THE INTEGRATION OF CHINA'S DUAL-TRACK SOCIAL SECURITY SYSTEM AND ITS IMPACT

Abstract

This thesis investigates how the integration of the dual-track social security systems in China affects capital accumulation, labor allocation between the production sector and the public sector, and welfare in an extended AK model with overlapping generations and externalities from aggregate capital. It finds that aggregate life-cycle saving from households in both sectors is below the efficient level. The optimal size of public employment chosen by shortsighted governments aiming at maximizing utility of living generations is above the efficient size chosen by the social planner aiming at an infinite horizon for welfare of all generations. Optimal funded social security in the form of compulsory saving chosen by shortsighted governments for living generations?utility maximization does not change the inefficiently low aggregate saving. A pay-as-you-go pension system for public employees reduces savings further, and thus abandoning the pay-as-you-go pension system for public employees and integrating them into the same compulsory retirement saving system has a positive effect on savings and growth.