Impact of the Basic Pension Program on Labor Supply and Retirement Decisions: An Empirical Analysis Based on the China Health and Retirement Longitudinal Study
China’s society is experiencing accelerated aging due to increasing life expectancy. At the same time, the size of China’s labor force is declining, which means that the pension insurance policy and retirement policy need to be adjusted accordingly.Due to the differentiation in China’s social pension system and labor market segmentation into urban and rural, we need specific analyses for specific pension programs. China’s public pension systems comprise mainly the Basic Old Age Insurance(BOAI)for employees in for-profit enterprises, the New Rural Pension Scheme(NRPS)in rural areas, the Urban Resident Pension Insurance(URPI), and the Public Employee Pension(PEP)for civil servants and employees in non-profit government institutions(in 2014, the combination of the NRPS and URPI began to establish a unified pension system for urban and rural residents). As the URPI is not employment related, and the PEP for government institution slacks corresponding data, we discuss only the first two types of social insurance system mentioned above. The traditional concepts of "raising children to provide against old age", intergenerational care, and medical insurance all affect the labor supply. This paper attempts to explore the links between these factors and pension insurance.We mainly study the impact of social pension insurance on both the labor supply and individual retirement decisions through pension wealth. Pension programs have two opposite effects on the labor supply, namely the negative incentive of the income effect and the positive incentive of the substitution effect. We examine whether the basic pension insurance system has the induced retirement effect, i.e., encouraging people to quit the labor market early. "Retirement" here refers to the cessation of work done for the purpose of earning money.Using data from the China Health and Retirement Longitudinal Study(2011, 2013, 2015) and the instrumental variable method, this paper examines the effects of the NRPS and the Urban Employee Basic Pension Insurance on the labor supply and retirement decisions, respectively. The empirical analysis demonstrates the following.(1) The BOAI encourages workers to retire early. On average, workers plan to stop working about 0.10 years(about 1.2 months) in advance, with pension wealth increasing by 1%.Workers who need to take care of their grand children tend to retire early.However,participation in the urban workers’ medical insurance weakens the induced retirement effects.(2) The NRPS has a weak negative impact on "retirement age":the older the farmer, the weaker the induced retirement effect. At the same time, the increased pension wealth restrains the willingness of peasants to work endlessly, although rural workers who adhere to the traditional concept of "nurturing children to provide against old age" are more inclined to extend their working life to reduce the burden of child support.(3) The income effect of the BOAI on the labor supply is greater than the substitution effect, which affects not only the full-time individual labor supply, but also the part-time labor supply.(4) With the augmentation of the pension, the working time for household agricultural activities will first gradually increase and then decrease. The improvement in pension benefits has no significant impact on the labor supply for other activities. Our study has certain critical policy implications. If the government reduces the urban employee’s basic pension growth rate, workers will tend to postpone their expected retirement age, providing an empirical basis for the timely introduction of a progressively delayed retirement age policy in China.Our paper makes several important contributions to the ongoing research. First, it proves that China’s social pension system has an induced retirement effect, and evaluates its size under different types of old age pension scheme. Second, using high quality national micro data, our study verifies the effect of the BOAI and NRPS on the labor supply from the perspective of pension wealth. Third, to alleviate endogeneity problems, we choose instrumental variables, such as the number of years away from the statutory retirement age and the difference between the pension received in the first year of retirement and the minimum basic pension standard, to effectively identify the causal relationship between pension wealth, the labor supply, and the retirement decision. Fourth, we discuss the impact of the pension plan on retirement behavior by treating the expected retirement age as the dependent variable to provide a new perspective. The conclusions drawn from this paper have important reference value for our government’s implementation of its policy of gradually extending the retirement age.