Although China’s one-child policy was abolished in 2015, its effect on the country’s demographics will be felt for years as it has put a squeeze on its pension system, which is expected to have a $540 billion shortfall by next year, according to China’s Academy of Social Science.
More than one-third of China’s population will be older than 60—China’s national retirement age—by 2050, according to the United Nations. That’s a 16% rise from 2017, which translates to an additional 25 million retirees. As a result, there will only be two workers for every retiree in the country by 2040.
According to Axa Financial, the steady rise of China’s elderly as been similar to other emerging market countries, but will soon buck this trend and start a steeper climb toward the developed market average during the next few decades. Axa forecast that more than 350 million elderly people will reside in China by the 2050s, which is more than twice the current level, and will represent the largest demographic group in the country.
And China seems to be at a loss as to how to solve this problem.
“The government is not doing nearly enough,” Stuart Leckie, chairman of consulting firm Stirling Finance, told the South China Morning Post. “They need to sort out communications, transparency, open up to the whole country. It is very serious.”
Like many developed countries, such as Germany, Canada, and Switzerland, China has what is known as a three-pillar pension system. The first pillar is the state-run pension that consists of pensions for urban workers and basic pensions for urban and rural residents. The second pillar consists of enterprise and occupational annuities that are encouraged by the government but managed by companies. And the final pillar is private pension insurance for individuals, which only launched last year.
According to Axa, the current pension system relies heavily on the state-run pillar, which accounts for nearly 80% of the system. And while the second pillar has seen strong growth since its inception just over a decade ago, that has leveled off due to rising costs for private-sector enterprises. Axa said the Chinese government’s push to lower business costs and fees and increased assistance for occupational annuities should help spur future growth. However, it warned that the third pillar—private pension insurance for individuals—is underdeveloped.
“In China, if you ask a man a year from retirement how it works, there is absolutely no understanding,” said Leckie. “It is not transparent, or open. You are just told ‘this is your pension.’ Good governance and transparency, and explaining to people what is going on, has got nowhere in China.”
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Tags: Academy of Social Science, Axa Financial, China, Pension