This chapter formulates a theory on the interconnections between political institutions, pension policymaking and labour market behaviours in China's pension reform. Drawing on Daniel Treisman's three-stage formalisation of the political process which combined together constitutes a political-economic equilibrium. The first phase is the leadership selection stage, in which bureaucratic tournament promotion and Chinese-style political decentralisation structure the incentives of Chinese municipal leaders. The second stage is the policymaking stage, in which the incentive structure shapes municipal leaders' pension policy choices. The third stage is the economic decision-making stage, which shows how economic agents such as workers and employers make human capital investment decisions in response to the local pension arrangement. The chapter discusses foundational theoretical perspectives, namely methodological individualism and rational choice institutionalism. Methodological individualism is a theoretical position that asserts social phenomena should be explained in terms of individual choices that are to be aggregated into the phenomena of interest.