Summary:
A multi-tier pension system with Chinese characteristics is an essential component of China's social security system in the new era. The Tier 2 enterprise annuity system is a type of supplementary pension insurance based on a fully funded personal account. This system represents an important strategy for addressing the challenges posed by population aging. International experiences show that enterprise annuities have become a major source of pension funds for middle-income populations by mitigating longevity and economic risks. The development of enterprise annuities can not only improve the social security system but also promote steady financial growth related to aging and positive interactions with the financial market. Although China's enterprise annuity system has made steady progress since its establishment in 2004, its coverage and fund accumulation are not sufficient, leaving much room for expansion and growth. Additional research is needed to better understand the operating mechanism and effects of enterprise annuities and expand their coverage. Currently, the literature on enterprise annuities is limited and focuses primarily on macro policy analysis. Some studies investigate the factors affecting the rates of participation in enterprise annuities, but few studies examine the socioeconomic impact of such programs. Our study examines the impact of enterprise annuities on the urban consumption, savings rate, and allocation of financial assets among urban employees' households, based on the development of China's enterprise annuity system over the past decade. According to the life-cycle theory, the impact of an enterprise annuity on a household's current consumption and savings rate depends on the household's saving motives and degree of credit constraints and the expected returns of the annuity. From a life-cycle perspective, an enterprise annuity can increase a household's expected pension wealth and lower the risk of retirement income, thus reducing private savings and precautionary savings against aging and promoting current consumption. However, contributions to an enterprise annuity might reduce a household's current disposable income, leading to decreased consumption and an increased savings rate, especially for households facing credit constraints and having targeted saving motives. Risky financial assets are an important form of diversified household savings. While the effect of enterprise annuity contributions on household income may lead credit-constrained households to reduce their investments in risky financial assets, participation in an enterprise annuity may increase households' investments in risky assets due to substitution between retirement income risk and financial market risk, as well as improved financial literacy. Because these different mechanisms offset each other, theoretical estimates of the net impact of enterprise annuity are ambiguous, necessitating empirical research. This study uses data from the China Family Panel Studies during 2012-2020 and employs a two-way fixed effects model and the instrumental variable method to mitigate endogeneity. We find no evidence that participation in an enterprise annuity system affects the current consumption expenditure and savings rates among urban employees' households; however, such participation increases the likelihood that a household will participate in risky financial investments, and the value of those investments, particularly in households with a higher education level and homeownership. Further analysis shows that the effect of enterprise annuity system participation on investment in risky financial assets is stronger for households with a greater reduction of background risks in old age. Additionally, participation in an enterprise annuity improves employees' financial literacy, providing empirical evidence to support the mechanisms underlying the positive effect of enterprise annuities on households' investments in risky financial assets. This study makes the following three contributions. First, it enriches the literature on enterprise annuities and provides new empirical evidence regarding the socioeconomic consequences of the enterprise annuity system in China. This information adds to understanding of the implications of enterprise annuity expansion and the establishment of a multi-tier pension system to support China's retirement savings in pension funds, family welfare, and financial development. Second, it broadens the literature's perspective on households' financial asset allocation, providing insights for policy-making to promote urban families' participation in risky financial asset investments on both the extensive and intensive margins and increasing their property income. This study also provides policy implications for forming positive interactions between enterprise annuities and financial market development. Third, our results regarding households' consumption and savings rate suggest that the role of enterprise annuities in mitigating precautionary savings against aging should be strengthened, thus supplementing the literature on pension insurance and household consumption and savings in China.
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