Tag Archives: demographics

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.

Leave a comment

Filed under Economy, Politics & Society

Three-Child Policy Will Struggle To Raise China’s Birth Rate

THE THREE CHILD policy is now official. On August 20, the National People’s Congress formally passed revisions to the law that will let couples have up to three children.

The aim, self-evidently, is to raise China’s birth rate. The results of the 2020 National Census reveal that China’s total fertility rate has fallen to an all-time low of 1.3 — well below the replacement level of 2.1.

Five years ago, the one-child limit was replaced by two, acknowledging the adverse impact of the strict controls on reproduction introduced in 1980, when the worry was the prospect of too many mouths to feed. Now, the concern is too few youngsters to pay for the pensions and healthcare of the elderly.

The unintended demographic consequence of the one-child policy was to leave China with an ageing population and shrinking workforce much sooner than other countries at this stage of economic development.

There was also a huge personal and social cost in the suppression, often forced, of an estimated 400 million births over the 35-years of the one-child policy.

Yet legal permission is far from the only factor in couples’ decisions to increase the size of their family. Adequate and affordable housing, the cost and availability of education and social welfare provisions, particularly childcare, also matter. Without extensive reforms in those three areas, this latest change is unlikely to reverse the downward trend in births, at least in urban areas.

Since the introduction of the two-child policy, as few as 5-6% of couples in large cities have opted to have a second child. A pair of recent surveys by Xinhua and Weibo showed only 3-5% of respondents were ready to have another child.

The countryside, where there is still a preference for sons and the one-child policy was not enforced for couples whose first child was a girl, may prove to be different.

The other factor weighing on the birth rate is the infertility rate, which rose to 18% in 2020 from 12% in 2007 among couples of childbearing age. While the absolute level is not out of line with other upper-middle-income countries, the sharp rise is, and its reasons are not well understood.

Leave a comment

Filed under Politics & Society

China’s Birth Rate Is A Cost, Not Numbers Problem

IT STRIKES THIS Bystander as odd that China’s decision to switch to a three- from a two-child policy is being described as a surprise. Demographic data does not change that quickly. That the country faces a reversal from its demographic dividend to a demographic deficit with the ageing of its population has been known for many years.

True, the 2020 census gave the inevitable decline of population growth as economies get more prosperous and more urbanised a new urgency. The 12 million new babies born last year were the least since 1961 — and two-thirds the level of 2016 when Beijing ended its one-child policy. 

The impact of the pandemic on couples’ willingness to have children may not be fully apparent yet. Nonetheless, a birth rate declining even faster than the mortality rate may mean the population will begin to contract in 2025. That is sooner than expected, with the economic impact of having relatively fewer workers to create output and to pay the taxes to care for the elderly.

The other question is whether allowing couples to have a third child will reverse the long-term trend. Allowing them to have two has had little effect. More significant deterrents to larger families are the high cost of childcare, education and housing.

Policymakers need to address those if they are to get the fertility rate up. It is another reason that Beijing needs to hark the calls of those, including most recently the OECD, to take advantage of the pandemic to push through structural reforms that will increase social protections.

1 Comment

Filed under Politics & Society

China Has To Get Rich Before It Gets Old

REPORTS THAT CHINA’S population is in decline have proved premature, but growth has slowed further.

The newly released 2020 census shows the population growth rate averaging 0.53% over the past ten years, down from 0.57% in 2000-2010 and the slowest since 1953. The population is counted at 1.41 billion.

That is still 72 million more than captured by the previous census. The increase alone would be sufficient to rank as the 20th largest country by population, with more people than France or the United Kingdom.

Like many countries, China saw a drop-off in births after the Covid-19 pandemic struck. Some 12 million babies were born last year, compared to 18 million in 2016, after the one-child policy was ended. The uptick in fertility this caused lasted barely a year.

Fertility has been on a long term decline since the late 1970s; initially planned to check population growth with the one-child policy introduced in 1979 but more recently due to economic growth. Most industrialising countries see lower fertility rates as they move up the economic development ladder.

China’s social and economic consequences will be the same as those of other countries where the demographic dividend that propelled growth turned into a demographic tax. The population aged over 65 rose to 13.5% of the total population, up from the 8.9% recorded by the 2010 census.

Growing numbers of elderly require more economic resources to be devoted to providing services for them such as health and social care. These have to be paid for by a relatively smaller cohort of those of working age. The working-age population has slumped to 63.4% from more than 70% a decade ago,

The smaller labour pool, estimated to have shrunk by 40 million people between the two censuses, will act as a drag on overall growth unless productivity can be sustained by better use of non-labour factors of production — which is just the economists’ way of saying the economy has to move up the development value chain, as it is doing.

As we explained it after the previous census:

Working population is a proxy for production, and when it grows faster than the total population (a proxy for consumption), as it has for the past three decades, the difference becomes exports. Some time over the next decade that trend will reverse and the reversal intensify over the subsequent three decades reaching its peak in 2050. The consequent demographic bias will work through to the trade account long before then.

That will drive the transformation of the economy towards being more led by domestic demand. The supply of surplus labour available to low-cost export manufacturers will dry up. Manufacturers will move up the value chain, and a domestic market for products and services for the elderly will expand domestic demand, helping to run up domestic consumption and down domestic savings. The era of manufacturing in China predominantly for export comes to a close, replaced by an era of manufacturing and services provision in China for Chinese consumers.

Which is pretty much how it is playing out. It is also what, with the appropriate allowances for the geopolitical context, the new five-year plan is intended to sustain.

