ABSTRACT
China’s household saving rate has increased markedly since the mid-1990s and the age-savings profile
has become U-shaped during the 2000s. We find that rising income uncertainty and pension reforms
help explain both of these phenomena. Using a panel of Chinese households covering the period 1989-2006,
we document that strong average income growth has been accompanied by a substantial increase in
income uncertainty. Interestingly, the permanent variance of household income remains stable while
it is the transitory variance that rises sharply. A calibration of a buffer-stock savings model indicates
that rising savings rates among younger households are consistent with rising income uncertainty and
higher saving rates among older households are consistent with a decline in the pension replacement
ratio for those retiring after 1997. We conclude that rising income uncertainty and pension reforms
can account for over half of the increase in the urban household savings rate in China since the mid-1990s
as well as the U-shaped age-saving profile.
Marcos Chamon
Research Department
International Monetary Fund
700 19th Street, N.W.
Washington, DC 20431
MCHAMON@imf.org
Kai Liu
Department of Economics
Johns Hopkins University
440 Mergenthaler Hall
3400 N. Charles Street
Baltimore, MD 21218
kliu@jhu.edu
Eswar S. Prasad
Dyson School of Applied Economics and
Management
Cornell University
440 Warren Hall
Ithaca, NY 14853
and NBER
eswar.prasad@cornell.edu