By Leqing Huang

To tackle the population aging and improve the sustainability of the pension system, the Chinese government proposes to postpone the statutory retirement age gradually. However, when implementing this policy in China, age discrimination in the job market and grandchild care culture are two potential concerns. Therefore, this paper builds a multi-period OLG model with these two crucial factors to provide a quantitative evaluation of the potential policy impacts on population growth, labor supply, and pension funds. The framework allows for endogenous fertility and year-by-year grandparenting. Taking an increase in childcare costs as an exogenous input, the model can well predict the declining fertility both in level and in trend. The results of the counterfactual analysis suggest that postponing retirement alleviates the pressure on the pension system in the short and medium run, by reducing the number of retirees and increasing the size of the labor force. However, importantly, a five-year retirement delay could reduce fertility by more than 25%, which will affect the size of the labor force in the long run and put additional long-run demographic pressure on the pension system. As for the intensive margin, postponing retirement will bring an extra flow of labor supply from old workers, while keeps the participation of young generations relatively constant due to the fertility adjustments.

Source SSRN