Do Pensions Reduce Debt? Evidence from China's New Rural Pension Scheme1Working Paper

第一作者:Wei Chen


This paper studies the causal impact of receiving pension payments on debt behavior among older adults, using a natural experiment around China's New Rural Pension Scheme (NRPS), one of the world's largest social pension programs. Using a regression discontinuity and a difference-indifferences (RD-DID) research design and four waves of the China Health and Retirement Longitudinal Survey (CHARLS), I find that the introduction of the NRPS reduced debt among older adults, and increased their ability to shield themselves against shocks, especially for those with lower socioeconomic status. My findings indicate that receiving NRPS payments has a statistically significant negative impact on debt, although it is modest in size and is observed for formal debt only. This finding is consistent with the life-cycle hypothesis, which suggests that receiving cash payments increases income, and thereby reduces borrowing and indebtedness. However, this result is not consistent with the literature on pension schemes or cash transfers in developing countries, which suggests that receiving such payments should lead to a decline in informal debt. I provide potential explanations for this discrepancy, including psychological effects, a substitution between debt and consumption, credit constraints, and bequeathing considerations. These findings have important implications for pension programs and cash transfers in countries with a relatively weak safety net.