The Chinese economy had an extraordinary average GDP growth rate of 8.50 percent from 1980 to 2018. However, the implementation of one-child policy in the late 1970s has depressed the total fertility rate to below the replacement rate since 1992. China thus experienced an increasing composition of older populations in the past three decades, which puts pressure on Chinese economic growth and makes its eye-catching economic growth potentially unsustainable. This study develops an overlapping generations (OLG) model to investigate the impacts of this demographic transition in the Chinese economy. This study conducts six policy reform exercises to examine measures that could improve the sustainability of fiscal and pension systems. The simulation results indicate that a mild tax increase on either wage income or consumption does not improve the fiscal stance but creates distortionary effects on saving and consumption behaviors. Of the pension reform measures considered, the combination of extending the mandatory retirement age and cutting the replacement ratio offers the most significant improvement to pension sustainability. However, increasing the contribution rate of the working-age population has the least effect on pension sustainability and a noticeable distortionary effect on the consumption ratio and saving rate.
AuerbachA. J., & KotlikoffL. J. (1987). Dynamic fiscal policy. Cambridge University Press.
2.
BeckerG. S., & LewisH. G. (1973). On the interaction between the quantity and quality of children. Journal of Political Economy, 81(2), S279–288. https://www.jstor.org/stable/pdf/1840425.pdf
3.
BongaartsJ., & GreenhalghS. (1985). An alternative to the one-child policy in China. Population and Development Review, 11(4), 585–617. https://doi.org/10.2307/1973456
4.
BraunR. A., IkedaD., & JoinesD. H. (2009). The saving rate in Japan: Why it has fallen and why it will remain low. International Economic Review, 50(1), 291–321. https://www.jstor.org/stable/pdf/20486861.pdf
5.
CaiF. (2018). Population dividend and economic growth in China, 1978–2018. China Economic Journal, 11(3), 243–258. https://doi.org/10.1080/17538963.2018.1509529
6.
CaiY., & ChengY. (2014). Pension reform in China: Challenges and opportunities. Journal of Economic Surveys, 28(4), 636–651. https://onlinelibrary.wiley.com/doi/pdf/10.1111/joes.12082
7.
ChoiK. H., & ShinS. (2015). Population aging, economic growth, and the social transmission of human capital: An analysis with an overlapping generations model. Economic Modelling, 50(4), 138–147. https://doi.org/10.1016/j.econmod.2015.05.015
8.
CiprianiG. P. (2014). Population aging and PAYG pensions in the OLG model. Journal of Population Economics, 27(1), 251–256. https://doi.org/10.1007/s00148-013-0465-9
9.
de la CroixD., & MichelP. (2002). A theory of economic growth: Dynamics and policy in overlapping generations. Cambridge University Press.
10.
DiamondP. A. (1965). National debt in a neoclassical growth model. American Economic Review, 55(5), 1126–1150. http://piketty.pse.ens.fr/files/Diamond65.pdf
11.
EgglestonK., OiJ. C., RozelleS., SunA., WalderA., & ZhouX. (2013). Will demographic change slow China’s rise? The Journal of Asian Studies, 72(3), 505–518. https://doi.org/10.1017/S0021911813000557
12.
FangH., & FengJ. (2018). The Chinese pension system (NBER Working Paper No. 25088). NBER. https://cpb-us-w2.wpmucdn.com/web.sas.upenn.edu/dist/3/517/files/2018/11/w25088-1enz7iz.pdf
13.
FaruqeeH., & MühleisenM. (2003). Population aging in Japan: Demographic shock and fiscal sustainability. Japan and the World Economy, 15(2), 185–210. https://doi.org/10.1016/S0922-1425(02)00017-8
14.
FeenstraR. C., InklaarR., & TimmerM. C. (2015). The next generation of the Penn World Table. American Economic Review, 105(10), 3150–3182.
15.
FougèreM., & MéretteM. (1999). Population aging and economic growth in seven OECD countries. Economic Modelling, 16(3), 411–427. https://doi.org/10.1016/S0264-9993(99)00008-5
16.
