Can China Solve Its Ageing Population Problem?

Many countries face a similar issue: How to provide the social amenities promised to senior citizens while their number grows faster than the working population.  Birth rates have fallen below the replacement line in many of the wealthier nations while demographic surges and increases in longevity have increased the fiscal pressures on national pension plans.  Many of these plans are ostensibly on a firm foundation as workers are expected to contribute enough to cover the costs of their future retirement.  However, most plans were implemented long before the necessary accumulation of resources was available: the first pensioners had to be accommodated before they had contributed much of anything.  This left systems continually trying to catch up with current workers’ contributions being partially used to fund those already retired.  For this type of approach to work, a given number of workers is required to fund the pension needs of the retired population.  With lower birth rates and an increasing fraction of the population reaching retirement age, the necessary number of workers are no longer available, and changes will be required to maintain fiscal stability of the system.  The pension system will require more funds and eventually someone will have to pay more in taxes.

Wealthy nations have the resources to deal with this issue if only there was the political will.  How they address it is not at all clear; the political problems are daunting.  Japan and Germany either have falling populations or will soon have them.  They are being forced to plan for this future.  However, the nation with perhaps the biggest problem is China.  Because of the need and the desire to limit its population, it will experience a rapid increase in the number of retirees and a drop in the number of workers before it has even had the opportunity to initiate a stable universal pension system.  Anja Manuel provides perspective on China’s issues in her book This Brave New World: India, China, and the United States (2016).

“Almost 200 million Chinese are over sixty years old (compared to just 60 million Americans), and that number will nearly double by 2030.  China’s working-age population will peak within the next several years, and decline thereafter.  By 2030, only about 47 percent of Chinese people are expected to be of working age.”

China is facing a dramatic growth in the number of retirees when it has yet to establish a universal pension system.  Rural people, from the time of Mao, were expected to live off the land, while children cared for their elders.  The nonrural and government workers were expected to be supported by their employers or by the government when they were old.

“Rural retirees expected very little.  Urban Chinese who worked in state-owned companies or for the government implicitly relied on the ‘iron rice bowl’: the idea that workers stayed at one place throughout life and that the enterprise would take care of them in old age.  The iron rice bowl has become untenable as China moves toward a market economy—in fact, the bowl is nearly empty and many retirees have to rely on their children to survive.”

The tradition of children supporting parents is collapsing as children go off to schools and jobs wherever they are available.  They can send money home to support parents, but a couple who were single children with no siblings could have four parents and up to eight grandparents to care for.  There is neither the money nor the physical space to accommodate such a responsibility.

China has recently promised to create a universal pension system for their elderly by 2020.

“The task China is attempting now is comparable to the United States creating
Social Security virtually from scratch in the 1990s, with the baby boomers retiring without having paid anything in.”

China has only recently taken steps to set up a pension system.  What exists has been far from universal.

“The Chinese retirement edifice is shaky.  It is a patchwork of thousands of state and local pension funds with no real central oversight.  The rural pension scheme….is not very generous.  Since 2009, when China created the system, some 325 million Chinese have been promised retirement benefits—almost as many as the entire population of the United States.”

“Chinese government workers are the only ones who receive a relatively generous retirement, a fact that many private sector workers resent.  In 2011, government workers received about 40 percent of their working pay (about $4,000 a year), even though they never had to pay into the system.  By contrast, workers in large private sector companies have to contribute eight percent of their wages.  After they have contributed for fifteen years, they are entitled to approximately $2,900 a year.”

However as in most systems, the individual contributions must be raided to make the payments for existing retirees.  This, in effect, creates a gap between what future retirees will need and what the pension system can provide.  Unless changes are made this shortfall will become enormous.

“This gap will rise to $128 trillion (yes, trillion) by 2050, according to the Chinese Academy of Social Sciences.  It sounds very much like the problems we have in the United States, only, like most things in China, on an even more epic scale.”

China seems to have many familiar political obstacles to overcome as they attempt to refashion their system into one that is fiscally viable and more universal in nature

“Beginning in October 2015, 40 million Chinese public servants must now contribute 8 percent of their income to their retirement to address the shortfall of funds, just as private sector workers do.  This was of course unpopular with public employees, so the Ministry of Human Resources and Social Security agreed to give all public servants a pay raise that same year.  However, this risks undermining the reform.”

Retirement age in China has been fifty-five for women and sixty for men.  These generous ages might have been appropriate in Mao’s time, but they are lower than in most developed countries, and are lower than China can afford.  In 2016, it was announced that retirement age would be raised.  A scheme would be developed and announced in 2017.  As of yet, no such announcement has been noted.  Politics matters—even in China.

China’s Social Security problem is much bigger than that of the Unites States.  Based on past performance, it is likely that China will survive this challenge and move into the future with an ever-smaller population, but a more sustainable future.  Meanwhile, the United States will likely continue to contend with the same tired arguments over what the government’s role should be in providing social services—accomplishing little, if anything.