Population Aging in China: A Mixed Blessing

China is rapidly getting older. Three decades ago, only 5 percent of the population was over 65; today, 123 million people, or 9 percent of the population, are over this age. A report released by a government think tank forecasts that China will become the world’s most aged society in 2030. Further, by 2050 China’s older population will likely swell to 330 million, or a quarter of its total population.

Rapid aging in China has been driven by three distinctive developments. First, robust economic growth over the past decades has been associated with increased average life expectancy in China—from 68 in 1981 to 74 today. Second, the generation of baby boomers (those Chinese born in the 1950s and 1960s) has started to join the older population. Third, the draconian population control policy, introduced in the early 1980s, resulted in an extremely low fertility rate, further increasing the proportion of the older population.

Beyond social impacts, population aging affects economic performance, and it does not bode well for China’s international competitiveness. It leads to a drop in the proportion of the productive labor force, which in turn raises the average wage level, making China less competitive in labor-intensive industries. In years past, China was able to rely on almost unlimited low-cost labor in achieving its double-digit economic growth. However, if China is approaching its Lewis turning point, a point at which China would move from a vast supply of low-cost workers to a labor shortage economy, it could quickly lose its competitive edge to other emerging economies that still enjoy significant demographic dividends. Indeed, according to an OECD report, China will be surpassed by both India and Indonesia in terms of economic growth rate after 2020. Meanwhile, rapid population aging means that China will not stand in good stead to adjust its industrial structure and move to capital- or technology-intensive industries, and China’s “advantages of backwardness” (to borrow from Alexander Gerschenkron) in competing with developed countries will also be undermined.

While China is not swimming against the population aging tide, the speed and scope of the change has caught Beijing off guard. Pensions, health care, and social security systems are still underdeveloped. China’s pension fund, put in place in 1997, is unable to keep up with aging population, and the pension reserve level remains extremely low. According to Dai Xianglong, chief of the National Council for Social Security Fund, pension reserve accounts for only 2 percent of China’s GDP, compared to 83 percent in Norway, 25 percent in Japan, and 15 percent in the United States. As a result of the low reserves, the benefit level is very low, especially in the countryside, where the pension fund only covers approximately one-third of the elderly people, who each receive a monthly payment of only $12. Services and facilities geared toward elderly care (e.g., retirement homes, nursing homes, and rehabilitation care) are still rare, even though nearly 23 percent of the older people in China cannot fully take care of themselves. It is hard to believe, but I was once told that the president of Peking University had to put a retired professor in a hospital for one week when the manny hired by the professor returned to his hometown during the spring festival.

This booming senior population, together with the changing household structure and growing wealth, has also created a new growth market: institution-based elderly care. Currently, less than 2 percent of the senior population uses institution-based care. Yet according to a 2011 survey, 11.3 percent of the older people living in urban areas are willing to receive care in institutions (compared to 12.5 percent in the rural areas). It is estimated that the number of seniors who are able to afford senior housing will reach 22 million by 2020. This would generate huge opportunities for U.S. investors—indeed, in late August, Premier Li Keqiang convened a State Council meeting, which sent out a strong signal that China would relax restrictions on market entry and encourage overseas capital to invest in China’s health care industry, including elderly care.

Furthermore, population aging in China may mitigate the security dilemma in East Asia. Because of the overall low testosterone level associated with older people, a graying Chinese society would become less enthused about rattling its saber at its neighbors. This “geriatric peace” is made more likely as population aging slows China’s economic growth while creating tremendous demand for welfare spending. As Seongho Sheen suggested in a recent article, growing demand for social security in Northeast Asia could severely strain spending in defense budgets. As if to resonate this theory, President Xi Jinping in his Nov. 3 speech to an international forum insisted that improving welfare was China’s “No. 1 priority.”