The Impact of Longevity Inflation on the Robustness of the Basic Pension Insurance System

In this paper, we investigate the longevity inflation and its potentially negative consequences to the stability of the Chinese public pension systems. The modelling framework we use builds upon the continuous time life-cycle overlapping generations for an actuarial balanced pension system and an unbalanced pension system. We find that the driving forces of longevity inflation on social security systems are the wealth income effect, the retirement incentive effect and the age structure effect. The in fluence of longevity inflation on the retirement age can be attributed to those three effects in case of the actuarial balance. Longevity inflation affects the pension contribution rate and pension benefit level mainly via the age structure effect and the overall effect of longevity inflation on the two indexes is opposite. The responses of the level of consumption and the pension contribution rate to longevity inflation have two opposite direction and both are affected by the retirement incentive effect. On the aggregate level, the effect of longevity inflation shock is mainly influenced by the external demographic structure for the balanced pension system and by the internal mechanism design of the pension system for the unbalanced pension system. In discrete-time frameworks, balance ratio is further decomposed into the pension wealth effect, the age structural effect, and the inter-generational distribution which is correspondent to the continuous time model. Empirical analysis of the Chinese pension system shows that the influence of longevity inflation to the adequacy, the sensibility and the sustainability of pension system is attributed to the three effects respectively. The evaluation of the risk sharing mechanism of longevity inflation shock of Chinese pension system indicates that much of the risk is mainly borne by pension provider other than pension benefiter.