FukumotoY., & KinugasaT. (2017). Age structure and trade openness: An empirical investigation. The World Economy, 40(6), 1247–1263. https://doi.org/10.1111/twec.12464
17.
GanL., YinZ., JiaN., XuS., MaS., & ZhengL. (2014). Data you need to know about China: Research report of China Household Finance Survey 2012. Springer. https://doi.org/10.1007/978-3-642-38151-5
18.
GudmundssonG. S., & ZoegaG. (2014). Age structure and the current account. Economic Letters, 123(2), 183–186. https://doi.org/10.1016/j.econlet.2014.02.001
19.
HeerB., & MaussnerA. (2009). Dynamic general equilibrium modeling: Computational methods and applications (2nd ed.). Springer.
20.
HillsJ. (1989). Demographics and the trade balance. Economic Review (Federal Reserve Bank of Dallas), 1–11. https://europepmc.org/article/MED/12283585
21.
HoriokaC., SuzukiW., & HattaT. (2007). Aging, savings, and public pensions in Japan. Asian Economic Policy Review, 2(2), 303–319. https://doi.org/10.1111/j.1748-3131.2007.00080.x
22.
HsuM., & YamadaT. (2017). Population aging, health care, and fiscal policy reform: The challenges for Japan. The Scandinavian Journal of Economics, 121(2), 547–577. https://doi.org/10.1111/sjoe.12280
23.
HsuY. (2017). The welfare effects of pension reforms in an aging economy. American Journal of Industrial and Business Management, 7(5), 652–670. https://doi.org/10.4236/ajibm.2017.75049
24.
HvidingK., & MéretteM. (1998). Macroeconomic effects of pension reforms in the context of ageing populations: Overlapping generations model simulations for seven OECD countries (OECD Economics Department Working Papers No. 201). OECD. https://www.oecd.org/tax/public-finance/1865232.pdf
25.
IhoriT., KatoR., KawadeM., & BesshoS. (2011). Health insurance reform and economic growth: Simulation analysis in Japan. Japan and the World Economy, 23(4), 227–239. https://doi.org/10.1016/j.japwor.2011.07.003
26.
İmrohoroğluA., & ZhaoK. (2020). Household saving, financial constraints, and the current account in China. International Economic Review, 61(1), 71–103. https://doi.org/10.1111/iere.12417
27.
KimI. K. (1999). Population aging in Korea: Social problems and solutions. The Journal of Sociology & Social Welfare, 26(1), Article 8. https://scholarworks.wmich.edu/jssw/vol26/iss1/8
28.
KimS., & LeeJ. W. (2007). Demographic changes, saving, and current account in East Asia. Asian Economic Papers, 6(2), 22–53. https://doi.org/10.1162/asep.2007.6.2.22
29.
KudrnaG., TranC., & WoodlandA. (2015). The dynamic fiscal effects of demographic shift: The case of Australia. Economic Modelling, 50, 105–122. https://doi.org/10.1016/j.econmod.2015.05.010
30.
LeeH. H., ShinK., & ParkD. (2017). Population aging and its impact on economic growth—Implications for Korea. Economic Analysis, Economic and Social Research Institute (ESRI), 196, 162–188. https://ideas.repec.org/a/esj/esriea/196h.html
31.
LiH., XueM., HellersteinS., CaiY., GaoY., ZhangY., & QiaoJ. (2019). Association of China’s universal two-child policy with changes in births and related health factors: National, descriptive comparative study. British Medical Journal, 366, Article 14680. https://doi.org/10.1136/bmj.l4680
32.
LinJ. Y. (2011). China and the global economy. Remarks at the 20th anniversary of the University of Science and Technology, Hong Kong. http://www.bm.ust.hk/chinaforum/pdf/prof_lin_speech.pdf
33.
