China: the mother of all demographic time bombs

I argued in a previous blog article that an ageing population is not necessarily problematic provided pay-as-you-go (PAYG) pension systems are scaled back. However, there is always an exception to every rule, and, as is often the case, that exception is China.

The IEA monograph Pension Provision: Government Failure Around the World describes the scale of China’s demographic time bomb. Under Chairman Mao, China experienced rapid population growth. This was brought to an abrupt halt by the ‘one-child’ policy. Combined with rapid increases in life expectancy, this has led to the 4-2-1 problem – one child supports two parents and four grandparents.

To give an illustration, in the UK the ratio of working age population to population over 60 will drop from the current 3:1 to about 2:1 over the next 40 years and this is causing us a great deal of worry. In China, the ratio will drop from 6:1 to below 2:1.

Even if China’s economy continues to grow rapidly, its per capita income will still be a fraction of the UK’s during the demographic transformation – China will grow old before growing rich. Indeed, China’s current high savings rate is not surprising given its rapidly ageing population (more on this in a future post).

In the monograph, we surveyed many countries’ pensions systems. China’s was by far the most complex, the most inequitable (relatively rich urban dwellers receive very generous pensions from age 50, poor rural workers receive nothing), entirely inflexible (you can’t transfer benefits between regions) and riddled with corruption. It is entirely unsuited to meet the oncoming crisis.

What will happen? I have no idea. There is a famous Chinese curse: ‘may you live in interesting times’. Times certainly will be interesting when what will probably be the world’s largest economy hits its demographic great wall.

A couple of questions. Would ending the one-child policy make a big enough difference to solve the problem or is it too late? And will China’s relative lack of democracy enable it to avoid some of the perils associated with ageing voters voting for more old-age benefits or will other political tensions arise?

On a conference I attended last weekend, someone raised the following idea: For international communication, English has emerged as the standard language. Now why aren’t the French, Germans, Italians or Spaniards complaining about that? The answer: Because nobody DECIDED to make English the standard language – it just happened.
Similarly, in a state-free form of old-age provision, nobody would complain about rising costs of pension saving, resulting from an increased life expectancy. In such a case, nobody DECIDED that old age should become more costly – it just happened.
It it the politicisation of the issue that causes the conflict.

The ageing issue to become real issue to China in 2040-2050, according to experts projections: one may see the US Census Bureau (www.census.gov) 50 years diagrams to see how it is going to be considering existing rate of life expectancy and one child rule. Solution has also been proposed: second obliged participation in fully funded scheme which is added to first PAYG pillar; and 1-1,5% of payroll to be paid by corporations to employees. Question is how soon these needed measures to be adopted in China. One cannot raise % of payments due to decreasing replacement ratio: workers will not agree to pass half of their salaries to sponsor pensions of the others.

A couple of questions. Would ending the one-child policy make a big enough difference to solve the problem or is it too late? And will China’s relative lack of democracy enable it to avoid some of the perils associated with ageing voters voting for more old-age benefits or will other political tensions arise?

On a conference I attended last weekend, someone raised the following idea: For international communication, English has emerged as the standard language. Now why aren’t the French, Germans, Italians or Spaniards complaining about that? The answer: Because nobody DECIDED to make English the standard language – it just happened.
Similarly, in a state-free form of old-age provision, nobody would complain about rising costs of pension saving, resulting from an increased life expectancy. In such a case, nobody DECIDED that old age should become more costly – it just happened.
It it the politicisation of the issue that causes the conflict.

The ageing issue to become real issue to China in 2040-2050, according to experts projections: one may see the US Census Bureau (www.census.gov) 50 years diagrams to see how it is going to be considering existing rate of life expectancy and one child rule. Solution has also been proposed: second obliged participation in fully funded scheme which is added to first PAYG pillar; and 1-1,5% of payroll to be paid by corporations to employees. Question is how soon these needed measures to be adopted in China. One cannot raise % of payments due to decreasing replacement ratio: workers will not agree to pass half of their salaries to sponsor pensions of the others.

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