Analysis: China’s Retirement Age Reforms Insufficient to Address Pension Challenges By Reuters

By Farah Master

HONG KONG – China’s decision to increase retirement ages marks a necessary step to address significant pension deficits and strengthen a diminishing workforce. However, as the economy continues to decelerate, economists and demographers emphasize that more reforms are urgently needed.

Aging populations are a challenge faced globally, but China’s situation is particularly critical due to the long-term effects of its one-child policy, which was enforced for 30 years and has intensified its demographic issues.

In 2022, China’s birth rate fell to 9 million, and projections from the United Nations suggest that the working-age population could shrink by almost 40% by 2050 compared to 2010 levels if current fertility rates persist.

Concerns about the changes have been voiced by both older and younger workers amid existing disparities between rural and urban pension schemes, ongoing public stability issues, and high youth unemployment rates.

Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, stated, "They need to solve the pension problem now because this is when they still have some growth to finance the deficit." China’s economic growth rate has decreased from around 8% in the early 2000s to approximately 5% presently, with projections suggesting it could dwindle to as low as 1% after 2035.

In response to public apprehension, Chinese lawmakers swiftly advanced the retirement age policy in September without consulting the public, altering the retirement ages that had remained unchanged since the 1950s.

China’s life expectancy, which was about 44 years in 1960, increased to 78 years by 2021 and is expected to surpass 80 by 2050. Premier Li Qiang has described the reform as a "significant move" aimed at enhancing China’s social security system and bettering the livelihoods of the population.

Despite these efforts, China’s state-managed basic pension system is facing considerable financial strain. Current estimations indicate that about one-third of provincial jurisdictions are operating with pension deficits. The Chinese Academy of Social Sciences has predicted that the pension system could deplete its funds by 2035 without substantial reform.

In urban areas, monthly pensions vary from around 3,000 yuan in less-developed provinces to about 6,000 yuan in major cities like Beijing and Shanghai. Conversely, rural pensions, introduced nationwide in 2009, remain relatively low.

The number of citizens aged 60 and over is projected to increase by at least 40% to over 400 million by 2035, a figure comparable to the combined populations of Britain and the United States.

Migrant workers, who typically receive limited pensions, often continue working well into their older years, while state-sector employees, benefiting from more generous government pensions, have less incentive to adapt to the higher retirement ages. Starting in 2030, the required contribution period for pension eligibility will extend from 15 to 20 years.

Stuart Gietel-Basten, a professor at the Hong Kong University of Science and Technology, cautioned that extending the contribution period, particularly in the context of the current gig and informal economy, may hinder many blue-collar workers from qualifying for pensions.

The immediate fiscal implications of raising retirement ages are expected to be minimal, as the changes are largely voluntary, according to Ernan Cui, a consumer analyst at Gavekal Dragonomics. "Raising the retirement age may entail only a limited fiscal gain for now… The forthcoming increase will effectively be optional for many workers, though the extension of the minimum contribution period will not," she noted.

John Wang, an analyst at Moody’s Ratings, warned that the new legislation could pose social risks due to China’s demographic challenges and rising income inequality.

"Successful implementation of China’s retirement age reforms will depend on managing risks… such as the skill set of the elderly population, the available jobs, and their adaptability to developments in technology and innovation."