ABSTRACT
Chapter 4 studies the impact of the fragmentation in pension administration and financing on pension sustainability by identifying and analysing two mechanisms through which the fragmentation affects pension sustainability: (1) moral hazard and (2) inefficiencies. The first section reviews the administrative and public financial environments the Chinese pension system operates in. Section 4.2 examines the intergovernmental relations in pension financing and how they lead to a principal-agent problem, from which the moral hazard arises. Section 4.3 offers an in-depth analysis of the behavioural patterns of local governments under moral hazard and documents the detrimental effects of their manipulations of the local pension pools with detailed examples from case studies. Section 4.4 investigates inefficiencies caused by the fragmentation that have direct negative impact on the financial sustainability of the system. Section 4.5 concludes the chapter by discussing on the aggregate effect of local implementation of pension policy on the financial sustainability of the pension system.
