On the effectiveness of insurance mechanisms for older individuals in China

Abstract Does consumption smoothing among older individuals over time and across households indicate the efficiency of overall insurance mechanisms against health shocks? And what is the extent of suboptimality in various market and non-market insurance arrangements? To address these questions, we utilize panel data from the China Health and Retirement Longitudinal Study (CHARLS) spanning 2011, 2013, 2015, and 2018 to evaluate the effectiveness of both institutional and informal insurance mechanisms for older individuals in China. While conventional tests generally support consumption smoothing for essential items across time and individuals in response to adverse health shocks, our findings indicate that the welfare costs associated with these shocks are not insignificant, particularly in rural areas. These results underscore the need for strengthened long-term care, pension systems, and other social safety nets, which could enhance welfare even when consumption appears resilient to shocks.