Chapter 4—Pension Reform in China: An Economic and Sociological Analysis | Judy Qiu, Mt. Holyoke

Over recent decades, China has been recognized as the world’s fastest growing economy, with annual growth rates averaging 10% (IMF, 2011). Furthermore, China is gaining attention for its rapid development and increasing potential to be a world leader. In the midst of its powerful ascent, however, old age security has become a growing socio-economic concern in China. In particular, since the post-Maoist reform era, two interacting factors have posed a threat to the future of China’s pension system. Fundamentally, its vast population is aging at a very fast pace disproportionate to the growth of its younger generation. Additionally, China’s recently established National Social Security Fund suffers heavily from debt, threatening the scope of pensions that are already highly negligent towards rural and migrant workers. In light of the rapidly aging population and looming pension-funding crisis, China faces a serious social challenge ahead on its road to economic prosperity, which may be obstructed by a nation-wide phenomenon of “Getting old before getting rich” (Wee, 2012).

Compared to other developing nations, China is aging at an alarmingly rapid rate. In 2013, just under 15% of the population will be over 60 (Hu, 2012), the current male retirement age. Furthermore, if the current trend continues, this is expected to reach 33% by 2050 (Hu). The magnitude of China’s population growth is exacerbated by its fast pace, a product of both the Maoist era baby boom and the one-child policy implemented at the start of the post-Mao period. China’s population ageing also takes place at a much lower socio-economic level than in developed countries, raising economic concerns about supporting dwindling pension funds. Pension finances already struggle to keep up with inflation and the rising wages of workers, resulting in many of the elderly being left behind (Zhao, 2009).

To tackle the pension fund debt, China established the National Social Security Fund in 2000, which aims to help solve its aging problem and serves as a reserve fund for the government to support growing social security needs. Nonetheless, this system remains heavily underfunded, with a current deficit of 18.3 trillion RMB (Wee, 2012). Currently, the funding gap in old age security expenditures is mostly covered by tax and fiscal support, which the Chinese government is trying to gradually eliminate and replace with institutional support. At the end of 2011, government fiscal subsidies for pensions had totaled to 1.25 trillion RMB (China Daily, 2012). China’s vast state-owned assets are its best means to raise money for the fund; however, its economic structure makes it very difficult to transfer these funds. The government cannot sell state-owned shares on the market and transfer the proceeds as funding because the domestic market cannot withstand the massive sell-off pressure without triggering turbulent fluctuations (Wang, 2010). In response to these factors influencing the future of its old age security system, the Chinese government has recently announced its plan to reform the pension system, an economic action that could launch many sociological consequences with conflicting moral complications.

The primary component of China’s pension system reform is raising the retirement age to 65 for men and 60 for women, a policy change that would increase the national workforce by 25% and reduce its retirees by 28% (China Daily, 2012). This would help offset China’s shrinking human capital potential, as the ratio of younger workers to the elderly population declines and current workers face the challenges of producing enough to sustain the entire nation. For the Chinese government, whose priority continues to be economic development, raising the retirement age will allow it to raise spending on old age care without undermining its capacity to sustain high economic growth in the long term. Because China’s economic success is largely due to its vast supply of cheap labor, the Chinese government is highly averse to its shrinking workforce and hopes that a higher retirement age will delay the growing burdens of its working population.

The extra funds generated from this policy change would also allow the government to widen the pension system to include more rural and migrant workers. This could help decrease the inequality in pension opportunities between urban and rural communities, where more than half a billion rural Chinese are not yet covered by social security (French, 2007). As well, according to current policies, pensions are highly immobile, causing many migrant workers to forego them altogether because they fear losing their entitlements when they cross provincial borders (The Economist, 2012). Moreover, in many state-owned companies, employees are allowed early retirement. Under the current age regulations, this allows some women to retire as early as age 50 (Gu, 2012), meaning they will collect pension benefits for more years than they work. This unjustly exacerbates the pension deficit, as these workers begin to collect earlier, while contributing fewer funds overall. Therefore, to the central government, many potential benefits suggest that raising the retirement age is a worthwhile and reasonable sacrifice, as China continues to struggle with the trade off between old age care and national economic growth.

The Chinese public, however, holds differing opinions about the future of their pension system. In an online survey by the People’s Daily newspaper, over 93% of 450,000 respondents were opposed to raising the retirement age (China Daily, 2012). This potentially puts the government in a difficult position, as suddenly breaking a lifelong promise towards the elderly may create a large class of malcontents, adding to the government’s current troubles. Some disapprove of the government’s motives for increasing the retirement age, criticizing that the adjustment is fueled largely by economic incentives to reduce the state’s pension subsidies. As a result, they accuse the government of failing to fulfill its responsibility to cover the pension payment shortfall, as required by the Social Insurance Law (China Daily).

However, all elderly workers do not necessarily share this disapproval. Many teachers, doctors, and government and public employees support postponing retirement. These workers feel that, since they are in good physical condition and enjoy their jobs, it would not be a problem to extend their careers beyond the retirement age. Nonetheless, many others, who face long commutes or work in heavy-pressure industries, are still strongly opposed to prolonging their retirement.

The debate is further complicated by the nature of Chinese society’s cultural expectations and values. Most of China’s elderly population today grew up during the height of the Maoist era; as a result, following traditional socialist policies, many elderly citizens still expect their government and society to “take care of them from cradle to grave” (Gu, 2012). Furthermore, in Chinese culture, the elderly are to be highly respected and valued for their life experiences. As such, they are viewed as assets rather than liabilities and important role models for younger generations (Zhao, 2009). Thus, many consider it a duty and moral obligation to take good care of the elderly.

Lastly, China’s pension system crisis and the government’s proposed solution may have drastic consequences for future generations. The rapidly aging population, coupled with China’s one child policy, has already created discernible changes in family structure. Working Chinese couples must now support four parents in addition to their own family and heavy financial burdens are falling on the next generation. Consequently, economic pressures on second and third generations of only children are threatening the filial piety bonds of Confucianism that traditionally tied Chinese society together (Wee, 2012). Even more troubling, the government is also using payroll taxes paid by current workers to supplement pensions for their parents’ generation. If the deficit crisis is not resolved soon, the younger generation, who, in theory, are paying into their own retirement accounts, may unexpectedly find themselves facing even more funding shortages in the coming decades.

At the same time, however, the government’s solution of raising retirement rates might actually hinder rather than help the struggling younger generations. Approximately 30% of university graduates remain unemployed a year after entering the job market, while unemployment among non-university graduates is at least as high (French, 2007). Thus, prolonging employment for older workers could have volatile consequences for the younger generation of workers who will ultimately bear the burden of supporting them. One-third of China’s annual new jobs are vacancies left by retirees (China Daily, 2012) and a delay in new workers starting their careers could create more damage than the benefit of nearly retired employees working for a few additional years.

China’s rapidly aging population and old age funding deficit are its two main concerns as the central government seeks to reform its national pension program. Amidst numerous financial and structural considerations, the government must also acknowledge the moral implications of its policy revisions on all members of Chinese society, as well as the potential longterm repercussions of the system on its future generations. The future of China’s pension rests on a combination of numerous social, financial and cultural factors, all of which policymakers must take into account if they hope to maintain China’s delicate balance between growing old and growing rich.