Options and impact of China's pension reform: a computable general equilibrium analysis

A serious obstacle to China's economic reform is the lack of a sustainable pension system. Using a newly designed computable general equilibrium (CGE) model that differentiates 7 productive activities and 22 age and gender groups, this study compares various options for financing the implicit pension debt and estimates the effects of pension reform on the sustainability of the system and on economic growth. Simulation results show that the current pay-as-you-go system is not financially sustainable and the implicit pension debt is estimated at around 46 to 64 percent of GDP in 2000. The paper proposes to use value-added tax revenue to finance the transition cost, which would make the new multi-pillar system financially sustainable.