LuoW., & XieY. (2020). Economic growth, income inequality, and life expectancy in China. Social Science & Medicine, 256, 1–9. https://doi.org/10.1016/j.socscimed.2020.113046
34.
MasonA. (1988). Saving, economic growth, and demographic change. Population and Development Review, 14(1), 113–144. https://doi.org/10.2307/1972502
35.
MaximeF., & MéretteM. (1998). Population ageing and the current account in selected OECD countries (Working Papers). Department of Finance Canada. https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.574.4022&rep=rep1&type=pdf
36.
MutoI., OdaT., & SudoN. (2016). Macroeconomic impact of population aging in Japan: A perspective from an overlapping generations model. IMF Economic Review, 64(3), 408–442. https://doi.org/10.1057/imfer.2016.6
37.
OtsuK., & ShibayamaK. (2016). Population aging and potential growth in Asia. Asian Development Review, 33(2), 56–73. https://doi.org/10.1162/ADEV_a_00072
38.
ParkD., & ShinK. (2012). Impact of population aging on Asia’s future growth. In ParkD., LeeS. H., & MasonA. (Eds.), Aging, economic growth, and old-age security in Asia (pp. 83–110). Edward Elgar Publishing. http://hdl.handle.net/11540/1357
39.
PhangH. (2011). Issues and challenges facing population ageing in Korea: productivity, economic growth, and old-age income security, Journal of Comparative Social Welfare, 27(1), 51–62. https://doi.org/10.1080/17486831.2011.532984
40.
SamuelsonP. A. (1958). An exact consumption-loan model of interest with or without the social contrivance of money. The Journal of Political Economy, 66(6), 467–482. https://www.jstor.org/stable/pdf/1826989.pdf
41.
Sanchez-MartinA., & Sanchez-MarcosV. (2010). Demographic change and pension reform in Spain: An assessment in a two-earner, OLG model. Fiscal Studies, 31(3), 405–452. https://doi.org/10.1111/j.1475-5890.2010.00120.x
42.
SchönM., & StählerK. (2020). When old meets young? Germany’s population ageing and the current account. Economic Modelling, 89, 315–336. https://doi.org/10.1016/j.econmod.2019.10.034
43.
ShimasawaM. (2007). Population ageing, policy reforms and economic growth in Japan: A computable OLG model with endogenous growth mechanism. Economics Bulletin, 3, 1–11. http://www.accessecon.com/pubs/EB/2007/Volume3/EB-07C60004A.pdf
44.
ShimasawaM., & OguroK. (2010). Impact of immigration on the Japanese economy: A multi-country simulation model. Journal of the Japanese and International Economies, 24(4), 586–602. https://doi.org/10.1016/j.jjie.2010.05.002
45.
van DullemenC. E., NagelI., de BruijnJ. M. (2017). Are the Chinese saving for old age? Journal of Population Ageing, 10(3), 287–310. https://doi.org/10.1007/s12062-016-9159-x
46.
WeilP. (2008). Overlapping generations: The first jubilee. Journal of Economic Perspectives, 22(4), 115–134. https://doi.org/10.1257/jep.22.4.115
47.
YashiroN., & OishiA. (1997). Population aging and the saving-investment balance in Japan. In HurdM. D., & YashiroN. (Eds.), The economic effects of aging in the United States and Japan. University of Chicago Press. https://www.nber.org/system/files/chapters/c8461/c8461.pdf
48.
ZengY., & HeskethT. (2016). The effects of China’s universal two child policy. Lancet, 388(10054), 1930–1938. https://doi.org/10.1016/s0140-6736(16)31405-2
49.
ZhangD. (2016). Understanding China from a household’s perspective: Studies based on the China Household Finance Survey (CHFS), Emerging Markets Finance and Trade, 52(8), 1725–1727. https://doi.org/10.1080/1540496X.2016.1189810
50.
ZhuC. (2011). China’s savings and current account balance: A demographic transition perspective. Modern Economy, 2(5), 804–813. https://doi.org/10.4236/me.2011.25089
