China’s dilemma: Growing old before it becomes rich and powerful

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Opinion

China’s dilemma: Growing old before it becomes rich and powerful

For all countries, a lot depends on the dependency ratio. That is, the number of people aged under 14 and over 65, compared with the rest of the population.

In Australia, that figure is hovering close to 55 per cent, meaning there are more young and old people who are less likely to be working than there are those who are employed and paying taxes that fund healthcare, pensions, nursing homes and education.

The ratio will rise as the baby boomer generation retires, driving up the number of people aged 65 or more per 100 working-age people from 21 to 30 by 2031.

China faces one of the steepest generational slides in the world.

China faces one of the steepest generational slides in the world.Credit: Joe Benke

“In real dollar terms, this equates to an annual cost to the budget of around $36 billion by 2028–29,” the Parliamentary Budget Office found in 2019.

“This is larger than the projected cost of Medicare in that same year.”

Australia is not unique in grappling with the impact of an ageing population. It does not even make the top 20. Japan, Italy and Finland are already pushing the old-age dependency ratio through the 30s, but it is China - due to its size and the scale of its retirement pension system - that faces among the steepest generational slides in the world.

In Beijing last month at the National People’s Congress its leaders grappled with measures designed to avert a looming economic and fiscal crunch: By 2050, China is forecast to reach an old and young age dependency ratio of 70 per cent.

That will leave just 30 per cent of a population of more than 1.4 billion carrying the tax bill for an economy that will become the world’s largest by the end of the decade.

How big will the bill be?

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The International Monetary Fund believes China will have to increase public spending on pensions by an amount equivalent to over 100 per cent of GDP in aggregate over the next 30 years based on current plans.

Tea attendants practice before the second plenary session of the National People’s Congress at the Great Hall of the People in March.

Tea attendants practice before the second plenary session of the National People’s Congress at the Great Hall of the People in March. Credit: Getty

That is $18.7 trillion. Four times the level of the average developed country as a proportion of the economy.

“Chinese and international experts have been warning about a demographic time bomb in China for decades: That China will grow old before it grows rich and powerful,” wrote Australian National University researchers Yun Jiang and Adam Ni in their China Neican newsletter in March.

The 14th Five Year Plan (2021-2025) was approved by the National People’s Congress last month. It elevated addressing the demographic challenge from developing a “system for addressing population ageing” to a “proactive national strategy on ageing population”.

In China, the rhetorical change is significant. It clicks the gears of a state-driven economy behind the mammoth demographic task at hand rather than focusing on policy development or contingencies.

The top levels of the Chinese government will now turn their departments, propaganda and state-backed enterprises behind achieving the desired outcome.

“The change in language indicates that policy is moving in a more ‘pro-birth’ direction. This is not surprising.”

Yun Jiang and Adam Ni

The reckoning will also include grappling with the long-term effects of China’s one-child policy. In the 1990s China’s fertility level dropped well below replacement rate: down to 1.2 children per couple. That drove down exponential population growth that at one stage had produced a fertility rate of 6 in the 1970s.

The difference between these two figures - just a generation apart - has perpetuated the looming fiscal and economic crisis of the government’s own making.

Now it wants young Han-majority Chinese couples to have more babies again by establishing a push to “enhance the inclusiveness of fertility policy” in its latest Five Year Plan.

“The change in language indicates that policy is moving in a more ‘pro-birth’ direction. This is not surprising,” said Jiang and Ni.

“Countries wanting to reverse an ageing population must either take in more migrants or put in place policies to raise the birth rate. Most governments put more effort into the latter, as that tends to be more politically popular.”

The other deeply unpopular strategy for ameliorating the age-dependency ratio is to increase the retirement age at which people can access the pension.

For decades China’s retirement ages have been pegged at 60 for men, 55 for female government workers and 50 for other women. The average across the OECD is 64. In Australia, from 2024 you will have to be aged 67 or older to access the pension.

In 2014 former treasurer Joe Hockey attempted to progressively raise Australia’s retirement age to 70 by 2035. The principle was poorly prosecuted, the public backlash was swift, and less than a year later it was one of more than a dozen measures that saw him dumped from the job.

In Beijing, China’s leadership is now grappling with its own internet-fuelled backlash after it began publicly discussing its plans to extend retirement ages through the 14th Five Year Plan. It has not put a new figure on the retirement age but the speculation has been enough to propel a month-long and rare public outcry.

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”Young people may have to work a few years longer but will have a long adaptation and transition period,” Jin Weigang, the head of the Social Security Research Institute at the Ministry of Human Resources told state media in an effort to quell growing disquiet.

The crux of the dilemma is whether increasing the retirement age will actually help to raise workforce participation and therefore alleviate the age-dependency ratio or just help Beijing’s budget deficit.

Capital Economics chief Asia economist Mark Williams said the changes will barely lift employment.

In China, where multi-generational households, family childcare and the challenges of a developing economy make decisions about retirement even less clear-cut than in Australia, Europe or the US, the pension is more of a buffer than a guaranteed income stream.

“The median woman in her 50s with a grandchild under 16 provides more than 30 hours of childcare each week. Delaying women’s access to pension benefits is therefore not a straightforward means to raise employment,” he said.

“As for men, the early retirement age makes no difference to employment rates relative to those elsewhere. Pension provision is meagre and many on low incomes have few savings to rely on. That explains why around 70 per cent of Chinese men continue working after the statutory retirement age.”

Zhang Jun, a dean of the school of economics at Fudan University and director of the China centre for economic studies, believes China has little choice but to simultaneously attempt to drive fertility, raise the retirement age and encourage more workforce participation.

“If it is to sustain its economic dynamism in the decades to come, it must work hard to expand its labor force, including by raising the retirement age and encouraging families to have more children,” he wrote for Project Syndicate in March.

“Otherwise, its population will become old in the same way Ernest Hemingway described how one goes bankrupt: gradually, then suddenly.”

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