Distributional Effect of Pension Reform: Pension Benefit Reduction and Housing Market in China

Abstract

This paper studies the impact of pension reduction on the housing price and wealth distribution in China. We first set up a simple model, conceptually predicting that a pension reduction will boost the housing price and reduce housing wealth inequality. To get a full picture of the impact of pension reduction, we set up a stochastic OLG model with the housing market to quantitatively examine the long term effect of pension benefit reduction on the housing market and welfare redistribution in China. The policy experiment shows that a reduction of replacement ratio from 0.7 to 0.45 will produce a rise in housing price by 14%. Quantitatively the housing price rise is contributed by four main channels: direct channels, the non-housing asset price channel, the tax rate channel, the bequest channel. We also checked the response of the cohort-wise housing wealth distribution and finds out that housing wealth distribution is more equal after the pension reduction. We finally examined the effect of a pension benefit reduction on welfare redistribution and finds out the policy change generated interesting implications on welfare and wealth redistribution across households with different income, asset levels, and age.