China Must Keep Workers Working Longer To Plug Pension Gaps

G.Tech Technology Factory in Zhuhai China, 2015. Photo credit: Chris Licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license.

THE OPTION TO defer retirement offered for the first time by Jiangsu province this month is the first step in what is an increasingly urgent need for China to raise the retirement age.

Chinese workers retire young by the standards of the upper-middle-income countries that China aspires to join. Retirement is based on gender and collar. Women in industrial and manual jobs retire at 50 and in white-collar employment at 55. Most men retire at 60 (special rules can apply to Party leaders). The average retirement age for workers in OECD countries is during their 64th year, ten years beyond the average in China.

With demographic pressures bearing down, China has an economic need to keep more people working longer. The announced goal is to raise the retirement age to 65 (for all workers) by 2030. That will not prove popular.

The retirement rules date back to the 1950s and have resisted several attempts at reform. When they were introduced, life expectancy was 35 years. It is now over 77. Meanwhile, the proportion of the working population and the replacement fertility rate have decreased significantly. All this has put the long-term viability of pension provision in doubt. 

Raising the retirement age will have complex social and economic impacts. 

Many white-collar women, who, like those in other countries, have growing career opportunities, will welcome the choice of working longer. However, it will limit the supply of family childcarers, given that grandparents currently act as primary carers for their grandchildren so that parents can work. Grandparents who retire later will no longer be available for the task.

Another challenge is that delaying retirement will limit job opportunities for young workers. The unemployment rate among workers under 24 years old is already 13%, compared to the overall labour force average of 5%.

Authorities will likely raise the retirement age gradually to mitigate those factors. However, the economic imperatives will require picking up the pace, which will likely occur during the next five-year plan (2026-30). The option to retire later will increasingly become a mandatory requirement.

China cannot afford to delay the reforms. It is not alone in facing a contracting workforce due to an ageing population and low birth rate. Yet, the scale of the country adds another level of challenge. China had 254 million retirees in 2019 and 300 million in 2021. The number is forecast to top 400 million by 2033.

The pensions of the swelling ranks of retirees will have to be paid by economically active 16-59-year-olds. Their share of the population has shrunk by five percentage points since 2011.

Between 2021 and 2025, the economically active population is forecast to decrease by about 35 million, while 40 million will retire. Combined with pensions indexed to salary increases and consumer price inflation, the imbalance increasingly makes the system unsustainable.

A recent study by the Chinese Academy of Social Sciences suggests that China’s state pension fund, which coordinates and tops up the fragmented system of local pension schemes, will be depleted by 2035. 

The state pension fund paid over $148 billion to local pension schemes in 2021, indicating the scale of the strain on the local funds. 

Almost a quarter of the support went to the less densely populated central and western regions and the northeastern ‘rust belt’ provinces, where the squeeze of labour outflows reducing pension inflows and greying populations increasing pension payments is the most acute.

In addition, $265 billion worth of state assets were transferred last year from centrally administered state-owned enterprises and agencies to bolster the pension funds. Raising the retirement age will provide further but temporary relief for the funds. However, it will not be a long-term cure unless pension fund reform and restructuring are carried through.

The financial implications of the current retirement system compound the impact of slowing growth on the government’s aspirations to deliver its other social policies. These include closing the wealth gap and improving living standards under the Common Prosperity rubric. The new national pension system that came into effect on January 1 is intended to top up local pensions where needed and narrow regional economic inequalities.

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