By Wei Chen

This paper estimates the causal impact of receiving pension payments on debt behavior among older adults, with a natural experiment around China’s New Rural Pension Scheme (NRPS), one of the world’s largest social pension programs. Using a fuzzy difference in discontinuity research design and four waves of the China Health and Retirement Longitudinal Survey (CHARLS), I find that the introduction of the NRPS reduced debt among older adults, and increased their ability to shield themselves against shocks, especially for those with lower socioeconomic status. My findings indicate that receiving NRPS payments has a statistically significant negative impact on formal debt but not on informal or total debt. The pension reduces debt among its beneficiaries in the sample by roughly half of the average formal debt (CNY 1,324 or $211) and the likelihood of holding debt by 6.5%. This finding is consistent with the life-cycle hypothesis, that people borrow when their income is low and save when their income is high. Receiving cash payments increases income, and thereby reduces the chance of borrowing and indebtedness. However, this result is not consistent with the literature on pension schemes or cash transfers in developing countries, which suggests that receiving such payments should lead to a decline in informal debt. I provide potential explanations for this discrepancy, including psychological effects, a substitution between debt and consumption, credit constraints, and bequeathing considerations. These findings have important implications for pension programs and cash transfers in countries with a relatively weak safety net.

Source: SSRN