22 October 2016
In China, those aged above 60 have reached 212 million at the end of last year, representing 15.5 percent of the population. Photo: CNSA
In China, those aged above 60 have reached 212 million at the end of last year, representing 15.5 percent of the population. Photo: CNSA

China set to delay retirement amid labor shortage

China is getting old before it can get rich.

Its two-child policy won’t create a new working force until 20 years later.

Meanwhile, the nation is grappling with a growing number of retirees and a shrinking labor force, while the country’s expenditures are exploding.

The average retirement age in the country is below 55 at present, the lowest worldwide. The Ministry of Human Resources and Social Security (MHRSS) hinted at delaying the retirement age three years ago. It suggested the retirement age be changed to 65 by 2045.

The third plenary session of the 18th Communist Party of China Central Committee, which was held in 2013, announced a study on gradually postponing the retirement age. The fifth plenary session this year unveiled the detailed measures.

The newly-released 13th Five-Year Plan noted that delaying the retirement age would have a far-reaching impact. It would involve pension fund reform, the aging population, labor supply and the diminishing demographic dividend, among other things.

Taking a gradual, step-by-step approach, the MHRSS proposes to raise the retirement age by a few months each year.

Aging is a global issue, and various nations have raised the retirement age. It has been reported that 170 nations have postponed the retirement age for both men and women as far back as in 1989.

In China, those aged above 60 have reached 212 million at the end of last year, representing 15.5 percent of the population. They are estimated to surpass 400 million by 2033.

Meanwhile, the pool of working-age people is shrinking rapidly. The nation saw its labor force decline for the first time in 2012, down by 3.45 million from 2011. The number dropped by another 3.71 million in 2014 from the previous year.

This means that China could face a severe labor shortage in the future. And the aging population spells increasing burden for pension funds.

China intends to adopt a gradual and multi-year approach to raising the retirement age. But it would take a long time for the nation to achieve its goals if it only delays the retirement age by a few months each year.

The initiative is quite complex, including drafting the plan, public communication, announcement, timetable for implementation, public consultation, optimization, etc.

The authorities should hammer out a detailed plan as soon as possible, which should take into account the nation’s labor supply shortage and rapidly aging population.

Also, the plan should consider the difference among working populations as well as urban and rural disparities.

Raising the retirement age would also delay the payment of pension funds, which would affect the quality of life and well-being of those who are already retired.

It is said that many provinces have been unable to raise sufficient revenues to meet their obligations to retirees since last year, as there are now more retirees than working people.

In the first 10 months of this year, the nation’s pension fund reported a balance of more than 210 billion yuan (US$32.9 billion), and most provinces still have balances worth over eight months of pension payments.

However, Beijing should step up fiscal support for provinces that have failed to meet their obligations.

Meanwhile, the Finance and Economics Commission of the National People’s Congress suggested that the government launch an individual income tax reform.

Many have suggested that the current individual tax exemption of 3,500 yuan should be raised. The exemption level was set in 2011, but consumer prices, wages and the population policy have changed dramatically over the last four years.

Taxes are aimed at mitigating social wealth gaps through secondary distribution of the national wealth. However, the current tax regime has failed to do this, and the poor are required to pay more taxes than the rich.

In addition, China levies tax on individuals instead of households. In fact, for many households, the taxpayer is the breadwinner of the whole family. And low-income families have a heavier tax burden than high-income households.

In particular, the current tax regime may be unfair for those who decide to have a second child, which could lead to more expenditures but the same tax payment under the existing system.

The central government should adopt a more flexible income tax regime to reflect the income gap in different regions.

And local governments should be granted the power to make adjustments to support the nation’s economic growth and population policy.

This article appeared in the Hong Kong Economic Journal on Nov. 23.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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