China Will Get Rich Before It Grows Old: Beijing’s Demographic Problems Are Overrated

Baozhen Luo. Foreign Affairs. Volume 94, Issue 3. May/Jun 2015.

At a conference on the Chinese economy in 2012, Cai Fang, a demographer at the Chinese Academy of Social Sciences, issued a dire warning: “There’s now no doubt China will be old before it is rich.” He was expressing a view widely held by economists and China watchers. Over the past 65 years, life expectancy in China has more than doubled, from 35 years to roughly 75, as the fertility rate has plunged. Many fear that if these trends continue, China’s population will age faster than the country can accommodate. In 2014, the share of China’s population older than 60 reached roughly 15 percent; demographers predict that figure will double by 2050, reaching the equivalent of nearly 450 million people, or about one-quarter of the world’s elderly. Over the same period, China’s median age will skyrocket, from roughly 35 to 46. China, some experts say, is in for a shock: As more and more people age out of their working years, the country’s economic productivity will plummet. And as its growth slows, China will find itself without the money and resources to provide for its elderly, who will become a financial burden.

But a closer look at China’s demographics reveals a more positive picture. For one thing, although China’s working-age population has been shrinking, its employment rate has been increasing steadily, as has the productivity of those entering the work force. For another, since around 2000, the Chinese government has aggressively prioritized the creation and expansion of public welfare programs to support the elderly. In 2007, Chinese President Hu Jintao signaled that the country’s aging population had become a political priority when he included proposals for their well-being in his report to the 17th National Congress of the Chinese Communist Party. In 2009, Beijing enacted major reforms of its pension and health-care systems, and in 2013, an amended version of the country’s elderly rights law went into effect, calling for a comprehensive system for eldercare at the national and local levels. Put simply, as its population ages, China will not be caught off-guard.

Still, more remains to be done. To guarantee the productivity of its future work force-especially if it is a smaller one-China must continue to invest heavily in education. To alleviate the financial burden on households caring for the elderly, Beijing will need to improve its pension system, putting more effort into managing funds and equalizing the benefits paid to urban and rural residents. It will also have to grapple with the repercussions of its one-child policy, enacted in 1979, whereby a single child will be expected to support two parents and potentially four grandparents. As a supplement, China should establish a professional work force to tend to its elderly, who will live longer than their predecessors and therefore require more care. If China prepares itself, it may be able to grow rich before it grows gray.

Growing Pains

Until recently, China was experiencing a demographic golden age: it had a large labor force and a small dependent population of children and the elderly. Beginning in the 1970s, the large cohort of post-World War II baby boomers began reaching working age. At around the same time, fertility rates declined, a result of the one-child policy, and the elderly population remained relatively constant, with life expectancy held back by famine and poor health care. Given this so-called demographic dividend, China’s population was primed for economic growth. Between 1980 and 2010, relying on a seemingly unlimited supply of laborers, the country achieved double-digit annual gdp growth rates and surpassed Japan as the world’s second-largest economy.

But demographic dividends do not last forever-and as this one ends, many fear that China’s economic miracle will end with it. Within the next two decades, China’s baby boomers will enter their 60s and 70s. The rate of population aging has been higher in the country’s eastern region, which tends to be more developed, but the problem has hit the central and western regions as well. Meanwhile, thanks in part to the effects of the one-child policy and higher rates of women’s education and employment, the fertility rate remains low, at around 1.7 births per woman, according to 2012 figures from the World Bank-lower than that of developed nations such as France and the United States. China has moved to relax the one-child policy in recent years, allowing couples to have two children if at least one spouse is an only child, but this has had limited impact. As of May 2014, The Wall Street Journal reported, only 271,600 couples, out of a possible 11 million, had applied for permission to have a second child.

With a growing number of older people and a shrinking number of younger people, China’s work force is in trouble. According to the latest report from China’s National Bureau of Statistics, the country’s working-age population has already begun to shrink, from roughly 941 million in 2011 to 916 million in 2014. The population is aging at roughly the same rate as the work force is declining. The fear is that a shrinking work force will raise average wage levels, making China less competitive in labor-intensive export industries than other emerging economies, such as India, Indonesia, and Vietnam-countries that are still in the honeymoon period of their own demographic dividends.

