For developing and ageing societies, the establishment of a pension program is important for both individuals and the aggregate economy. But the implementation or reformation of pension programs will generate impacts, intended or unintended, on the labor market, economic growth, and income redistribution within and across generations. For residents yet uncovered by pension programs, normally without formal jobs and poorer, a dominant source of old-age support is children. Given the expected reliance on children, middle-age parents invest generously in children, especially in their human capital which determines future incomes. The purpose of this paper is to study how the reciprocal relationship between generations responds to a newly initiated pension program in rural China. A...[ Read more ]

For developing and ageing societies, the establishment of a pension program is important for both individuals and the aggregate economy. But the implementation or reformation of pension programs will generate impacts, intended or unintended, on the labor market, economic growth, and income redistribution within and across generations. For residents yet uncovered by pension programs, normally without formal jobs and poorer, a dominant source of old-age support is children. Given the expected reliance on children, middle-age parents invest generously in children, especially in their human capital which determines future incomes. The purpose of this paper is to study how the reciprocal relationship between generations responds to a newly initiated pension program in rural China. A stylized life-cycle model, which incorporates different motivations of transfers and different sources of old-age support, is constructed to depict the possible channels through which exogenous pension shocks can affect people's decisions about consumption smoothing, educational investment in children, upward transfers to parents, and savings. Empirical results suggest a crowd-out effect on adult children's upward transfers and parents' educational investment in children, both on the intensive and extensive margin. Female students after finishing primary school are more likely to drop out of school if their parents have access to pensions and educational expenditures on male or female children are reduced. Consistently, we find that rural residents' expectations of old-age support is reshaped by the pension program, in that the reliance on children is partially substituted by pensions.