Pension crisis reaches China

The pension challenges facing western governments are also confronting the world’s second most populous country.

At what age should the state start to pay a pension? The question is a challenge to all governments, whether democratic or otherwise. There are two main drivers, at opposite ends of life:

  • Life expectancy. Unless state pension ages increase in line with life expectancy, the state spends more on pensions and a rising proportion of life is spent in retirement. The economy suffers from a smaller workforce which generates a smaller revenue.
  • Birth rate. Most state pension systems are pay-as-you-go with workers funding the pension of retirees through taxes and social security contributions. Thus, the ratio of workers to retirees is a critical factor in affordability. In much of the world outside Africa, the birth rate has been steadily falling and is now below the replacement rate of 2.1 children per woman. Consequently, over time there will be fewer workers to support pensioners, with all that implies.

China recently announced plans to raise its state pension age, which is currently 60 for men and 55 for women, or 50 for women in blue-collar jobs. These retirement ages have not been changed since 1978 when the average life expectancy at birth was 63 for men and 65 for women. The latest data (for 2022) shows life expectancy is now 16 years higher. Over that same period, China’s one-child policy, now abandoned, saw the birth rate drop from 2.7 to just 1.2. As a consequence, in 2023, China was displaced by India as the most populous country.

From January 2025, China will start increasing the state pension ages to 63, 58 and 55, respectively, over a 15-year phase. Meanwhile, in the UK the current State Pension age of 66 (for men and women) is due to rise to 67 between April 2026 and April 2028. The previous government sidestepped the decision on the move to 68 by announcing (yet another) review, due to take place by July 2026.

China’s state pension challenge is a reminder that retirement planning needs to cover a gap of several years or more between when you want to stop work and when the government thinks you should.

31st October 2024