China's Aging Population Puts Pressure on Nation's Weak Pension System

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China has entered the stage of an aging society since 1999, and the trend is expected to be irreversible this century. With a growing share of the country’s massive population turning gray, the fragmented pension system faces unprecedented challenges.

More than 140 million Chinese are now over the age of 60, accounting for 11 percent of the total population, and China is home to half of all Asians in this category. According to research by the country’s Aging Problem National Commission, the over-60 cohort is projected to grow to 248 million by 2020, accounting for 17.2 percent of the total population. By 2051, the figure will top 437 million, comprising more than 30 percent of the population; it is then expected to level off at 300–400 million for the rest of the century.

What’s particularly worrisome is that China is getting old before it gets relatively rich. The nation’s current per capita GDP barely exceeds US $1,000, compared with levels of between $5,000 and more than $10,000 in developed countries at the time of their societal aging. This lack of societal wealth has severely squeezed China’s ability to care for its expanding senior population.

The problem is directly manifested in the inadequacy of the nation’s pension system. Only 13.4 percent of the total population—some 174 million people—was covered by the system as of 2005, far below the minimum level of 20 percent prescribed by the International Labor Organization. Nearly all rural residents and rural migrant laborers, some 800 million in total, are left out of the net.

For those who do get covered by the pension system, there is considerable uncertainty as to whether they will receive sufficient retirement payments promised by the plan. The national pension scheme, introduced in 1997 during China’s drastic restructuring of state-owned enterprises, first had to account for the legacy benefits for millions of laid-off workers who used to enjoy cradle-to grave state welfare. It must now also cover the accrued obligations for millions of newcomers to the workforce who are required to contribute a certain percentage of their monthly salaries to individual pension accounts.

Lacking state funds to compensate the large number of retirees from the pre-reform era, some of China’s less-developed provinces have been appropriating money from current workers’ individual retirement accounts, creating a huge pension deficit. The pension shortfall ballooned from $4.5 billion in 2000 to $100 billion by the end of 2005, increasing by roughly $12 billion annually over the five-year period. This has left millions of personal retirement accounts with no actual assets, only notional credit entries in a ledger based on a bank-deposit rate.

The situation is likely to further deteriorate as more Chinese reach retirement age. The ratio of workers to retirees nationwide has declined significantly, from 13:1 in 1980 to 3:1 in 2003, and is projected to reach 2.5:1 by 2020. Whether China will address this problem in a timely and effective manner will ultimately determine the happiness and prosperity of every one of its 1.3 billion people.