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

China’s missing girls, as demographers call them, pose a big problem for a Confucian society in which virtually everyone expects to marry — and more to the point, in which women do virtually all of the caregiving. Already today, ‘bachelor villages’ dot China’s poorer regions in Shaanxi, Ningxia, and Guangxi provinces. To meet the emerging bride shortage, there is a growing market in foreign brides from countries like North Korea and Vietnam — and a growing traffic in kidnapped ones.
Some observers worry that the bride shortage will add fuel to simmering popular resentments about unemployment, the unraveling social safety net, and growing income disparity. Gender imbalance has sometimes played a role in igniting social unrest in the past — most notably during the Nien Rebellion in the mid-1800s, when bands of surplus bachelors turned to brigandage and insurrection. Even more ominous than the shortage of brides, however, is the looming shortage of daughters-in-law. The missing brides of today, after all, will become the missing caregivers of tomorrow, for while it is the son who bears responsibility for caring for his aged parents in Chinese culture, it is the daughter-in-law who actually does the caring.

5. The Long March to Retirement Reform

Confronting China’s ageing challenge will require a shift in attitudes and expectations every bit as sweeping as the demographic transformation itself. Today’s leaders came of age in an era of abundant youth — and worries about runaway population growth. Since the People’s Republic was founded in 1949, China’s population has grown by a staggering 750 million people, an increase that alone is two and one-half times greater than the entire current population of the United States. As young men and women, few of today’s leaders could have imagined that they would someday have to prepare for a future in which China’s population will not only be greying, but shrinking.
Fortunately, China is beginning to confront its ageing challenge. Starting in the late 1990s, the State Council, China’s highest executive body, began to expand coverage under the basic pension system to include the urban private sector. At the same time, it initiated a transition from the old pay-as-you-go system, in which current workers are taxed to pay for current retirees, to a new two-tiered system consisting of scaled-back pay-as-you-go benefits and personal retirement accounts.
According to most observers, however, the reform is running into serious trouble. Private businesses are resisting joining the pension system, since their contributions mostly go to pay off the unfunded liabilities of the SOEs. As of 2002, more than nine out of ten private-sector workers still had no pension coverage at all. Meanwhile, the personal accounts, which are administered by municipal and provincial social security bureaus, are not being saved and invested. Worker contributions are simply treated as tax revenue and used to cover the growing deficit in the pension system’s pay-as-you-go tier.
How can a rapidly developing yet still poor China design a retirement system that can care for tomorrow’s elders without overburdening tomorrow’s youth? How can it follow through and ratify what the government’s pension reforms have set out to achieve but so far are failing to deliver?
The foundation of the retirement system must be a universal floor of protection against destitution in old age. At a minimum, the floor should cover the entire urban workforce and rural workers in the so-called town and village enterprises. Over time, it could be expanded to include agricultural workers as well. To ensure broad participation, contribution rates must be modest. This in turn means that the central government will have to assume responsibility for paying off the unfunded pension liabilities of the SOEs. The lesson of the government’s recent pension reforms is clear: Saddling the new pension system with the debts of the old system leads to massive evasion. The legacy costs of the SOEs are a collective problem, and should be paid for out of general government tax revenues, not workers’ payroll contributions. Indeed, China is already moving in this direction with the creation in 2000 of the National Social Security Fund, a ‘pension fund of last resort’ that is financed entirely through the privatisation of state assets.
Beyond a solid floor of old-age poverty protection, China needs a mandatory and funded system of supplemental pensions. To ensure that the funding is genuine, workers should be given explicit property rights to their accounts, and account assets should be managed by fiduciaries independent of government. Let us be clear: This is not a recommendation to privatise the public pension system. Assets in funded accounts would be personally owned and independently managed. The system, however, would remain a public social insurance program organised and supervised by government.
The government will have to overcome major hurdles to set up a workable system. At the local level, there will have to be an infrastructure for routing contributions from workers and employers to fund managers. At the national level, there will have to be a central supervisory board to certify fund managers and establish everything from investment guidelines to withdrawal rules. To win participants’ trust, the government must at the same time ensure the security and transparency of the personal accounts system. It will have to strengthen accounting, discloser, fiduciary, and funding standards that protect the interests of private investors. In the United States and other developed countries, regulatory bodies like the Securities and Exchange Commission have established strict rules to protect the interests of individual investors. China has only begun to put the necessary safeguards in place.
Successful retirement reform would yield huge benefits for Chinese society. A universal floor of old-age protection would ensure that elders will no longer have to fear dependency and destitution — and may even avert widespread social unrest in a much older China. Meanwhile, a funded system of personal accounts would help to maintain adequate levels of savings, investment, and living standard growth as China ages. The choice is simple: Does China want to pay for its growing elderly population out of workers’ meager earnings or out of the new wealth that a funded system would create?
A funded system might have other benefits as well. It could foster middle-class values of thrift and stewardship and make workers into long-term stakeholders in the economic and political system. It could also broaden and deepen China’s capital markets and help speed its integration into the global economy. In many of today’s developed countries, funded pensions have played a crucial role in broadening and deepening capital markets. As China’s pension funds grow, so will the size and liquidity of its capital markets. Along with professional fund management will come greater accountability, transparency, and long-term returns. Funded pensions are thus the ground zero where China’s development and ageing challenges meet.
Like many developing economies, today’s China is experiencing the stresses of modernisation. Tens of millions of people are moving from traditional agricultural villages to bustling manufacturing hubs. Worker mobility and turnover is rising and the income gap between the rich and poor is widening. Social services are spotty and civic authority is strained. Such stresses, bearable in a youthful society, become less tolerable in an ageing society. Imagine a large share of China’s postwar baby boom generation, tens of millions of whom have joined the ranks of its low-wage and rootless floating population, maturing by the year 2020 or 2030 into tens of millions of indigent urban elders who lack nearby families, lack pensions, and lack access to health care. Or imagine, in western rural regions, entire towns of demographically stranded elders.
How China confronts its ageing challenge will do much to determine the shape of its economy and society over the next half century. If China fails to forge an effective retirement policy, the costs of rapid economic development will increase. If it succeeds, the potential benefits will be enlarged. The future will not only be one in which elders retire in greater comfort and families live with less worry, it will also be a future in which capital formation is stronger, living standards are higher, and public trust in government is firmer. Most of all, it will be a future in which China’s maturing role in the global economy undergoes a basic shift — from a vast reservoir of unskilled labour to a dynamic, high-saving, high-investing, high-value-added economy. The whole world thus has a stake in the outcome.

ILO (2004): International Labor Organisation, LABORSTA Database,

MOLSS — Ministry of Labor and Social Security and National Bureau of Statistics of China (2003): China Labor Statistical Yearbook 2003.

NPFPC — National Population and Family Planning Commission (various years): Statistical Bulletin of Family Planning,

Takayama, N. (2002): “Pension Reform in the PRC: Incentives, Governance, and Policy Options”, paper presented at the ADB Institute’s 5th Anniversary Conference (Tokyo, 5-6 december).

UNO (2003): World Population Prospects: The 2002 Revision, 2 volumes, UN Population Division.

World Bank (2003): World Development Indicators 2003.

Zeng, Y. and Wang, Z. (2003): “Dynamics of Family and Elderly Living Arrangements in China: New Lessons Learned from the 2000 Census”, The China Review, 3:2 (Autumn).

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