Effect of China's new rural pension scheme on the consumption of relatively poor households

Abstract

Understanding the relationship between China's New Rural Pension Scheme (NRPS) and the consumption behavior of relatively poor rural households is crucial for enhancing the targeting of social pension policies and improving multitier social security systems. Using panel data from the China Family Panel Studies of 2014, 2016, and 2018, this study uses fixed-effect models and instrumental variable approaches to examine the effect of NRPS participation and receipt on household consumption. We find the following: (1) Participation in NRPS significantly reduces consumption among relatively poor rural households, whereas receipt of NRPS benefits has a significant positive effect on consumption. (2) Heterogeneity analysis shows that NRPS participation notably decreases subsistence- and enjoyment-oriented consumption, while benefit receipt significantly increases subsistence-, development-, and enjoyment-oriented consumption. Moreover, the consumption effects of NRPS are more pronounced among households with a higher marginal propensity to consume. (3) Mechanism analysis indicates that participation suppresses consumption by tightening household liquidity constraints, whereas benefit receipt increases consumption by relaxing liquidity constraints and reducing precautionary savings. These findings provide empirical evidence for designing more efficient and inclusive rural social pension systems in China and other developing countries.