Beijing still has policy decisions to make about how it will deal with future labour shortages. The least likely way is immigration. More possible is that it will scrap the two-child policy at some point. More immediately, it will likely raise the retirement age.
.
Another consequence of the demographic tax is that the growth in per-capita income and living standards are at risk of slowing. Regional neighbours such as Japan, South Korea and Singapore stand in testament that that is not inevitable regardless of ageing populations and declining fertility, even population shrinkage.

However, in China’s case, it will require politically deft handling. The legitimacy of one-party rule turns on delivering a steadily improving quality of life. The Party still needs China to get rich before it gets old.

1 Comment

Filed under Economy, Politics & Society

China’s Economy Labors Under Its Demographic Pressures

It is tempting to gloss over the conclusion of the newly published report of the International Monetary Fund’s most recent annual Article IV consultations with China’s economic policy makers. That the managed slowdown of China’s economy to more sustainable long-term growth rates has run into stronger than expected headwinds from the euro crisis and that China remains too dependent on unsustainable investment for growth is now conventional wisdom.

This Bystander’s eye was caught by a short note in the report about labor supply and the extent to which fast intensifying demographic pressures are squeezing out the supply of cheap rural labor available to transfer to the urban industrializing economy that has underpinned China’s three decades of rapid growth. The point at which the excess subsistence labor in the countryside is fully absorbed into the modern sector is known as the Lewis Turning Point (LTP).

It is a critical point along the path of a developing nation. Once the pool of low-cost labour runs dry, employers and the state have to raise wages and benefits, and the country loses its low-cost competitive advantage. Made in China will be replaced by Made in Myanmar as the label of cheap everything, just as Made in China replaced Made in Japan decades back. The subsistence and industrializing parts of the economy merge. Overall growth is driven increasingly by the marginal productivity of labour. Increased purchasing power in workers’ pockets means that consumption increases. The country transforms itself from a producer to a consumer, while services become a larger part of the economy as the industrial sector diminishes relatively. This is a point China wants to get to. The IMF asks if when it will do so.

Source: IMF Country Report No. 12/195, PRC 2012 Article IV Consultation

In short, its answer is that China will be approaching it by the end of this decade, and hit it sometime between then and 2025 (see chart, left). Despite labour being in short supply in some regions and wages being pushed up for reasons of social stability, the IMF reckons the country’s surplus labour to be in excess of 150 million at present. But it says it will fall to 30 million by 2020.

As a result there will be pressure to unlock surplus labour between now and then. An easing of the one-child policy, further reform of the hukou system of residency rights and with it easier access to social benefits such as subsidized housing, schooling and healthcare, and an end to informal but widespread discrimination in job recruiting based on gender and looks are likely. All will delay the onset of the LTP, just as liberalizing financial services and improving productivity could advance it as it would raise net household wealth. But wherever the LTP lies, it is an unescapable point in China’s future, just as the country will have to navigate another tipping point, when per capita income reaches $10,000-12,000 a year, the level at which developing economies tend to stop developing without institutional change.

4 Comments

Filed under Economy

When China’s Demographic Dividend Becomes A Demographic Tax

Much of the follow-up attention given to the census results published this week has concentrated on the implications for China’s one-child policy. This Bystander is more struck by the long-term economic impact of the key demographic trends–low birth rates, a greying of the population and an unbalanced sex ratio (15% of young Chinese men won’t be able to find a partner among their fellow citizens in 20 years time).

These will, we believe, likely combine to make China a deficit country within two decades. Working population is a proxy for production, and when it grows faster than the total population (a proxy for consumption), as it has for the past three decades, the difference becomes exports. Some time over the next decade that trend will reverse and the reversal intensify over the subsequent three decades reaching its peak in 2050. The consequent demographic bias will work through to the trade account long before then.

For now, China’s demographic dividend has brought it more than just merchandise trade surpluses. Add on dramatically rising productivity from economic reform to the country’s working population growing much faster than its total population and the inevitable consequence has been a sharp improvement in per-capita income and living standards. The peak in the workforce forecast for sometime in the next decade will be accompanied by an explosive growth in the number of over-65s. China’s working population will begin to grow more slowly than its total population. The demographic dividend will become a demographic tax. As China is getting old really fast, it will become an increasingly heavy tax relatively quickly.

That will drive the transformation of the economy towards being more led by domestic demand. The supply of surplus labor available to low-cost export manufacturers will dry up. Manufacturers will move up the value chain, and a domestic market for products and services for the elderly will expand domestic demand, helping to run up domestic consumption and down domestic savings. The era of manufacturing in China predominantly for export comes to a close, replaced by an era of manufacturing and services provision in China for Chinese consumers.

How this all turns out in detail will depend on other factors, such as  changes in worker productivity, savings rates, institutional reform, whether monocultural China proves open enough to deal with future labor shortages through immigration, and, yes, what happens with the one-child policy. But today’s fast economic growth and huge export-driven current-account surpluses will by then be but a distant memory.

Footnote: Certainly the numbers can be used to argue the one-child policy policy should be scrapped. Wang Feng, Director of the Brookings-Tsinghua Center in Beijing, does just that in a commentary in Caixin.

To put the growth of the population in some perspective, since the previous census in 2000, China’s population has grown by 74 million to 1.34 billion. The increase alone would be sufficient to rank as one of the 20 largest countries in the world by population, with about the same number of people as Turkey or Iran. Over the same decade India’s population increased by 181 million. And while we are making such comparisons, on present demographic trends, by 2050, silver China, the nation of Chinese over 65 years old, will constitute a larger nation than the U.S. today.

5 Comments

Filed under Economy