Raising Retirement Age, TFP and Elderly Welfare in China

Yang Hualei (杨华磊)1*, Shen Zheng (沈政)2 and Shen Yingxi (沈盈希)1

1 School of Public Administration, Zhongnan University of Economics and Law, Wuhan, China

2 School of Economics and Management, Zhejiang A&F University, Hangzhou, China

Abstract: The fact that China is facing the challenge of aging population has led to debates about whether the government should raise the retirement age. The current pension system in China is characterized by the collection of contributions on payment and adopts the defined benefit (DB) plan. Considering the welfare effects of intergenerational support, this paper develops a dynamic general equilibrium model to investigate how postponing retirement would affect the TFP and the welfare of the elderly. Utilizing realistic parameters, our simulation finds that raising the retirement age will benefit the welfare of the elderly. This conclusion remains robust after a sensitivity analysis with respect to core parameters, the average age of the working population, and the pension system. However, opinion polls have found that most people oppose delaying retirement. This stems from the absence of pension transfer payments and pension system inequalities. The policy implications of this paper are twofold: Firstly, the government should convince the public about the benefits of delaying retirement; secondly, it is necessary to introduce supportive policies facilitating the implementation of delayed retirement (e.g. increasing the replacement rate of pensions or implementing a healthy aging strategy), and the retirement policy should be differentiated for people from various socio-economic backgrounds.

Keywords: postponing retirement, TFP, elderly welfare

JEL Classification Codes: H55, J26, C61

DOI: 10.19602/j.chinaeconomist.2021.03.07