Will the old derail China’s growth?

The report from CSIS Two-thirds of Chinese can currently look forward to a destitute old age. China faces the prospect of tens of millions of low-wage workers maturing into indigent urban elders between 2020 and 2030, with untold social and political consequences.

A new report from the Centre for Strategic and International Studies, The Graying Of The Middle Kingdom Revisited, analyses China’s current state of preparedness for its rapidly ageing population and makes persuasive recommendations for a pensions policy which could avert disaster.

Pensions are an increasingly inflammatory issue in many countries – exacerbated, as in Greece, by the conflicting pressures of the agebomb and the need for austerity measures to deal with deficits. In recent years, the Chinese government’s political legitimacy has rested on its dual promise of rapidly rising living standards and social stability; now a new combination of an extremely rapidly ageing population, of whom tens of millions could become destitute, and the need to maintain economic growth make pension reform more urgent here than almost anywhere.

Only a third of China’s workforce is currently earning any public pension. Of those, the report’s authors point out, a small minority are accumulating adequate financial resources to support themselves in retirement. Most elderly Chinese will have to fall back on the most traditional form of old-age insurance: the family. But a hazardous collision of China’s one-child policy with rapid industrialisation is untying this safety net.

photo from HelpAge International, Shaanxi province

photo from HelpAge International, Shaanxi province

The one-child policy was designed by the Chinese government to stop runaway population growth and so lay the foundations of prosperity. When it was implemented, a future in which a small number of workers would need to support a large number of elders was far too distant to be a worry; the upshot is that over the next few years China’s last large generation will begin to reach old age. In 2005, 11% of the population was aged 60 or over. By 2015 it will be 15%; by 2030 24% and by 2050, 33%.

Meanwhile, mass rural-urban migration is increasingly separating children from their parents. In 1996, the National People’s Congress passed a law obliging children to support their aged parents, a sure sign that tradition was waning in the face of ‘Western’ values. Weakening families face a huge, unwelcome burden of care and responsibility, known to the Chinese as ‘the 4-2-1 problem’ – the prospect that one child may well end up having to support two parents and four grandparents.

The report’s authors, Neil Howe and Richard Jackson, identify a number of reforms to the basic pension system already made by the Chinese. These are designed to increase participation, with the aim of universal pension coverage by 2020. While acknowledging that these reforms are headed in the right direction, the report, which is backed by Prudential, argues that the current high contribution rates encourage evasion, while Chinese pensions are also insufficiently portable. There is a limit to what the government can do by tinkering with the current system.

They argue for radical reform, with a four-point plan:

  1. A floor of protection against poverty, which would cover all Chinese whether or not they have contributed to the basic pension system
  2. A lower contribution rate, leaving the government to meet the underfunded liabilities left over from the State Owned Enterprises
  3. Gradual reform of the existing basic system into a national system of privately managed (but publicly regulated) invested personal accounts – fully funded, fully portable and offering a market rate of return
  4. Expansion of the current ‘Enterprise Annuity’ system, introduced in 2004 with the intention of providing supplementary income to higher earners.

Taken together, they argue, these measures would require significant upfront investment but would save millions of Chinese from destitution. They may well avert widespread unrest. If pensions were to become genuinely personal, Chinese workers may come to see them as investment accounts rather than as a tax. Pension reform would help to broaden and deepen China’s capital markets, seen by many as the crucial next step in its development.

Throughout China’s long history, periods of strong central authority and growing economic prosperity have alternated with periods of social and political chaos – or what the Chinese call luan. Whether China’s ageing ushers in the next turn of the cycle may well depend on how successful China is in meeting its ageing challenge.