| Abstract | With the decreasing birth rate and the increasing life expectancy, the fiscal imbalance of pension system has emerged in many economies. As a solution to the financial crisis of pension, postponing retirement age has been widely adopted by many European countries. Faced with similar challenge, postponing retirement age has also been put on agenda in China. Since proposed in TheOutline of the 12th Five-Year Plan for Social Securityin 2012 and The Report of the Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China in 2013, postponing retirement age has aroused a wealth of discussions, among which two issues deserve the most attention. The first one is, how much will retirement age increment help alleviate the pension gap? The second is, how should we design the detailed policy? To answer the above two questions, it requires not only comparative analysis focusing on the long-term effect but also transitional dynamic analysis focusing on the short-term effect.
In this study, we answer the above questions using a multiple-period overlapping generation model with a general equilibrium framework. The detailed research takes the following four steps.Firstly, we build a simple two-period model to analyze the relationship between retirement age and individual’s education choice and show the importance of human capital accumulation for the role of retirement age in the process of alleviating the pension crisis.Secondly, we incorporate the above mechanism into a multi-period overlapping generation general equilibrium model in accordance with the background of China’s urban pension system. Thirdly, we analyze the effects of postponing retirement on output, social security and pension tax rate by comparative static analysis, and compare the results with those in the model with exogenous human capital. Fourthly, we analyze the short-term effect of three different plans of postponing retirement age: the unexpected one-step postponing, the expected one-step postponing and the expected gradually postponing.
The simulation results show that, with endogenous human capital accumulation mechanism, postponing retirement not only increase the number of labor forces, but also improve the level of human capital of the whole economy by increasing education time. This means that the effects of ageing are not always negative. Secondly, although postponing retirement age can make better use of human capital and promote the financial balance of pension in the long run, the whole process will take some time. The transitional dynamic analysis shows the economy would go through a period of “transition pains”. In the short run, the plan of suddenly postponing the retirement age caused the least fluctuation in aggregate output while experience a sharp drop in wages and pension tax rates. However, from the perspective of individual, cohorts near retirement age will suffer more welfare loss comparing to the expected gradually postponing plan.
Compared with the existing literature, this study contribute as follows: firstly, we analyzes the impact of postponing retirement age on macro economy and pension finance from the perspective of inter-generational human capital accumulation for the first time; secondly, we analyze the short-term and long-term effects of postponed retirement by numerical simulation from the perspectives of comparative static analysis and transitional dynamic analysis, which puts forward new methods for future research in this field.
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