The Greying of the Middle Kingdom: The Demographics and Economics of Retirement Policy in China

2. China’s Demographic Transformation

China may boast the world’s oldest living civilisation, but for most of its history it has been a demographically young society. As recently as the mid-1960s, when Mao Zedong called on the nation’s youth to launch the Cultural Revolution, China’s median age was 20, meaning that half the population were children or teenagers. The elderly made up just 7% of the population, about what they had since time immemorial.
Over the past few decades, however, a far-reaching demographic transformation has been gaining momentum. The transformation, which will soon lead to a dramatic ageing of China’s population, is the result of two fundamental forces: falling fertility and rising longevity. The first force is decreasing the relative number of young in the population, while the second force is increasing the relative number of old.
The Chinese fertility rate has fallen precipitously since the days of the Red Guards. Back in 1970, the fertility rate was 5.8, meaning that women averaged that many births over their lifetimes. Today, the average is 1.8, well beneath the 2.1 replacement rate needed to maintain a stable population over time (see Fig. 3). Even as birthrates have fallen, improved nutrition, sanitation, and health care have been leading to large increases in life expectancy. Since the People’s Republic was founded, life expectancy has risen from 41 to 70, making China one of the longest-lived low-income nations (see Fig. 4).
The decline in Chinese birthrates is in part the inevitable result of modernisation, in part the result of deliberate government population control policy. As living standards have risen in recent decades, fertility has fallen throughout East Asia — and indeed, most of the developing world. In China, however, the decline has been given an extra push by the government’s strict birth policies. Beginning in the early 1970s, the government, worried about China’s ability to support its enormous population, began encouraging couples to limit children to only two. In the early 1980s, it announced the ‘one child policy,’ together with a system of birth permits, targets, and penalties to enforce it.
In the countryside, where local authorities typically allow families whose first child is a girl to ‘try for a son’, fertility remains higher than the official one child target — though even here families are barely replacing themselves. In the cities, where only the wealthy can afford to ‘buy’ the right to a second child by paying a hefty penalty that can come to several times the family’s annual income, fertility has fallen further. In Beijing and Shanghai, the fertility rate now hovers just over 1.0.
China’s demographic transformation is being given an extra twist by the ageing of its postwar baby boom — or rather child boom. The developed countries, and especially the United States, had large postwar baby booms that are temporarily slowing the ageing of their populations. China had a baby boom too, but it was the result of a rapid decline in child mortality rather than a rise in fertility. Although survival rates for children began to improve dramatically beginning in the 1950s, birthrates did not begin declining until the early 1970s. The result was a large increase in completed family size.
With its outsized boomer cohorts now in their thirties and forties, China’s ageing challenge still looms over the horizon. China’s median age has already risen substantially since the days of the Red Guards, from 20 to 32. But this rise mostly reflects the surging number of working-age adults, rather than an increase in the number of elderly. In fact, the elder share of China’s population has risen only modestly and now stands at 11%, compared with an average of 20% in the developed countries.
For the time being, the big challenge is finding jobs for China’s large working-age population. The number of working-age adults is now growing by about 10 million each year. In addition, China’s state-owned enterprises or SOEs are shedding about 5 million jobs each year. To keep unemployment from rising, China thus needs to create 15 million jobs annually — a figure that doesn’t count the rural migrants who leave China’s countryside each year to look for better jobs in the cities. This so-called floating population is now growing at the rate of at least 5 million a year, and some experts believe that the pace of migration will accelerate as China’s entry into the WTO exposes farmers to increasing global competition.

Figure 3: Behind China’s age wave: A dramatic decline in fertility rates
Source: NPFPC (various years).

Figure 4: Behind China’s age wave: An equally dramatic rise in life expectancy
Source: UN (2003).

The demographic engine behind the growth in China’s workforce, however, is already slowing and will soon be thrown into reverse. Over the next ten years, the growth in the working-age population will decelerate sharply as the postwar boom generation begins to retire and is replaced in the workforce by today’s relatively small ‘peach generation’ born after the 1970s. In fact, the UN projects that China’s working-age population will peak around 2015 and thereafter begin to decline (see Fig. 5). By 2040, assuming current demographic trends continue, there will be 10% fewer working-age adults than there are today; by 2050, there will be 18% fewer.

Figure 5: China’s working-age population will soon begin to shrink
Source: UN (2003).

Meanwhile, China’s age wave will arrive in full force. The elder share of China’s population is due to rise from 11% in 2005 to 15% in 2015, then leap to 24% in 2030 and 28% in 2040. Over the same period, China’s median age will climb from 32 to 44. A median age of 44 will not make China the oldest country in the world. Germany’s median age is already 42 and is heading for 50 by 2040. Japan’s is already 43 and is heading for 54. A median age of 44, however, will make China an older country than the United States.
If anything, these projections may understate the magnitude of China’s age wave. As it turns out, there is considerable debate about what China’s current fertility rate actually is. The UN estimates that the fertility rate is now 1.8 — and the projections cited throughout this article assume that this 1.8 rate will continue indefinitely. According to Chinese Census data, however, the current fertility rate is now just 1.3. All demographers agree that the Census number is too low, because parents, fearful of running afoul of family planning rules, systematically under-report births. But they disagree about the level of under-reporting and the size of the upward adjustment that should be made. If China’s fertility rate is now lower than the UN estimates — or if it falls in the future — the age wave could be more severe than the projections cited in this article suggest.
How much more severe? It’s worth taking a look at an alternative UN projection that assumes China’s fertility rate will drop to 1.35. Although this may seem like an extremely pessimistic assumption, 1.35 is about the current fertility rate in Singapore and well above the current rates in South Korea (1.2) and Hong Kong (1.0)4. Under the UN’s ‘low variant’ projection, the elder share of China’s population would climb to 32% by 2040 (instead of 28%), still less than Japan, but on a par with France, Germany, and many other countries of continental Europe. The decline in China’s population would also be much steeper. By 2050, China would lose 35% of its current working-age population (instead of 18%). China’s total population would also peak sooner — in 2019 — and then enter a much steeper decline (see Fig. 6).

Figure 6: Within a few decades, China’s total population will peak and begin to decline
Source: UN (2003).

4 The figures are for 2002. See “Demographic Fact Sheet”, Research and Library Services Division, Hong Kong Legislative Council, available online at

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