Pension Payment Level Estimation in the New Rural Pension System

1. Pension Payment Level Estimation in the New Rural Pension System Reportor：CHEN Xiaojie North China Electric Power University , Beijing, China

2. Contents • Background introduction • An actuarial model of pension payment level • Consumption expenditure forecast • Define a risk variable • An empirical analysis • Conclusion

3. Background introduction • China’s population is aging rapidly. A research reveals in 2007approximately 11 percent of China’s population was age 60 or over making up 21 percent of the world’s elderly population . Aging of population aggravates the demand of pension insurance, especially in the low-level rural district. • In 2009, the government decided to improve old-age income security in rural areas. The State Council promulgated Guiding Principles on the Development of the New Rural Pension Pilot, and launched pilot projects in 10% of the counties in China. It is the most ambitious rural pension system reform in China’s history and could, if successful, serve as a model for rural populations throughout the developing world.

4. An actuarial model • In order to derive the formula of the total pension pay level. We firstly need to establish an actuarial balance model, that is, the final value of pension payment terminal should be equal to the present value of all benefits in the beginning of acquisition period.

5. An actuarial model

6. An actuarial model parameter setting: • P: the total pension payment level, • s: the social pooling part per year, • p: the individual account payment level, that is what one person gets per year from his individual account in pension acquisition period, • x: the age of person when he joins in pension insurance, • y: the age of person when he begins to get pension(60 years old in the new rural pension system, irrespective of sex), • wx: the payment base in the first year (the base is defined as rural per capita net income of the last year), • c: contribution rate, • q: growth rate of the payment base (assuming that the payment base which is defined as rural per capita net income rises in exponential function), • i: the average net yield in fund accumulation period, • E60: life expectation of 60 years old, • r: nominal yield in pension acquisition period, • j: rate of inflation.

7. An actuarial model Let us look at the formula which we have gotten above We can see from this formula, the factors influencing pension pay level P include: contribution rate “c”, growth rate of the payment base “q”(rural per capita net income growth rate), number of payment years “y-x”, the average net yield in fund accumulation period “i”, the net yield in pension acquisition period “r-j”, and the number of years getting pension “E60”(which is estimated by life expectation of 60 years old). Therefore, the six variables mentioned above are possible risk factors in the new rural pension insurance system.

8. Consumption expenditure forecast • Then we make forecast of China’s rural elderly group's basic consumption expenditure. • According to the national statistic yearbook, China's consumption demand is divided into food, clothing, housing, family equipment and services, traffic communication, culture, education, entertainment products and service, medical care and other goods and services. • Due to a lack of detailed elderly group consumption expenditure data, considering the particularity of elderly group consumption, this article selects food, clothing, medical care to represent the elderly group’s basic consumption expenditure.

9. Consumption expenditure forecast We use the available data to develop a linear regression model to estimate those parameters, we select the data from 1991 to 2008, “old” is for the rural elderly groupbasic consumption expenditure, “t” is for years corresponding, setting 1991 to t=1. The result is as follows: Then we can use the equation to forecast the future elderly group basic consumption expenditure.

10. Define a risk variable To ensure the new rural pension system sustainable, we should make the participation rate reach a certain level. And one of the key factors influencing the participation rate is the pension payment level in the future. If the pension payment level can guarantee the basic consumption expenditure of the old in the future, the peasants are willing to participate pension insurance, so the continuity of this system can be guaranteed. For this reason, this article first define a risk variable R. R = the total pension payment/the total basic consumption expenditure of rural elderly group. the total pension payment = the individual account pension payment + the government finance pension payment. It is clear that the bigger R value is, the smaller the pension payment risk is.

11. An empirical analysis • Variable analyze This article selects the year 2012to estimate future annuities amount under multivariable assumption. First we make assignment for the parameters : the payment base of the beginning year “wx” selects 6688.32 yuan (in the assumption that mean growth rate of rural per capita net income is 12%); number of payment years “y-x” selects 15; average life expectation of 60 years old selects 22 years (life expectation of 60 years old rises by 1.49 every five years, so we adjust average life expectation of 60 years old to 22 years in 2012); the growth rate of payment base “q” select 12% which is best close to mean growth rate of rural per capita net income in China through these years; contribution rate “c” selects the maximum possible mean contribution rate 15%; inflationrate selects 4%; as one-year bank deposit interest rate is 3%, investment return rate(IRR) of social security funds is 9.75% in recent years, IRR*70%=6.825%, so accounting rate selects 6.825%.

12. An empirical analysis • Calculation Based on these variables, this article use the formula derived above to estimate the future pension amount of the 45 years old who participate the new rural pension insurance in 2012. P = s + p = 720+3345.16=4065.16 yuan Set Nt for the annual basic consumption expenditure of rural elderly people, so: Finally, we calculate the risk variable R

13. An empirical analysis • Result analyze 1) The present lower payment base leads to lower pension pay level. As rural per capita net income rise in exponential form while rural per capita consumption rise in linear form, the pension amount will meet the basic consumptionexpenditure of rural elderly population ultimately along with policy promotion. 2) The rate of return on social security funds investment influences the future pension pay level directly. Therefore, improving the rate of return on social security fund investment will improve annuities amount of personal account. Turn the investment of social security funds from bank deposit, government bonds to stocks. But extraordinary care should be taken for risk averse and portfolio tools should be used for risk averse.

14. Conclusion Through the analysis, we can conclude that this newrural pension system is feasible from the angle ofindividual account risk. But there is still one point which needs our attention. In the process of policy promotion, especially in the initial phase, we cannot blindlyemphasize the advance of participation rate. This may increase the government financial stress. Therefore, in the initial phase of policy promotion, the requirement of insured person should follow the "fewer but better" principle. As this system promotes gradually, the strict control of risk variables will gradually reduce. Under such circumstance, we can emphasize the advance of participation rate.

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