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

4. The ‘4-2-1 Problem’

For the majority of Chinese without public retirement benefits, the alternative means of support are limited. Despite China’s prodigious savings rate, estimated at 40% of GDP, few elders will be able to count on personal wealth to make up the difference. Household savings only comprises a fraction of total savings, and much of it is invested in the family home. As for financial savings, although the number of households who purchase life insurance or invest in China’s fledgling stock markets is growing, most is still deposited in low-return bank accounts. Asset ownership, moreover, is highly skewed by income. According to a survey conducted in the mid-1990s, less than one-quarter of urban households headed by adults aged 55 and over own financial assets exceeding their annual income. Just 5.4% own financial assets exceeding twice their income — hardly enough to finance a retirement that on average will last two decades8 (see Fig. 10).
Nor will most elders be able to count on private pensions to pick up where public benefits leave off. Although employer-sponsored plans exist, they are still rare. In the late 1990s, the government gave employers the option of setting up supplemental retirement savings schemes called ‘enterprise annuities’. It failed to give them any tax incentive to do so, however — and it restricted the option to employers already making contributions to the basic public pension system. As of the end of 2000, just 6 million workers were covered by the new plans, or less than 1% of China’s workforce9.

Figure 10: Only a fraction of Chinese elders can count on personal savings to finance their retirement years
Source: Takayama, N. (2002).

Staying on the job is an obvious alternative to collecting retirement benefits. The elderly labour-force participation rate in China, however, has been falling for decades and is now lower than the rate in most East Asian countries. Just 28% of men aged 65 and over are still on the job in China, even including peasants working the family farm. In the Philippines, which has almost precisely the same per capita income, the share is 55% (see Fig. 11). Although many members of China’s ageing baby boom generation may want to work longer than today’s elders do, they will find it hard to compete with younger, healthier, and better educated cohorts. As youths, many Chinese boomers missed out entirely on secondary and higher education during the Cultural Revolution. As elders, they may find themselves competing with teenagers for sweatshop jobs.
The truth is that for most Chinese elders, the only backstop against a destitute old age is the family. In Chinese society, the ethic of filial piety requires children to take care of their aged parents — and most children do just that. According to the latest 2000 Census data, 64% of elders aged 65 and over live with their children (see Fig. 12). The shares are somewhat higher for rural elders than for urban elders and considerably higher for the old elderly than for the young elderly. Among elderly women, 67% aged 65 to 79 live with their children, compared with 80% of those aged 80 and over. Even when elders do not live with their children, they are usually dependent on them financially, at least in the countryside. According to one survey of rural households, elders aged 60 to 64 receive one-third of their income from their children, a share that rises to three-quarters by age 75 and to nine-tenths by age 8510.

Figure 11: Relatively few Chinese elders work compared with other Asian countries
Source: ILO (2001).

Figure 12: Most Chinese elders still live in extended families with their children
Source: Zeng and Wang (2004).

As China modernises, its informal old-age support network is coming under stress. The exodus of young adults from the countryside is separating rural elders from their children. Meanwhile in the cities, as western ‘individualistic’ values gain currency, urban elders are being stripped of their traditional social role. Multigenerational families, though still the norm, are already less common than a decade ago. In 1996, China’s People’s Congress actually passed a law requiring children to support their elderly parents — a danger sign that the ethic of filial piety may be waning.
In the coming decades, the informal support network will have to withstand a series of unprecedented demographic challenges. To begin with, rural youth will continue to leave their villages in search of opportunity in the big city. On average, per capita income in China’s cities exceeds that in the countryside by three to one. Meanwhile, the OECD estimates that at least 200 million rural workers are underemployed11. In 2001, city dwellers made up 37% of China’s population. By 2030, according to UN projections, that share will rise to 60%12. With more young people than old people leaving for the city, rural China is ageing faster than urban China. Like the American Great Plains or France’s Massif Central, large tracks of the Chinese countryside may someday be dotted by towns and villages populated almost exclusively by elders.
Beyond migration, there is the challenge of shrinking family size. Today’s elders, who started their families before the era of China’s strict birth policies, typically have four or five children to share the burden of supporting them. China’s fertility decline will soon change this. According to Chinese demographer Xiaochun Qiao, urban women who will turn 65 over the next five years on average gave birth to 3.0 children, while rural women gave birth to 3.7. The average number of children per elder will continue to decline with each successive cohort reaching old age. By 2025, urban women turning 65 will on average have just 1.3 children, while rural women will have 2.213. Today’s pampered single-child ‘little emperors’ may someday find that the burden of filial piety is a heavy one indeed.
Finally, there’s the matter of China’s ‘missing girls’. In a normal population, roughly 105 boys are born for every 100 girls. According to the 2000 Census, the sex ratio at birth in China is now 118 boys for every 100 girls. The imbalance, the largest in any modern society, is the unintended consequence of China’s one child policy. Part of it reflects under-reporting of baby girl births by parents who still hope to have a son, but much of it is real — the result of sex-based abortion and even infanticide. Although illegal, sex-based abortion is widely practiced in the countryside, not just because parents need a son to help out on the farm, but because it is the son who is expected to care for the parents in old age. The desperation of couples who didn’t produce a son the first time around is evident when sex ratios are calculated by birth order. For first children, the ratio is 107 to 100 in favor of boys, while for second children it is 152 to 100.

8 Takayama, N. op.cit.
9 Williamson, J.B. and Zeng, B. (2003): “The Applicability of the Notional Defined Contribution Model for China”, China and World Economy, XI: 3, June.
10 Qiao, X. (2001): “Aging Issues and Policy Choices in Rural China,” paper presented at the International Union for the Scientific Study of Population’s 24th General Population Conference (Salvador, Brazil; August 20-24).
11 OECD (2002): China in the World Economy: The Domestic Policy Challenges.
12 UN, Population Division (2002): World Urbanisation Prospects: The 2001 Revision.
13 Qiao, X. op.cit.

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