Currently showing: Funding longer lives > Pension/retirement

19 Mar 14 08:20

The demographic time bomb facing China is well-known, partly as a result of the earlier one-child policy. How to deal with the expected shrinkage in working population and the corresponding sharp rise in older people is a pressing concern. One of the topics under discussion is raising the retirement age.

Currently, female factory workers can retire at a minimum age of 50 and for male workers and most employees at government and state-owned organisations, at 60. This was introduced in the 1970s when life expectancy in China was around 70. As average life expectancy has risen to 75, it seems there is room to delay retirement age. Some also argue that early retirement was favoured in the past because this would give younger people more job opportunities. However, with most surplus labour having been absorbed and demographics pointing to a tight labour market going forward, securing enough jobs for graduates seems less of a concern now.

Raising the official retirement age will help to keep a bigger portion of the population working, which should be beneficial to the economy. At the same time, China is facing significant unfunded pension liability. Delaying the retirement age will alleviate pressure on government/enterprises, particularly as China is no longer expected to sustain economic growth at above 8%. It seems that economic logic is straight-forward.

But things are never straight-forward in China. While raising the retirement ages will help to reduce pressures on pension liability, this is not going to be sufficient (for example considering further improvement in life expectancy) nor is this the right answer to unfunded pension liability. Enterprises are not providing adequate funds to their defined-benefits schemes, which means either incentives are needed to encourage enterprises to do so, or China needs to shift more towards defined-contribution schemes (which are fully-funded).

What I heard from many friends in China is that those who have retired at the official retirement ages are still economically and socially active. It is very common that retirees look after their grandchildren, or provide other social services (eg young-old helping to look after old-old). These economic benefits are typically not captured or reflected in GDP figures, but there will be opportunity costs to the society if the retirees are no longer providing these services, as when they stay longer in the labour force.

It is perhaps almost inevitable that retirement ages will have to increase in China. Many people simply like to work longer. However, there are at the same time a host of complicated issues. There is a need to better understand the economic benefits, and raising the retirement age should not be used as a tool to mask the deficiency in pension systems. Otherwise, what should the new retirement age be? How to deal with current inequality in pension benefits entitled by different social groups? How to fund pension payments? Should Chinese women have the same retirement age as men?

I guess the bottom line is that we don't have much time to think through these questions as the working population has already peaked in China.

Category: Funding longer lives: Pension/retirement

Location: China


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