The Socioeconomic Implications of Population Aging in the People’s Republic of China
which requires developing capital markets and wideningaccess to financial products and services. In addition, awell-functioning financial sector will underpin pensionreform, a key challenge directly associated with aging.
Strengthening Safety Nets
. Safety nets remain weak in spiteof recent efforts. Only about 15% of the working-agepopulation in the PRC is covered by any sort of socialsecurity net, with most of the beneficiaries located inurban areas. After several rounds of reform, a two-tierpension system has been adopted in urban areas, offeringa basic pay-as-you-go (PAYG) pension topped up by fully funded individual accounts. However, the systemis far from optimal and presents major challenges. First,expanding the PAYG system toward universal coveragewould require large increases in the budget allocationsfrom the current 3% of GDP. Second, the national reservepension fund appears to be substantially underfunded.Third, the low rate of return of the personal accountscasts doubt about their ability to generate the expectedreplacement rates. Efforts should be even greater inrural areas, where safety nets and pensions are almostnon-existent.
Policy Directions for the PRC
Labor supply shortfalls lead to diminished returns to capitaland, hence, less economic growth. Developed countrieswere the first to age and approached the problem by shiftingfrom input-driven growth models to productivity-drivenones. This could be achieved through rebalancing thegrowth pattern, including the development of services,and labor market reforms. Hence, determined policy actions are imperative to address the aging challenge,including measures to promote economic growththrough productivity increases and labor market reform,strengthening safety nets, accelerating pension reform,and developing capital markets.
Increasing Labor Supply.
Drawing on successful experiencesin countries with aging populations, some of the followingpolicy actions could be considered:
Enhancing labor mobility. Policy actions conduciveto greater labor mobility in the PRC will reinforceemployment generation. Existing institutionalbarriers—
and restriction on the portability of benefits—hinder natural migration flows and deterurbanization, resulting in an inefficient allocation of labor. Simulations suggest that transferring a largershare of the labor force employed in agriculture intoother sectors could add as much as several percentagepoints to GDP growth.
Raising the retirement age. Improved longevity haslifted life after retirement threefold in most of thecountries with aging populations, suggesting that itis appropriate to revise the retirement age upward.The retirement age in the PRC was establishedin 1950, at 60 for men and at 55 for women, whenlife expectancy was significantly lower. Underthe current average longevity, the retirement agecould be increased to 65 for both genders in urbanareas, while adopting a more flexible approach inrural areas. The common perception that early retirement eases unemployment is misleading. Thisis supported by many years of evidence in developedeconomies, where early retirement has not reducedunemployment levels. Given the improved longevity,early retirement does not usually free up space fornew workers, as early retirees continue to work whilereceiving a pension.
Encouraging female participation in the labor market.Female participation can be promoted through a policy of equal opportunities, supported by improved supportfor child and elderly care, to encourage married womento remain or join the labor force. In addition, andaccounting for the longer average life expectancy of women, the retirement age of female workers shouldbe lifted to match the standard of male workers.
Fine-tuning family planning policies. A relaxation of the one-child policy would ease the burden of only children supporting elderly parents and grandparentsin the PRC, the so-called 4-2-1 problem. However,adjustments should be carefully planned, as even smallchanges could result in large absolute numbers given thelarge size of the PRC’s population.
Importing labor indirectly through foreign directinvestment outflows. Asymmetries in the timepath of aging unleash capital flows from societieswith aged populations to ones with populationsthat are aging slower or not at all. FDI generatescapital income from foreign production that addsto the growth generated domestically. An adequateregulatory framework is necessary for these benefitsto materialize.
Importing labor directly though an open policy towardimmigration. Welcoming immigrants from countrieswith younger populations is the most direct way toincrease labor supply. However, this approach requiresa comprehensive regulatory framework supporting theparticipation of foreign workers, including loweringinstitutional and social barriers to immigration.