Elderly people relax in a park in Fuyang, China, on January 15, 2024. (Photo by Costfoto/NurPhoto via Getty Images)
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China’s top legislature approved a formal plan on Friday to begin gradually raising the country’s legal retirement age from Jan. 1 next year and finish in 2040, according to Chinese state media.
The ultimate goal of the roughly 15-year plan is to raise the retirement age by three years for men to 63, five years for women working in factories from 50 to 55 and three years for women working in jobs. from 55 to 58.
The reforms are “overdue and very welcome,” Erica Tay, director of macroeconomic research at Maybank Investment Banking Group, told CNBC.
China is grappling with a shrinking workforce and looming pension budget shortfalls that could significantly hurt the economy.
Economists have long called for an overhaul of the country’s retirement age laws, currently among the lowest in the world, set at a time of lower life expectancy. In 2023, average life expectancy increased to 78.6 years old, from approx 44 years old in 1960.
Aging demographics
Beijing’s low birth rates and relatively young retirement age mean its working-age population will continue to shrink.
The country needs to be able to tap into the pool of older workers when the shrinking workforce becomes more pronounced in the next decade, Tay said. “This policy change will prevent a sharper decline in China’s potential growth, even if only marginally.”
It’s a prudent move that “finds a balance between correcting demographic stagnation and managing people’s expectations” at a gradual and measured pace, said Bruce Pang, chief economist and head of Greater China research at JLL, an investment management firm. .
Beijing had previously said it was considering the plan to raise pension thresholds, but backed off after it sparked public outrage.
“The plan may not be popular, but it provides much-needed certainty and is good for China’s long-term economic future,” Tianchen Xu, senior economist at The Economist Intelligence Unit, told CNBC. He noted that China has avoided narrowing the five-year gap between men and women.
China is treading carefully to “avoid more social backlash,” Xu said.
Pension crisis
Ahead of the announcement, economists said China’s pension system, which relies on a shrinking active workforce to pay for a growing number of retirees, is unsustainable and needs to be reformed.
Raising the retirement age would help ease the financial crisis of local government pensions, said Sheana Yue, an economist at Oxford Economics. “While inflows may not change much, outflows will be delayed, buying local government time to fix their budget deficit.”
In 2019 reportthe state-run Chinese Academy of Social Sciences estimated that the pension system would run out of money by 2035.
But “more needs to be done to improve pension adequacy,” Maybank’s Tay said, adding that China needs a stronger pension plan and diversified investment avenues to ensure sustainable retirement savings.
This 15-year plan will be implemented gradually based on a highly complex calculation system. China’s Ministry of Manpower and Social Security has added a few tools for citizens to check the retirement age indicated on its website and mobile app.
Beijing said in the statement that some individuals may be granted exemptions, while also urging local and regional governments to “proactively respond to population aging, encourage and support people to join the workforce or start businesses,” according to with CNBC’s Chinese translation.
China may take “another round of default in the late 2023s, especially if the balance of China’s pension funds is tight,” Xu warned.
