The Chinese Saving Rate: Long-Term Care Risks, Family Insurance, and Demographics∗

In this paper, we show that a general equilibrium model that properly captures the risks in old age, the role of family insurance, changes in demographics, and the productivity growth rate is capable of generating changes in the national saving rate in China that mimic the data well. Our findings suggest that approximately half of the increase in the saving rate between 1980 and 2010 is a result of the interaction between the decline in the fertility rate due to the one-child policy and the shortcomings of the old-age insurance programs, especially against the long-term care risks, provided by the government in China. Changes in the productivity growth rate account for the fluctuations in the saving rate during this period. ∗We thank Steven Lugauer, Xiaodong Fan, the seminar participants at the University of Edinburgh, University of St. Andrews, Australian National University, Beijing Normal University, Renmin University of China, SHUFE, Manhattan College, Zhejiang University, the Macroeconomics of Population Aging Workshop, the 40th Annual Federal Reserve Bank of St. Louis Fall Conference, the CEPAR Retirement Income Modeling Workshop, the NBER Chinese Economy Group Meeting (May 2016), the Tsinghua Macro Workshop (2016), the SED Annual Meeting (2016), and the 3rd Workshop of the Australasian Macroeconomic Society and the Laboratory for Aggregate Economics and Finance for their comments. †Department of Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, CA 90089-0808. E-mail: [email protected] ‡Department of Economics, The University of Connecticut, Storrs, CT 06269-1063, United States. Email: [email protected]