Can China afford its aging population?
- By Brad Franklin
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E-mail China.org.cn, July 10, 2012
Recently released figures for China show that, as of the end of last year, there was1.95 trillion yuan in the country's pension fund. The glowing report indicated the fund grew more quickly in 2011, at almost 26 percent, than the number of retiring seniors who needed it, which grew at less than 21 percent. So far, so good, but if China follows the pattern we've seen in the West, there could be dark clouds ahead.
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Consider the problem: workers contribute a portion of their earnings to support the pension fund. They do this while they are working and they are paid from the fund when they retire. Here's the catch: inflation has pushed up both costs and salaries over the years. A person who is now retired was contributing to the plan based on a salary he was drawing 25 or 30 years ago, which was much lower than today's wages. At the same time, he has to use his pension to buy goods and services that are far more expensive than they were during his working years. While this is happening, modern medicine and the availability of good food means people are living longer and that means they will need to draw their pensions longer. In short, we need more money now than we put in back then.
Previously, this scheme has been acceptable because of China's population growth; with more people contributing to the plan every year, the amount of money in the pot kept getting bigger and the fund stayed solvent. True, it amounted to a sort of Ponzi scheme, but it worked.
That situation is changing. The government decreed years ago that each Chinese family should only have one child because the rate of expansion of the country's population was spiraling out of control. Since then the rate of growth has slowed but the total number of people in China is continuing to rise. Chinese citizens, like those in the West, are also living longer now than they did just a few years ago.
So far, the pension fund has been growing. As the country's economy expands and more people earn higher salaries, they have more money to contribute to their pensions. That same prosperity, however, drives up prices, allows people to live longer and puts increasing demands on the fund. It's a delicate balancing act and it's difficult to see how China will avoid the problem of ever-increasing numbers of people chasing a proportionally shrinking resource.
In the West, population growth is stagnating and even shrinking. Likewise, pension contribution amounts are not growing fast enough to keep up with the ever-increasing demands put upon it by the growing number of retirees who are living much longer than they used to. To illustrate the problem, just within my lifetime the average age to which I am expected to live has increased by almost ten years. Pension funds in the West are coping so far but the strain is clearly showing
China, at least, has been forewarned of this problem. Its leaders see what is happening elsewhere and have a chance to try to head off the situation. The problem is that it could take years for the government to work its way through something as complicated and sluggish as the country's economy.
Many years ago the population of China almost doubled under the leadership of Chairman Mao. However, he was forced to reverse his initial support of population expansion and later advocate the birth control policy, which seemed reasonable at the time. The lesson learned is that short-term fixes can cause tomorrow's problems. At least in China, with a single-party government, politicians can react more quickly to issues than they can in the West; hopefully, they can stay on top of the pension issue and avoid the difficulties other countries have faced. China's massive population is both a blessing and a curse; with all those people getting older, the country's pension fund will have some huge bills to pay in the coming years.
Brad Franklin is a former political reporter, newscaster and federal government employee in Canada. He is a regular columnist for China's English Salon magazine and lives on Vancouver Island.
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