Analysis of Savings Behavior after a Pension Reform from a PAYG to a Fully-Funded System in Asian Emerging Economies

Abstract: Pension systems in Asian emerging economies are under great pressure to conduct important reforms in response to declining growth rates and population aging. Our analysis aims to investigate how a shift from a PAYG to a fully funded pension scheme influences household savings. Our analysis is focused on China, Thailand and the Philippines. We use a standard two-period OLG model with heterogeneous labor productivity and contrast the results to a framework where agents behave altruistically towards their parents. The latter is typical for the rural population in Asian emerging economies where intra-family wealth transfers represent an important share of old-age income. The individual's response in terms of savings and gifts is highly correlated to the respective discount factor. In a stable political environment, we find that a fully funded scheme partially crowds out individual savings and gifts for both types of individuals. Introducing strong disincentives to save does not change the trend with respect to high income earning individuals. Less productive agents, however, who gain access to formal old-age social security for the first time, tend to borrow against their expected pension benefits, and increase their gifts to the older generation.