other studies, transition cost in this paper focuses on the transition of pillar 2 from notional to fully funded individual accounts. We assume that starting in 2001, current notional individual accounts will be kept only for prereform pensioners and workers who have contributed to the notional individual accounts (middle men), and that it will be phased out as the prereform pensioners and middle men die. Fiscal resources will be injected to finance deficits in the transition accounts. Using this model the financial flows over the next 50 years could be traced and estimates can be made of the financial resources needed over time to pay the current pension and accrued pension rights of current workers.

The equilibrium data set of the model at base year is constructed around a Chinese social accounting matrix for social security reform estimated for 1995. It provides a consistent framework for organizing the relevant flow-of-value statistics for China's economy to satisfy the requirements of a benchmark data set for CGE modeling, as outlined in Whalley (1985). Data on production and exports are divided among three types of ownership. The sources and structure of the base year data set are described in annex 2. The key parameters used in the model, and their averages, are listed in annex 3.

# **Baseline Calibration and Simulation Design**

# **Major assumptions in baseline calibration**

To calibrate a baseline of the model, we introduce two economy-wide, ownership-specific (one for SOEs, and one for IPEs and NSEs) TFP variables into the model. These are solved endogenously in calibration to match a pre specified path of real GDP growth and the decline of employment in the state sector. The growth rate of real GDP is set to the actual growth rate during 1996-99. The growth rate then declines linearly from 7.5 percent in 2000 to 3 percent in 2050. There were 113 million workers in the state sector in 1995. This figure had decreased to about 95 million by 1999. It is assumed to decrease further by 5 million annually from 2000 to 2020, and to remain stable afterward.

Since life expectancy will increase with rising living standards as the economy grows, a gradually declining motility rates are calculated each year in the baseline according to exogenously specified life expectancy estimates from recent World Bank population projections (World Bank 1994). The total fertility rate for women of childbearing years is assumed to increase slightly between 2000 to 2050 because of China's relaxation of its 'one child' policy in the coming years.

As mentioned, the individual accounts in China's current pension system are largely notional, and thus essentially a PAYGO system. The government is responsible for both the pension expenditure in notional individual accounts and the contributions in the social pooling PAYGO system of pillar 1. Thus, we combine pillar 1 and pillar 2 in our baseline calibration and assume 60 percent replacement and 24 percent contribution rates. Detailed assumptions on macroeconomic closure, demographic parameters, and pension system characteristics used to calibrate the baseline are summarized in table 2. (The major results from the baseline calibration are presented in table 6.) 20