Yale University. His main areas of interest involve early childhood development, population aging and public policies, and climate change and health. Chen has been funded by multiple agencies, such as Yale, NIH, China’s NSF, and The PEPPER Center, to study aging and pension policies and a 30,000 children birth cohort. Chen is a research fellow at the Instotute of Labor Economics (IZA), President Elect of the China Health Policy and Management Society, a reviewer of the NSF, and a reviewer of 30+ peer-reviewed journals. He has been consulting for United Nations research institutions. Chen’s work has been recognized through numerous awards, including the Outstanding Ph.D. Dissertation Award from the Agricultural and Applied Economics Association. His research has been covered in various popular media, such as The Macmillan Report, The Economist, The Washington Post, The New York Times, and China Central Television.
Visit his official page at http://publichealth.yale.edu/people/xi_chen.profile.
