Analysis – China’s retirement age reforms not enough to fix retirement headache By Reuters

By Farah Master

HONG KONG (Reuters) – China’s move to raise the retirement age is a starting point to plug large pension shortfalls and boost a shrinking workforce, but more pains lie ahead as the economy slows, which make further reforms urgent, economists and demographers say.

Population aging is a global phenomenon, but the problem is particularly acute in China because of the legacy of its one-child policy, which has been in place for three decades and has exacerbated its demographic challenges.

Births in China fell to 9 million last year, and the United Nations predicts that China’s working-age population will fall by nearly 40 percent by 2050 from 2010 if fertility rates remain at current levels.

Both older and younger workers have expressed concern about the changes as policymakers grapple with widespread discrepancies between rural and urban pensions, maintaining public stability and high youth unemployment.

“They have to solve the pension problem now because now they have some growth left to finance the deficit,” said Alicia Garcia Herrero, Natixis’ chief economist for Asia Pacific.

China’s economic growth rate has slowed from about 8 percent in the early 2000s to about 5 percent now and could reach as low as 1 percent after 2035, she said.

Alert to public concerns, Chinese lawmakers accelerated the policy without public consultation in September, changing retirement ages that had been set in the 1950s.

Life expectancy in China has increased to 78 years as of 2021, from about 44 in 1960, and is expected to exceed 80 by 2050.

Chinese Premier Li Qiang said the reform is a “significant move” to improve China’s social security system and “better safeguard and improve people’s livelihoods,” according to the official Xinhua news agency.

However, China’s state-run basic pension system is under significant financial pressure.

About one-third of China’s provincial-level jurisdictions have pension deficits. The Chinese Academy of Social Sciences has estimated that the pension system will run out of money by 2035 without reforms.

Monthly urban pensions range from about 3,000 yuan ($425) in less developed provinces to about 6,000 yuan in Beijing and Shanghai. Rural pensions, introduced nationally in 2009, are weak.

VOLUNTARY

China’s cohort of people aged 60 and over is expected to grow by at least 40% to more than 400 million by 2035, equal to the population of the United Kingdom and the United States combined.

Migrant workers, who typically receive meager pensions, continue to work into their older years compared to state sector workers with relatively generous government pensions, who have less incentive to opt for higher retirement ages.

The contribution period required to receive a pension in China will increase to 20 years from 15, starting in 2030.

Extending the contribution period further “especially in the context of the current state of the gig and informal economy could make it more difficult for many workers to be eligible to receive their pension”, said Stuart Gietel-Basten, Professor at Hong. Kong University of Science and Technology.

The initial fiscal impact of raising the retirement age is likely to be small because the increases are largely voluntary, said Ernan Cui, China consumer analyst at Gavekal Dragonomics.

“Raising the retirement age may only mean a limited tax gain for the time being… The future increase will effectively be optional for many workers, although the increase in the minimum contribution period to get a pension will not be,” she said.

Moody’s (NYSE:) Ratings analyst John Wang said the new legislation could pose a social risk because of China’s demographic challenges and income inequality.

“Successful implementation of China’s retirement age reforms will depend on managing risks … such as the skill set of the aging population, available jobs and their adaptability to evolving technology and innovation.”

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