Li Zhong attended the recent Shanghai RV Show 2024 with a mix of excitement and disappointment. Despite his long-standing dream of buying an RV and traveling across China with his wife, financial constraints have put those plans on indefinite hold. This personal setback mirrors a broader trend among older Chinese citizens, many of whom find themselves in a precarious financial position as they approach retirement.
China’s pension system, once a robust state-supported scheme, has evolved into a three-tiered structure: a state-endorsed public pension, enterprise annuities, and personal pensions. While the public pension is mandatory, the other two tiers are voluntary and have not gained significant traction. Unfortunately, the public pension system is now facing a severe crisis due to a perfect storm of demographic shifts and economic pressures.
According to government statistics, by 2035, around 300 million people currently aged between 50 and 60 will retire. This significant retirement wave is occurring in a country where the retirement age is among the lowest in the world: 60 for men, 50 for blue-collar women, and 55 for white-collar women. This growing cohort of retirees will soon outnumber the working-age population, who are already struggling with high unemployment rates, job burnout, and economic disillusionment.
The roots of this demographic crisis can be traced back to policies from the mid-20th century. During the 1960s and 1970s, China, under Mao Zedong, promoted large families. This policy was abruptly reversed with the introduction of the one-child policy in 1979, leading to a dramatic decline in birth rates. As a result, China now faces a sharp drop-off in the young population compared to the elderly. In the next 25 years, more than 500 million people—nearly 40% of the population—will be over the age of 60. The Chinese Academy of Social Sciences (CASS) has projected that the public pension system could run out of funds within the next decade if significant reforms are not implemented.
Cai Fang, the vice president of CASS and a leading expert on China’s demographic issues, has emphasized that the aging population presents significant challenges to economic growth. As the economy transitions from being driven by exports and investments to consumption, the aging population’s reluctance to spend will be a major hindrance. Older consumers, like Li Zhong, are increasingly cautious with their finances due to uncertainties about their future income and financial stability. A 2022 survey by the recruitment website 51job.com revealed that more than two-thirds of Chinese senior citizens plan to return to work after retirement to supplement their income.
The financial insecurity faced by retirees is compounded by the recent deflation of China’s property bubble. Real estate constitutes about 70% of family assets in China, and the property market’s downturn has eroded the savings of many families. Additionally, many older Chinese had invested heavily in wealth management products (WMPs), which suffered significant losses in late 2022 and early 2023. These losses have driven retirees to move their savings into low-yield investments like money-market and bond funds, further diminishing their expected income.
This economic hesitancy extends beyond retirees. The younger generation, predominantly single children due to the one-child policy, now bear the responsibility of supporting their aging parents. This financial burden diverts funds away from consumer spending, which could otherwise stimulate economic growth.
Economists have criticized the Chinese government’s reluctance to boost consumption through direct financial transfers to citizens, a strategy widely adopted by Western countries during the COVID-19 pandemic. Strengthening the pension system could boost long-term consumption, but significant reforms are necessary to make it credible enough to influence spending behavior. Michael Pettis, a senior fellow at the Carnegie Endowment, argues that increasing pension payments to current retirees would have an immediate positive impact on consumption. Wang Tao, chief China economist and head of Asia economics at UBS Investment Research, agrees, suggesting that government spending on pensions could enhance consumer confidence, reduce savings rates, and stimulate economic activity.
The financial landscape for retirees like Li Zhong is fraught with challenges. The broader economic implications for China are profound, requiring substantial policy adjustments to address both demographic and economic issues. As the population continues to age, the government will need to implement significant reforms to ensure the financial stability of its citizens and the sustainability of its economy.
China’s approach to this demographic and economic conundrum will likely shape its economic future and the financial well-being of its aging population. Addressing these challenges will involve not only reforming the pension system but also finding ways to stimulate consumer confidence and spending among both the elderly and the working-age population. The outcome of these efforts will determine whether dreams like Li Zhong’s can eventually become a reality for many of China’s older citizens.