The news is better than it seems, however. Although China’s working-age population has indeed shrunk, its employment rate has increased. In 2014, China’s active work force consisted of 772.5 million people, 2.8 million people more than in 2013. This growth, despite a smaller working-age population, suggests that many underemployed Chinese, especially in rural areas, are being drawn into the work force. As Beijing enacts policies to encourage internal migration, including revising the household registration system and increasing investment in the mechanization of agriculture, more and more surplus unskilled laborers from rural areas will be absorbed into urban manufacturing and service industries. Many will not even have to travel far: as China’s coastal areas become more technology-oriented, manufacturing jobs are moving inland.

The increase in China’s employment rate also suggests that a large portion of the elderly population has stayed in the work force. The country’s statutory retirement age is relatively young-60 for men and 50 or 55 for women-and given increased life expectancy, many are looking at an average of 15 to 25 years in retirement. (The retirement age was set in the 1950s, when life expectancy was much lower.) Some are rehired after retirement; others start second careers. In March, Beijing officially announced its intention to raise the retirement age, in large part to tap this potential. According to Bloomberg News, raising the male retirement age to 65 could, by 2020, keep some 41.5 million men in the work force. In the meantime, early retirement means that more grandparents have time to care for their grandchildren, freeing up working-age mothers to take jobs.

The work force can be further strengthened if those entering it are better educated and more productive than those exiting. Keeping this in mind, Beijing is pouring $250 billion a year into higher education, with the goal of producing 195 million college graduates by 2020. Chinese policymakers hope that a broadly educated public will help China compete against the versatile labor forces of Europe and the United States. Also by 2020, China aims to orient its economy toward innovation and to become a world leader in science and technology-important goals if China’s work force is to mature. Meanwhile, the government has begun to reform the education system to allocate funding and resources more evenly between urban and rural areas, so that people in the latter are as able to contribute to the economy as those in the former.

Paying Dividends

China’s elderly pose an economic threat not just because they are leaving the work force but also because they will be expensive to support. If countrywide pension and health-care systems are not strong, China’s households will bear the brunt of the burden, as a greater share of their disposable income will go toward supporting elderly parents. That will squeeze family budgets: Chinese households already pay a large share of their healthcare costs out of their own pockets-roughly 80 percent in 2007, according to the International Monetary Fund.

Paying for the elderly poses a challenge to any economy undergoing a demographic transition, but the problem is particularly acute in China, where policymakers have sought to rebalance the economy toward greater domestic consumption-the source, they hope, of future economic growth. Historically, China’s lack of adequate public welfare programs and well-regulated investment channels led households to set aside large pots of precautionary savings, holding back consumption. Between 1995 and 2005, China’s average urban household savings rate, relative to disposable income, rose from 17 percent to 24 percent. Chinese consumers won’t be able to support their parents and the economy at the same time.

The good news is that China has made big strides in improving public welfare, overhauling its urban and rural pension systems, for instance. In 2009, according to The Economist, government pensions covered less than 30 percent of Chinese adults. That year, officials announced a new rural pension scheme to expand insurance coverage beyond cities, and in mid-2011, China’s government instituted an urban residents pension scheme to ensure universal coverage. For the most part, these programs have been a success. According to a 2013 report by HelpAge International, an international nongovernmental organization dedicated to protecting elderly rights, the proportion of Chinese people enrolled in a pension plan nearly doubled between 2009 and 2012, reaching 55 percent. As of 2012, the report noted, some 125 million Chinese were receiving a monthly pension-60 percent of those aged 60 and over.

