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.