In recent years, elderly people in parks and teahouses across China have been hotly discussing the topic of delaying retirement. Now, China is about to officially implement the retirement age extension, which has almost become a certainty.
It is evident that this is the first step in addressing the enormous challenges faced by a country grappling with economic decline and a shrinking population.
In mid-July this year, the Chinese Communist Party held its Third Plenum of the Twentieth Central Committee in Beijing, specifically to discuss economic issues. Shortly after the meeting, a five-year national retirement reform blueprint was released. China plans to raise the statutory retirement age for over 500 million workers through a “voluntary participation, appropriately flexible” approach.
In this context, the deliberately ambiguous language is not meant to inject uncertainty but to mitigate any potential negative impact on the public. China faces a dual challenge of an aging population and declining birth rates, coupled with sluggish economic growth, placing a heavy burden on its social security and pension systems.
China and the United States have vastly different national conditions. In the U.S., in addition to national social security, a significant portion of retirees also have private pensions or retirement plans funded by themselves and their employers. In contrast, urban Chinese workers mainly rely on national pensions, while the vast majority of farmers have minimal national pension benefits and rely primarily on self-sufficiency.
The rapid aging of China’s population and increased life expectancy have imposed a heavy burden on the social security system. Data published by Caixin, a mainland China business magazine based in Beijing, shows that from 2012 to 2021, China’s elderly dependency ratio will rise from 12.7% to 20.8% over nine years. This means that by 2021, nearly 21 retirees will be supported by every 100 workers, compared to 13 in 2012. At the current rate, China’s national pension fund is projected to be depleted in approximately the next decade.
Undoubtedly, the Chinese government needs to race against time to reform and strengthen public pensions.
Due to several historical and social legacy issues, China’s current predicament is challenging to resolve.
Firstly, China’s statutory retirement age is relatively low because it is an agricultural and industrial economy where most people are laborers. Blue-collar female workers retire at 50, white-collar female workers at 55, and all male workers at 60. In contrast, in the U.S., 62 is the early retirement age, and 67 is the full retirement age to access social security benefits.
The records of the Third Plenum meeting of the Communist Party did not disclose detailed proposals for retirement reform. The Chinese Academy of Social Sciences, a national think tank, recently recommended raising the retirement age for both men and women to 65 within five years.
China’s pension system is akin to a three-legged stool. The first leg is the national basic pension scheme that covers almost every citizen, divided into urban workers’ pension and rural residents’ pension. This is the primary support for most workers. The second leg is managed by enterprises, including pension plans similar to fixed benefit plans in the U.S. The third leg is individual pensions, which are still in the early stages and constrained by fluctuations in the Chinese stock and financial markets.
Both employees and employers are required to contribute to the government’s pension plan, with higher wages entailing higher contributions.
However, China has recently encountered an issue, or more accurately, an irreconcilable contradiction.
The Communist government possesses the world’s largest social security system and is currently eager to increase contributions to alleviate the challenges posed by an aging population. Nevertheless, this policy also faces a growing chorus of demands from the public to lighten the economic burden on businesses and employees facing stagnant wage growth.
The Communist regime has been brewing reforms. Every summer, as national wage data is released from the previous year, social security contribution rates are also raised.
As early as 2013, Communist policymakers first proposed a gradual increase in the retirement age, although specific details were never made public. In 2019, the State Council of the Communist Party reduced the total proportion of employer-contributed pension funds from 20% to 16%, along with decreasing payouts related to work-related injuries and unemployment. In 2020, amid the global COVID-19 pandemic, the Party introduced temporary exemptions or reductions in social security fees.
Reducing fiscal tax burdens on businesses while cutting welfare has long been a primary strategy for local Communist governments to support economic growth and appease small and medium enterprises facing economic slowdown.
In the fourteenth “Five-Year Plan” (2021-2025) published by the Communist Party in 2020, the central government reasserted the need to delay the national retirement age, yet concrete plans were not released.
Subsequently, in 2022, the Communist government unveiled new reform measures to consolidate regional and provincial pension funds, transferring funds from surplus regions to deficit regions.
Over the past decade, these incomplete measures and slow introduction of specific plans reflect the Communist Party’s concerns about social stability in the face of dim economic growth prospects. However, the fundamental problem remains unresolved.
China has reached a point where it can no longer afford to stall and deceive. Minutes from the Third Plenum meeting of the Communist Party and official reports and commentaries indicate that retirement reform is imminent.
China is rapidly aging, with a relatively small number of young people supporting a disproportionately large retired population. Even Communist statisticians and officials themselves doubt the Party’s ability to fulfill its obligations as over 500 million people will be over 60 years old within a decade, representing over 40% of the total population.
The aging population presents significant challenges for the authorities. Besides the pension panic, other group reserves are also at risk. China’s real estate collapse began in 2021 and has yet to show signs of abating, depleting billions of dollars from the coffers of middle-class families.
Having elderly workers work longer on the job requires more than just legislation. China needs to enact policies to support older workers and relax historically stringent national labor mobility laws.
However, since the outbreak of the global COVID-19 pandemic, the youth unemployment rate in China remains high. Although there has been a slight decrease this year, as of June, the unemployment rate for youths aged 16 to 24, as released by the authorities, still exceeds 13%. By extending the retirement age of older workers, China is effectively taking away employment opportunities from young workers.
On the other hand, there is a mismatch in the types of jobs available. China’s emphasis on higher education has led to an abundance of graduates seeking well-paying jobs, surpassing the supply. Many educated Chinese youth face difficult choices between blue-collar work and temporarily remaining unemployed.
Lastly, the nationwide decline in birth rates exacerbates these grave circumstances.
Since 2017, China has been experiencing a continuous decrease in the number of newborns. Last year, India surpassed China as the country with the world’s largest population, with China’s new births in 2023 plummeting to a historic low of 9 million.
Unexpectedly, postponing the retirement age adds further pressure to already low birth rates: young people can no longer rely on their parents to care for their children. The ensuing social problems will continue to emerge.
This lengthy and in-depth analysis provides a comprehensive look at China’s complex challenges in retirement and pension reforms. The intricacies of the situation underscore the urgent need for strategic solutions to address the aging population, declining birth rates, and economic pressures faced by the country.