There is room for improvement, of course. The Chinese Academy of Social Sciences estimates that by 2050, there will be an accumulated pension shortfall of roughly $128 trillion. In 2014, Zheng Bingwen, a researcher at the academy, found that the government manages its pension funds so poorly that it likely forwent billions of dollars in the past two decades. Only 1.6 percent of the government’s social insurance fund had been put into government bonds or invested, according to Zheng. Bloomberg News has reported that about half of China’s 31 provinces cannot cover their retiree costs, relying instead on money from the central government- financial support that may soon run out. In addition to managing its funds better, Beijing must reduce the disparity between urban and rural pension benefits. According to a 2012 report by the Chinese Academy of Social Sciences, annual pension benefits for urban retirees reached roughly $3,300, whereas retired agricultural workers received just $137. Officials have indicated an interest in unifying urban and rural programs, which would be a step in the right direction. In 2014, according to the official Xinhua News Agency, China’s State Council announced that it would build a unified and standardized pension system for the country’s urban and rural population by 2020.

When it comes to health care, China has also upped its game. In 2009, the government announced an ambitious plan for universal health care, which expanded coverage to rural residents, unemployed urban residents, and migrant workers. The program, heavily subsidized by Beijing and local governments, allows citizens to buy insurance plans for as low as $20 a year, covering outpatient care, medicines, and hospitalization. The program is not perfect: it could improve the way it handles risk, for example, as China’s health-care system is currently fragmented into some 3,000 separate risk pools. But it is impressive. By 2011, China was able to provide health care to some 95 percent of the population. In addition to decreasing the need for households to save for the elderly, the insurance scheme has the added benefit of keeping younger generations healthy and thus economically productive.

Remarkably, the government managed to put in place these nationwide pension and health-care reforms within a single decade. The programs are emblematic of action-driven policy innovation, itself the result of a new kind of authoritarianism within China that allows greater input in policymaking from individuals and groups. In creating more channels for citizen participation, the country is also granting its citizens, especially its middle class, a sense of self-worth beyond economic well-being.

All in the Family

Even as its public welfare programs develop, the Chinese state will not displace the family as the primary source of eldercare-evidence of the continued importance of the Confucian value of Xiao, or “filial piety.” The concept is even embedded in law: the Chinese constitution says that “children who have come of age have the duty to support and assist their parents,” and the penal code of 1980 went so far as to threaten up to five years in prison for children who neglected their parents. (Xiao pervades all levels of Chinese society: on his first official trip as general secretary of the Chinese Communist Party, Xi Jinping, now China’s president, reportedly visited his mother.) In 2013, when Beijing’s revised elderly rights law went into effect, it reinforced the family’s centrality: families would provide primary care to the aging, with the community serving as a backup and institutional care being only a supplement.

Given the size of China’s aging population, however, some wonder if adult children will continue to be willing and able to support their parents. The offspring of today’s aging baby boomers were born under the one-child policy, which means that they will be left to care for two parents, and often four grandparents, without the help of siblings. But because baby boomers in China are on average healthier and better educated than their parents were-and, thanks to reforms to the social safety net, likely to be more financially independent- the soon-to-be elderly will not require as much care. Besides, their children may be more attached to them: to ensure that their adult children continue to care for them, baby boomers have taken on extensive grandchild-rearing responsibilities, making themselves indispensable to the family.

A decade and a half ago, Beijing began overhauling community organizations in urban and rural areas to extend support to those caring for their elderly family members at home. In 2001, for example, China implemented the Starlight Program, which, according to a white paper published by China’s State Council Information Office, has invested roughly $2.1 billion in building community-based senior centers in cities across China. By 2005, the program had established 32,000 such centers nationwide. In recent years, China has begun building a long-term care system designed to support its oldest citizens. Through so-called virtual nursing homes, for example, elderly Chinese can call a hot line to request a variety of in-home services. Looking forward, Beijing should start growing a sustainable work force of caregivers so that the supply is ready to meet whatever demand exists in the future. Where at-home care is not available-such as in many rural areas, which the elderly’s adult children have left for the cities-the state will be ready to step in.

As China ages, it is increasingly broadening the concept of xiao beyond the family. Xi’s “Chinese dream” campaign calls for a nationwide revival of traditional values such as filial piety. During a visit to community eldercare facilities in 2013, Xi called caring for the elderly a traditional Chinese virtue and said that all of China’s elderly should enjoy comfort, health, and security. If China continues to meet its demographic challenge head-on, it might yet be able to grow old and rich at the same time.