A] Prelude*
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A population equaling the size of the entire U.S. will retire from China’s workforce by 2035 and the country isn’t reproducing sufficiently to mend its fraying social safety net.
Fifty-eight-year-old Li Zhong, a traditional-Chinese-medicine salesman, retires in two years and doesn’t fret about his pension. It’s his daughter he is worried about.
He recently took out a mortgage to help her buy a house in a Shanghai suburb. China’s housing bubble burst in 2021 and prices are at their lowest levels in years – a great time to buy but crushing those who bought years ago, and a huge drag on the economy.
The vast majority of household wealth in China is tied up in property – roughly 70%, according to government statistics.
Home prices could fall further, denting Li’s property investments, but it’s not the near-term financial prospects that trouble him. The future health of China’s pension system is on his mind, in that it faces a perfect storm that few experts see a way out of.
Hitting those funds is the country’s economic malaise, which is expected to persist and likely worsen in the coming years, according to the International Monetary Fund.
B] Background
China rolls out new measures to fix property crisis with house prices down 10% this year. At the same time, China is rapidly approaching a demographic time bomb. The country has one of the lowest fertility rates in the world, and the population is shrinking and aging. China is no longer expected to “get rich before it gets old.”
China’s pension system was once a robust government-only program. But, under strain, it has splintered. It’s a problem for which Japan is often mentioned as the prime example. But in China’s case the crisis encompasses 10 times the population!
Over the next decade in China, some 300 million people are expected to retire from the workforce, putting enormous pressure on the shrinking employment-age cohort – millions of youth who are already overworked, disillusioned and burned out.
China’s premier government think tank, the Chinese Academy of Social Sciences, estimates that the basic pension fund for urban employees will be depleted by 2035.
China’s pension system was once a robust government-only program. But, under strain, it has splintered into three parts:
- a mandatory government fund;
- a company-based enterprise system;
- and finally private plans, the latter two of which are optional.
China’s flagging economy has reduced the ability of people to buy into the optional programs.
By the end of 2023, more than 50 million private pension accounts had opened, but only 20% had contributions, averaging about 2,000 yuan ($275) per account, according to government numbers.
Beijing had been exploring rescue options, including extending the retirement age, which now stands at 50 for female workers, 55 for female managers and executives, and 60 for male employees – among the youngest retirement ages in the world. But there has been stiff pushback in a country where dissent is scant.
A former central-bank governor, Zhou Xiaochuan, recently said such extensions could adversely impact elders’ livelihoods and harm worker productivity. Even if undertaken, the examples of South Korea and Japan show it takes more than a decade because of the need to juggle factors such as labor supply, income differentials among generations, and the inexact impact of demographic aging.
C] China is no longer expected to ‘get rich before it gets old.’
Beijing in the post pandemic era has reinforced its reputation as a light giver of stimulus, and, when it does pursue that option, its packages almost always target supply-side areas like infrastructure.
It has neglected direct support of households or for boosting the long-awaited rise of China’s potentially mammoth consumer class, which Beijing hopes will lead its economic recovery.
“Strengthening the pension system would definitely boost consumption in the long term, but it wouldn’t have much impact in the short term. That’s because a stronger pension system would need to be tested over many years before it was credible enough to change actual spending behavior,” Michael Pettis, senior fellow at the Carnegie Endowment, told MarketWatch from Beijing. “But if China were to make greater pension payments to current retirees, that would cause consumption today to rise.”
Wang Tao, chief China economist and head of Asia economics at UBS Investment Research, concurred, telling MarketWatch that the government needs to open its pocketbook to the people to stimulate spending.
“These measures can help boost people’s confidence about the future, lower their saving rate and, hence, boost consumption,” he said.