What Happens When China Goes
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What Happens When China Goes "Gray"?

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As China's major trading partners try to control rising public pension and health care costs, they may not realize they also have an important stake in China's ongoing struggle to fashion a safety net for its own rapidly aging population. Many observers assume China has no pensions or healthcare insurance for the 185 million people over the age of 60 (13.7% of population), the highest official retirement age for most workers. They may well believe this explains why Chinese families save so much–more than 30% of household income–and therefore spend less on consumer goods, including imports from trading partners.

But this line of reasoning is faulty because China already has large and rapidly growing public pension and health insurance programs in the cities, and is in the process of extending them to rural areas. It's time that China's trading partners, especially the United States, understand what this means for China's economic future and, by extension, their own.

For all the criticism of outgoing President Hu Jintao for presiding over a “do-nothing” administration, he did manage to oversee a substantial increase spending on China's public support systems.As a result, pensions have now become the most expensive function of the Chinese government—which already spends a lot on infrastructure, housing and defense. In 2011, pension expenditures rose to 1.28 trillion renminbi (RMB, U.S.$205 billion), up from only 489 billion RMB in 2006. These and civil service pensions cover only about half of those over age 60, but at current rates of growth universal coverage—and vastly higher expenditures—are not far off. The number of urban workers (including migrants from rural areas who in theory are in the cities temporarily) contributing to the public pension system now exceeds 290 million, while rural pensions are also growing rapidly. With so many new people paying in, the government's future pension obligations are rising quickly. A recent report issued by the Bank of China and Deutsche Bank estimated that China’s pension system will have a U.S.$2.9 trillion gap between assets and liabilities by the end of 2013. By 2033 the gap is expected to reach U.S.$10.9 trillion, or 38.7% of GDP.

What happened in the past decade or so to cause China, with an annual per capita income of around $5,000 (adjusted for purchasing power), to begin to acquire pension burdens found in richer and heavily indebted industrial states? What will this mean for trading partners who keep urging the Chinese government to rebalance its economy toward greater consumption (and imports) and away from relying so heavily on exports?

Essentially what happened is that Beijing designed a pension system in the late 1990s that will leave households with much less to spend than many observers assume. Urged by World Bank economists and foreign pension experts, the Chinese government put in place a hybrid pension arrangement that relies on both traditional pay-as-you-go collections from employers and mandatory individual accounts, from which workers were to finance anywhere from one half to two-thirds of their retirement needs. (They also were expected to buy pension and annuity products from commercial providers). But that pension design has resulted in a double whammy: households consume less in order to save for retirement needs, while the government's long term pension debt is escalating rapidly because local governments raided the individual accounts to pay benefits to current retirees.

Comments
51

[...] beyond the Near Seas will probably have greater difficulty competing. Especially salient are the rapidly expanding demand for social spending because of China’s slowing birthrate and an aging society beset with rising expectations and [...]

February 11, 2013 at 06:02

[...] What Happens When China Goes “Gray”? [Mark Frazier, Professor of Politics and Co-Academic Director of the India-China Institute at the New School, via The Diplomat] [...]

February 2, 2013 at 16:48

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January 19, 2013 at 07:25

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Abraham Dewitt
January 18, 2013 at 18:09

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.

ACT
January 18, 2013 at 15:13

@Angelus512
as i understand it, many citizens of the PRC outside of the citizes simply ignore the one-child policy.

Jean-Paul
January 18, 2013 at 14:35

 

 
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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.

Gent hid
January 18, 2013 at 13:03

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.

angelus512
January 18, 2013 at 06:28

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.

John Lennox
January 17, 2013 at 16:40

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.

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