China’s graying population and government-mandated retirement ages are putting pressure on the country’s economic structure. As the number of people seeking state aid in retirement rises, policy adjustments will be needed to prevent a funding crisis.
Du Yang, a professor at the Institute of Population and Labor Economics at the China Academy of Social Sciences (CASS) highlights three central requirements for China to cope with getting old before it gets rich: improving labor productivity, improving old-age insurance and efficient allocation of the state pension fund.
“Our core issue today is the improvement of labor productivity,” Du said. “We have already seen that dependence on an export- and investment-led economic structure has revealed limitations. Only with improved labor productivity and investment in human capital will stable economic growth be ensured.”
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A surplus of elderly workers and a deficit in new labor supply will lead to gross imbalances in China’s long-term growth prospects. Low retirement ages, and with them stunted income growth, are also contributing factors that will aggravate the problem.
The current retirement age lies at 60 for men and 50 for women. But workers are often pressured to take early retirement to make way for the next influx of college graduates and younger workers. This helps to keep short-term unemployment figures at around 4.1%.
“Officially retirement ages are low, and in reality they are even lower, especially for women. This is a huge waste of resources,” said Yolanda Fernández Lommen, head of the Asian Development Bank’s economics unit in Beijing. “Sixty years ago, life expectancy was much lower than it is today – about 50 years compared to over 80 years in larger cities. Retirement ages no longer match the situation on the ground.”
Fernández Lommen said the belief that extending the career lifespan of older workers will create higher unemployment for the youth is misplaced. In Western Europe, increases in retirement ages have proven to have almost no effect on employment opportunities for youth.
For now, a low retirement age and China’s notoriously inefficient social welfare system will continue to have the combined effect of higher savings rates and lower consumption.
“If you know you are going to retire at 49 and live to 80, even if you have a pension it will be a meager one – around 20% of your salary,” said Fernández Lommen. Workers know that they will have to rely on this insufficient level of income while also facing higher spending on health care. “Because of these expectations, the saving cycle will be prolonged,” she said.
Despite the government’s proclaimed desire to shift away from an export- and investment-led growth model to one based on consumption, it has done little to ease fears of the consequences for growth of an old-age society.
“China’s economy can still maintain a high growth rate if we can improve productivity,” said Du at CASS. “But improving the social support network and its coverage, as well as narrowing the social security gap between urban and rural areas, are the next steps the government needs to take.”