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Social security reforms, capital accumulation, and welfare: A notional defined contribution system vs a modified PAYG system

Author

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  • Shiyu Li

    (Financial Policy Research Center, School of Finance, Renmin University of China)

  • Shuanglin Lin

    (Peking University
    Peking University)

Abstract

This paper studies social security reforms in a model with declining population growth and increasing life expectancy. Based on simulations using data on China, it is found that a switch from a pay-as-you-go (PAYG) system to a notional defined contribution system favors the rich, causes the poor to work more, and may change the capital-effective labor ratio depending on the rate of return to personal accounts. A switch from the PAYG system to a modified PAYG system that saves part of the receipts, with the interest rate greater than the growth rate, increases labor supply and decreases the capital-effective labor ratio in period one; decreases labor supply and increases the capital-effective labor ratio after period one; and hurts the poor old more than the rich old while benefitting the poor in future generations more than the rich. If the interest rate is less than the growth rate, the accumulated funds are insufficient to balance the social security budget.

Suggested Citation

  • Shiyu Li & Shuanglin Lin, 2024. "Social security reforms, capital accumulation, and welfare: A notional defined contribution system vs a modified PAYG system," Journal of Population Economics, Springer;European Society for Population Economics, vol. 37(1), pages 1-34, March.
    • Handle: RePEc:spr:jopoec:v:37:y:2024:i:1:d:10.1007_s00148-024-01004-z
    DOI: 10.1007/s00148-024-01004-z
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    More about this item

    Keywords

    Population aging; Social security reform; Notional defined contribution system; Modified Pay-as-you-go system; Overlapping generations model; China;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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