Will Ending the One-Child Policy and Raising the Retirement Age Enhance the Sustainability of China’s Basic Pension System?

Abstract

The sustainability of China’s Basic Pension System (CBPS) has been challenged by the ageing of the population and the decline in economic growth. This article establishes a Markov model for CBPS to examine whether the reforms, including ending the one-child policy and raising retirement the age, will shrink the negative income–expenditure gap. We find that the negative income–expenditure gap will destroy CBPS in the future in the absence of fiscal transfer or reform. Ending the one-child policy will increase the number of contributors and then reduce the gap in the short term but will worsen the gap in the long term. Raising the retirement age will have several positive effects overall while increasing expenditures in certain periods. The contributions of this article are describing CBPS in detail and establishing a precise model to analyze the effectiveness of reforms.