china pension provision and pension strongadministrationstrong - the.pdfVIP

CHINA PENSION PROVISION AND PENSION ADMINISTRATION Shaoguang Wang Department of Political Science Yale University New Haven, CT 06520 203-432-5262 (O) 203-432-6196 (FAX) 203-239-0729 (H) E-MAIL: SWANG@BIOMED.MED.YALE.EDU 1 A background paper for the World Bank project, China: Pension System Reform, China and Mongolia Department, East Asia and Pacific Regional Office, the World Bank, November, 1995. 2 The general responsibility for the provision of public pension rests with the state almost everywhere. The reason for the government to be involved with providing mandatory public pensions is well-known: private annuity markets are not able to distinguish between people who are likely to be long-lived and people who are likely to be short-lived, and consequently adverse selection and moral hazard problems may plague private annuity markets, which tends to drive up annuity prices. Unlike private pension, public pension makes it possible to spread risk across the largest number of people--including the whole population in a single insurance pool or in a small number of pools, thus substantially lowering the costs of insurance and administration.1 ( Verbon 1988; Blinder 1988; Davis 1995) If a public pension systems has to be provided by the state, then one may ask which level of government should bear the primary responsibility of pension provision and administration. This question is especially relevant to Chinas pension system reform, because one of the dominant features of the current system is a high degree of decentralization and fragmentation in pension provision and administration.