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China Raises Retirement Age, First Step Towards Pension Reform

China Retirement

China has taken its first major step toward addressing a looming pension crisis by raising the retirement age, a move seen as necessary but insufficient by economists and demographers. This reform is intended to address the country’s significant pension deficits and shrinking workforce, exacerbated by decades of the one-child policy. However, as the economy slows, further reforms are urgently needed to prevent long-term financial and social challenges.

The Demographic Challenge

China’s aging population presents a stark problem. The country recorded only 9 million births last year, and projections by the United Nations indicate that China’s working-age population could decline by nearly 40% by 2050 if fertility rates remain stagnant. The legacy of China’s one-child policy has resulted in a shrinking younger generation and a growing elderly population.

By 2035, the number of people aged 60 and older in China is expected to rise by at least 40%, reaching more than 400 million—equivalent to the combined populations of the United States and Britain.

Economic Strain and Slowing Growth

China’s economic growth has decelerated, dropping from around 8% in the early 2000s to roughly 5% now, with some analysts predicting it could slow to just 1% by 2035. With economic momentum fading, addressing the pension shortfall is crucial while there is still some growth to support deficit financing. Natixis’ chief economist for Asia Pacific, Alicia Garcia Herrero, stressed the urgency of reforms, stating, “They need to solve the pension problem now because this is when they still have some growth to finance the deficit.”

China’s state-led pension system is already under financial pressure, with about one-third of provincial-level jurisdictions running pension deficits. Without reforms, the Chinese Academy of Social Sciences predicts the pension system could run out of money by 2035.

Raising Retirement Ages Without Public Consultation

In September, China’s lawmakers fast-tracked the retirement age reform without public consultation, a sign of the government’s wariness over potential backlash. Current retirement ages in China, set in the 1950s, have not kept pace with increased life expectancy, which has risen to 78 years as of 2021 and is expected to exceed 80 by 2050.

Premier Li Qiang hailed the reform as a “significant move” to improve social security and enhance the livelihoods of Chinese citizens. However, while the reform aims to strengthen the pension system, challenges remain in addressing the gap between rural and urban pensions and managing public concerns over youth unemployment and job availability for older workers.

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Impact on Workers and Future Challenges

The current reform includes provisions to raise the contribution period required to receive a pension from 15 to 20 years starting in 2030. While aimed at increasing fiscal sustainability, this change may place additional strain on blue-collar and gig economy workers, many of whom may struggle to meet the extended contribution requirements. As Stuart Gietel-Basten, a professor at Hong Kong University of Science and Technology, warned, “Expanding the contribution time frame further could make it harder for many blue-collar workers to be eligible to receive their pension.”

Raising the retirement age may have a limited immediate fiscal impact, as much of the increase is voluntary, according to Ernan Cui, China consumer analyst at Gavekal Dragonomics. However, the increase in the minimum contribution period will be mandatory, potentially affecting the most vulnerable workers.

Addressing Income Inequality and Social Risks

China’s pension system also suffers from significant discrepancies between rural and urban pensions. Monthly urban pensions can range from 3,000 yuan ($425) in less-developed regions to 6,000 yuan in Beijing and Shanghai, while rural pensions, introduced nationwide in 2009, remain comparatively meagre. This disparity has prompted concern about income inequality, especially as migrant workers, who receive minimal pension benefits, tend to work into their older years.

John Wang, an analyst at Moody’s Ratings, noted that the success of China’s retirement reform depends on managing risks related to demographic challenges, income inequalities, and the ability of the elderly population to adapt to new job markets and technological changes.

Conclusion

China’s move to raise the retirement age marks a necessary step in tackling the country’s growing pension deficit and shrinking workforce. However, experts agree that more comprehensive reforms, including fiscal policies and measures to address income inequality, will be essential to ensure long-term stability and prevent further economic strain.

(With Inputs from Reuters)