This happens in the rewriteTargetListIU function in src/backend/rewrite/rewriteHandler.c. The comment says it all:
/*
 * rewriteTargetListIU - rewrite INSERT/UPDATE targetlist into standard form
 *
 * This has the following responsibilities:
 *
 * 1. For an INSERT, add tlist entries to compute default values for any
 * attributes that have defaults and are not assigned to in the given tlist.
 * (We do not insert anything for default-less attributes, however.  The
 * planner will later insert NULLs for them, but there's no reason to slow
 * down rewriter processing with extra tlist nodes.)  Also, for both INSERT
 * and UPDATE, replace explicit DEFAULT specifications with column default
 * expressions.
So this happens during query rewrite, which is the step between parsing the SQL string and optimizing it.