Summary:
China has established a three-pillar pension system to support retirees' living standard,including public basic pension insurance, occupational annuities, and commercial pension insurance. Basic pension insurance is the dominant component in terms of the number of participants and the amount of pension funds; however, it faces increasing challenges due to rapid population aging. Thus, it is urgent to develop the other two pillars of the pension system, especially enterprise annuities. Enterprise annuities are an effective strategy to combat the issue of population aging in OECD countries.In 2018, only 87,400 chinese firms offered their employees enterprise annuities, and the 23.88 million enrolled workers accounted for 5.7% of all enrollees in the basic pension program for urban workers (2018 Bulletin on Human Resources and Social Security). Extensive discussions among policy makers and scholars extrapolate factors that affect firms' incentive to provide annuities, but no consensus has been reached. Despite much discussion, few studies empirically examine whether and to what extent the basic pension program affects firms' decisions about establishing enterprise annuities. This study aims to find the answers to these questions. In theory, the basic pension for urban workers can have a positive or negative effect on enterprise annuity provision. On the one hand, the higher labor cost involved in providing enterprise annuities may have a negative effect on firm profitability, cash flow, and innovation, lowering firms' incentive to provide annuities. On the other hand, the labor costs resulting from the high contribution rates of the basic pension program may motivate firms to increase their productivity. Therefore, firms may provide annuities to attract highly productive workers. In summary, the theoretical prediction of the relationship between the basic pension program and enterprise annuity provision is ambiguous. The goal of this study is to examine whether the high basic pension program contribution rates are the cause of the low offering of enterprise annuities. This paper uses geographic and time variations in employers' contributions to basic pension insurance to identify the impact of the enterprises' basic pension insurance contribution burden on the development of enterprise annuities. The basic pension program is administrated at the local level and its contribution rates vary substantially across regions and over time. We manually collect the policy contribution rates of the basic pension program for urban workers, which are exogenous and thus not subject to endogeneity issues. We use administrative firm tax return data for our empirical analysis. The data cover firms of various sizes and in different industries, rendering the sample more representative than other firm-level datasets. This study finds that basic pension insurance has a negative effect on the development of enterprise annuities. If the basic pension insurance contribution rate increases by 1 percentage point, the probability of an enterprise establishing an annuity decreases by 0.29 percentage points and the annuity payment rate decreases by 0.006 percentage points. The mechanism analysis shows that the high contribution rates for basic pension insurance reduce the likelihood of enterprises establishing enterprise annuities to attract and retain excellent employees. Profit and cash flow reductions are also important mechanisms. To the best of our knowledge, this study is the first to formally assess the effect of basic pension insurance contribution rates on firms' likelihood to offer annuities using a large sample. The study explains the possible underlying reasons for the underdevelopment of enterprise annuities. The results provide empirical evidence for the debate on the role of the basic pension contribution rates in firms' provision of annuities and support the argument that the basic pension hampers the development of enterprise annuities. The results imply that lowering employers' basic pension insurance contribution rates will promote the establishment of enterprise annuities.
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