China’s demographic time bomb may not come to pass, with pension moves offering hope

Kevin Martin says Beijing’s move to raise the retirement age and a shift by workers to save earlier for old age will help mitigate the state pension shortfall

PUBLISHED : Sunday, 31 July, 2016, 1:18pm
UPDATED : Sunday, 31 July, 2016, 5:14pm

China’s policymakers are confronting the country’s rapidly ageing profile and shrinking workforce by raising the official retirement age which has been in place since the 1950s.

This is a sensitive issue in a country where people have long depended on government and their families to sustain them in old age – retirees in China rely more heavily on state funding than most other countries. But to China-watchers and investors, it can only be a good thing that the country is taking a responsible approach to addressing a substantial deficit in individual pension accounts.

Chinese workers have grown accustomed to rising prosperity. But as change approaches, they have also been exposed to years of reports highlighting the need for reform through statistics showing that, for example, nearly four in 10 Chinese will be over 60 by the middle of the century.

So how well have the Chinese grasped the “new normal” that is putting pressure on pension systems around the world? The answer appears to be, very well. Working-age Chinese expect to save for 14 years longer than those who have already retired, research published last week shows. That equates to 23 years of saving, up from nine years for current retirees.

The solution to China’s demographic time bomb lies in changing age-old attitudes

This is the highest “retirement gap” between generations in the world, but it doesn’t necessarily mean working longer. Working-age Chinese are now starting to save for retirement 13 years earlier than their parents’ generation. This provides hope for China’s pension system and represents a paradigm shift in retirement thinking.

The shift is also seen in how working-age Chinese plan to fund their retirement. While a small majority still expect state help, many are moving towards defined benefit pension schemes provided by their employer, endowment or savings schemes or shares.

The paradigm shift is only one reason to doubt the claims of the most pessimistic commentators who believe that the demographic time bomb will bring China’s growth to a halt. One reason Chinese workers have typically started saving late for their retirement is that they only begin to put money aside for themselves once their children have completed their education.

Better education, productivity gains and migration promise to help raise workers’ living standards and retirees have the potential to unlock trillions of dollars in growth by 2030, helping to mitigate the effects of the ageing population.

With a responsible policy approach, a paradigm shift within the population, and the transition to a more productive economy, China’s demographic time bomb could go off with a whimper rather than a bang.

Kevin Martin is Asia-Pacific head of retail banking and wealth management at HSBC