Working Paper: NBER ID: w16565
Authors: Marcos Chamon; Kai Liu; Eswar S. Prasad
Abstract: China's household saving rate has increased markedly since the mid-1990s and the age-savings profile has become U-shaped during the 2000s. We find that rising income uncertainty and pension reforms help explain both of these phenomena. Using a panel of Chinese households covering the period 1989-2006, we document that strong average income growth has been accompanied by a substantial increase in income uncertainty. Interestingly, the permanent variance of household income remains stable while it is the transitory variance that rises sharply. A calibration of a buffer-stock savings model indicates that rising savings rates among younger households are consistent with rising income uncertainty and higher saving rates among older households are consistent with a decline in the pension replacement ratio for those retiring after 1997. We conclude that rising income uncertainty and pension reforms can account for over half of the increase in the urban household savings rate in China since the mid-1990s as well as the U-shaped age-saving profile.
Keywords: Income Uncertainty; Household Savings; China
JEL Codes: D91; E21; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising income uncertainty (D89) | increase in household savings rates (D14) |
| increase in transitory income variance (F29) | increase in household savings rates among younger households (D14) |
| decline in pension replacement ratios (H55) | increase in household savings rates among older households (D14) |
| rising income uncertainty and pension reforms (J26) | increase in urban household savings rates in China (D14) |
| U-shaped age-saving profile (J26) | explained by rising income uncertainty and declining pension replacement ratios (J26) |