The central government has tried to prevent local governments from tapping current pension assets, but has done so only by allowing them to accumulate further debt. Moreover, many local administrations bristle under the requirement that pension assets must be invested in low-interest bonds and bank deposits. Don't be surprised if future pension scandals like the one that rocked Shanghai in 2006 are exposed as local administrations seek a higher, though riskier return on their pension assets.
As China's population ages, scholars and officials are seriously considering proposals to phase out the one-child policy that is beginning to curb the flow of new workers into the economy, as well as raise retirement ages (currently 60 for men, 5 or 10 years earlier for women). But such adjustments are just as politically difficult in China as in in Western democracies because, as it turns out, not wanting to work longer is a widely held preference. Many Chinese also view the relatively early retirement age as a way to make vacancies for the millions of young people who enter the labor market each year. If older workers continue working into their twilight years, young workers may encounter greater difficulty in trying to find employment. This would pose its own issues for the country.
What does all this mean for the Asian, European, and American economies that trade with China? First, they should understand that China's aging problem is a slow-motion fiscal crisis. China is not Greece, but local debt burdens are already enormous, and these calculations do not include the mounting pension obligations that local governments have incurred. Just as in America and Europe, the tendency in China is for local officials running state-level pension funds to ramp up current benefits and let future generations pay for them. China's National Social Security Fund is the largest in the world at $150 billion, but these assets (some of which are permitted to be invested in stocks) still fall well short of the liabilities racked up by provincial and city pension funds.
Second, we should realize that as China moves towards universal pension and medical coverage (a likely prospect under its 2010 Social Insurance Law), the effect on household savings will be limited. True, families may no longer need to save for the high costs of catastrophic illnesses. But it is quite plausible that any reduction in household savings arising from the new safety net will be offset by mandatory payments by both workers and employers into the new welfare programs. In other words, don't count on the new safety net to rebalance China's economy, because it won’t give discretionary income much of a lift. This means that countries that have large bilateral trade deficits with China should not expect a turnaround at some uncertain date when Chinese households suddenly have imagined new spending powers.
Finally, we must consider the larger implications aging has on China and major economies such as the United States, Europe, and Japan. Aging trends don’t make the decline of these economies inevitable, of course, but it is time to calibrate expectations. Aging will curb or even reduce household consumption, which is the primary driver of Chinese exports to industrialized economies and what many hope will fuel future exports to China. All these governments need to find ways to slow the growth of health care and pension costs. In the United States and China, for example, insurance and other financial services providers (state-owned in China) make large profits on fees and other administrative charges for handling the funds that pass through their accounts. Cutting these costs is essential. More broadly, all these societies will be compelled to rethink the outdated notion that work is over and retirement begins at some arbitrary age defined by law.
Aging and the policies to cope with a graying population are first and foremost domestic issues, but, as is so often the case, the consequences of Beijing’s pension policies will resonate far beyond its borders. Those who manage economic relations with China should focus less on trade deficits and exchange rates and spend more time thinking through the long-term implications of aging, and what it will mean for patterns of trade and investment among the world's largest economies.
Mark W. Frazier is Professor of Politics and Co-Academic Director of the India-China Institute at the New School.and the author of: Socialist Insecurity: Pensions and the Politics of Uneven Development in China (2010).
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John Lennox
This article is so wrong.
The Chinese just have to dump their one child policy and allow two child and presto, within a decades, they will have millions of children and a policy reversal will be well received, as the Chinese like more child not less.
This article is flawed as it assumes that the one child policy will stays for eternity. Typical of paid journalism where the writers are paid and told to paint the Chinese Nation in all sort of imaginable negativity.
angelus512
Well if its so easy why hasnt it happened..?
Also having "loads of kids" is a product of an uneducated and poor society this is fact take a history lesson.
The less poor and more educated a society becomes the quicker it declines to 1 child per family generally. So no removing one child policy isn't actually going to make a difference plus its already ingrained in their behaviour so I don't see them suddenly having loads more kids.
Wake up.
Gent hid
Don't pretend to be an expert on Chinese as you know nothing about us.
we will change to two child policy and China will continue to produce more children….so no bullsxxit about an ageing nation. Sell your story all you like cos it is not going to happen. Pity it is too late for your old decaying economies to have more children as you guys are already too old.
There is a solution…just let the North African and West Indians produce more for you……just as in America. Very soon, they will be in the majority and save you from a declining birth rate.
Jean-Paul
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@ Lennox, Angelus
Well said angelus, the 1 child policy has already been around for decades so it is unlikely that it will have much immediate effect on birth rates. On top of that longer term relaxation of the policy would only lead to an increase in poor rural workers who add very little to the economy. The birth rates of the urban/middle class Chinese will stay roughly similar to all of the middle class citizens in most developed/developing economies.
ACT
@Angelus512
as i understand it, many citizens of the PRC outside of the citizes simply ignore the one-child policy.
Abraham Dewitt
You are spewing nonsense Angelusa.
Just for your puny mind, half of the ph.d students in the USA are Chinese and the majority of undergraduates doing engineering and science are also Chinese. Every year, Chinese Unis produce almost ten millions engineering and science graduates and I am sure there are many Chinese students in your Australian Universities, like in the UK and America.
A policy reversal is definitely on the table, so expect not 1.3 billions but 1.6 billions of their citizens and I can tell you, many of them are highly intelligent, not that much i can say about you and your tunne[ vision comments. Saying things like breeding like rabbits and half brains only shows your hatred and racist feeling , nothing else.
Lotus Eater
If the one-child policy was removed tomorrow very little would change in terms of population growth. If you compare China’s population growth with other Asian countries it is easy to see that the same reduction was achieved without the one-child policy. Once a country begins to educate girls and increase access to technology, the birth rates decrease rapidly. The one child policy was a poorly considered policy with disastrous consequences for China. However, young Chinese couples are now very similar in attitude to young couples in ten rest of the world. They want good housing, careers, holidays, cars etc. when they have children they want to be blue to provide good educational opportunities for them. All of these factors means they are not interested in having numerous children. With the migration of rural workers tot the city, the need for extra farm hands is also reduced, and therefore even the population in traditionally high growth areas will slow naturally.
@ John Chan – the worst treatment of workers I have seen around the world in modern times is in Communist countries. Other (democratic) countries have laws and unions to protect workers. China has huge workplace health and safety issues, rural workers are frequently not paid for 12 months work and many return home empty handed, Factory workers are treated like robots and required to work long hours in bad conditions for low wages. Workers in offices are often required to work for nothing or very low weasels to show they can do the job, for up to 6 months. Every year new reports of factory/mine owners kidnapping young people, the mentally disabled and the poor and using them slaves occur. These factories have been ‘inspected’ by local government officials… Feudalism is alive and well in China!
Lnrds
So true! You even get managers beating up workers in some cases and I mean really beat them up. Then if that person who got beat up squeals then they lose their job. What is even more sad is they can't afford to lose their job despite how little they earn because that's what keeps them going.
Discipline for them is beat the S**T out of you.
angelus512
@Lotus Eater
Please stand by for JC's white noise reply. Something senseless no doubt.
Bankotsu
It's high time for China to end the one child policy and adopt three child policy.