Social security reforms, capital accumulation, and welfare: A notional defined contribution system vs a modified PAYG system

Shiyu Li () and Shuanglin Lin ()
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Shiyu Li: Financial Policy Research Center, School of Finance, Renmin University of China
Shuanglin Lin: Peking University

Journal of Population Economics, 2024, vol. 37, issue 1, No 27, 34 pages

Abstract: Abstract This paper studies social security reforms in a model with declining population growth and increasing life expectancy. Based on simulations using data on China, it is found that a switch from a pay-as-you-go (PAYG) system to a notional defined contribution system favors the rich, causes the poor to work more, and may change the capital-effective labor ratio depending on the rate of return to personal accounts. A switch from the PAYG system to a modified PAYG system that saves part of the receipts, with the interest rate greater than the growth rate, increases labor supply and decreases the capital-effective labor ratio in period one; decreases labor supply and increases the capital-effective labor ratio after period one; and hurts the poor old more than the rich old while benefitting the poor in future generations more than the rich. If the interest rate is less than the growth rate, the accumulated funds are insufficient to balance the social security budget.

Keywords: Population aging; Social security reform; Notional defined contribution system; Modified Pay-as-you-go system; Overlapping generations model; China (search for similar items in EconPapers)
JEL-codes: E62 H55 J11 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00148-024-01004-z

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