- June 29, 2020 ECONOMY
Why Beijing Has Resisted Raising the Retirement Age
Why hasn’t China raised its oddly low retirement age yet? After all, a key solution to its rapid aging problem is right under Beijing’s nose, and it knows it too. As early as 2013, Beijing made it clear that the official retirement age (60 for men and 55 for women) would be raised by 2020—a priority that made it into the Ministry of Human Resources and Social Security’s 13th Five-Year Plan (2016-2020). Yet so far, no move has been made on the retirement age.
The short answer is that the Chinese government cannot afford to delay retirement at the moment. In the near term, postponing retirement will actually be negative for the economy. For one, since job creation is paramount amid the post-Covid recovery, Beijing needs retirees to vacate their spots that can then be filled by the unemployed, including many of the nearly 9 million recent college graduates.
In 2018, those between the ages of 55 and 59 accounted for 7.3% of China’s total urban labor force (see Figure 1). If Beijing had raised the retirement age by one year to 61 for men and 56 for women, a quick estimate suggests that would’ve translated into 5 million and 4.5 million fewer job vacancies and raised the unemployment rate by more than one percentage point in 2019 and 2020, respectively. And given the necessity of solving the unemployment problem during the current economic slowdown, delaying retirement has to be put on hold.
Figure 1. Share of Urban Employment by AgeNote: Data adjusted to account for the fact that women are required to retire five years earlier than men.
Source: National Bureau of Statistics and MacroPolo.
Holding steady on the retirement age also brings a counterintuitive benefit: a larger social security deficit that serves as stimulus. As more workers exit the labor force in the near term, the Chinese government will run a deficit as it has to pay out more retirement benefits than it will receive in social security contributions. Of course, such a trend over the long run turns social security into an unfunded liability and is not fiscally sustainable.
But social security spending can be stimulative during periods of economic contraction while avoiding the downside of relying on investment to spur growth. This recognition has led Beijing to increasingly use social security spending as stimulus since 2019 (see Figure 2). For instance, Beijing has shown a willingness to run a social security deficit in 2020, having reduced social security contributions for small businesses and raised benefits faster than inflation. These actions amount to a stimulus of more than 1% of GDP, a hidden yet meaningful boost to the economy.
Figure 2. Social Security Turns from Surplus to Deficit (% GDP) Source: Wind.
A weaker Chinese economy has put the retirement age issue on the back burner, but this hiatus won’t last long. In fact, Beijing will likely lift the retirement age by 2023, because by then China’s roughly 250-million strong baby boomer generation (those born in the decade after the 1959-1961 Great Famine) will retire en masse.
Herein lies a potential silver lining: when the fiscal burden of paying for social security really kicks in, it may actually accelerate state sector reforms. Despite controlling enormous state assets, Beijing has actually been reluctant to redirect those assets to pay for social security—ironic given a nominally socialist state that not so long ago required state firms to cover all social welfare spending for its employees.
With growing pressure to support an aging society, Beijing will likely be forced to return to its roots and become, well, more socialist. The government will likely transfer more state assets to the social security funds that operate at the central and local levels—which essentially manage the equivalent of China’s “401K plan”—to cover social security spending. But because these funds are mainly interested in getting higher returns from investing state assets, they will either push state firms to improve their performance or simply sell state assets to finance social security. Either way, it should help catalyze sluggish state sector reforms.
China simply cannot wish away the sobering reality that despite still having a staggering labor force of 800 million, it is a labor force that has already peaked and is dwindling in size. In other words, there will be more people exiting the work force than entering it over the next decade. This secular trend is unavoidable and will force Beijing to reprioritize in coming years to deal with this economic headwind. Indeed, almost all difficult reforms come by way of necessity and not as a result of good intentions.
Houze Song is a research fellow at MacroPolo. You can subscribe to his research here.
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