China’s Plan to Raise Retirement Age: A Necessary Reform Amidst Economic Pressures

China’s top legislative body has approved a significant overhaul of the country’s retirement age laws, set to begin on January 1, 2025. The new plan, which will incrementally increase the statutory retirement age over the next 15 years, aims to address the pressing economic and demographic challenges facing the nation.

Under the reform, the retirement age for men will rise by three years to 63. Women working in factories will see their retirement age increase by five years, from 50 to 55, while women in white-collar jobs will see a three-year increase, from 55 to 58. The reforms are set to be fully implemented by 2040.

The decision comes as a response to China’s shrinking workforce and growing pension budget shortfalls. The country’s current retirement age laws, among the lowest globally, were established during a period of lower life expectancies. As of 2023, China’s average life expectancy has risen to 78.6 years, a significant increase from approximately 44 years in 1960.

Erica Tay, director of macro research at Maybank Investment Banking Group, welcomed the reforms, stating they are “overdue and very much needed.” She emphasized that the policy change is crucial for mitigating a potential sharp decline in China’s economic growth due to a shrinking working-age population. “This policy change will forestall a sharper drop in China’s potential growth, if only marginally,” Tay noted.

China’s demographic challenges are compounded by low birth rates and a relatively young retirement age, which means the country’s workforce will continue to contract. Bruce Pang, chief economist and head of research for Greater China at JLL, described the policy as a balanced approach to address demographic stagnation while managing public expectations. “It strikes a balance between fixing the demographic stagnation and managing people’s expectations in a gradual and measured pace,” Pang said.

The plan has faced some public backlash, as previous discussions about raising retirement ages had led to significant outcry. However, Tianchen Xu, senior economist at The Economist Intelligence Unit, argues that despite the unpopularity of the reform, it is essential for China’s long-term economic stability. “The plan might be unpopular but provides much-needed certainty and is good for China’s long-term economic future,” Xu explained. He also pointed out that the reform avoids narrowing the five-year gap between men’s and women’s retirement ages.

China’s pension system, which depends on a shrinking pool of active workers to support an increasing number of retirees, has been deemed unsustainable without reform. Sheana Yue, an economist at Oxford Economics, noted that raising the retirement age will help alleviate the pension fund’s cash crunch. “Although inflows might not change much, outflows will be delayed, buying local government time to fix their budget deficit,” Yue said.

A 2019 report by the state-run Chinese Academy of Social Sciences projected that China’s pension system could be depleted by 2035 if no reforms were implemented. While the new retirement age plan is a step towards addressing this issue, experts like Tay believe that further action is required. “More needs to be done to improve retirement adequacy,” Tay emphasized, advocating for a stronger pension system and diversified investment options to ensure sustainable retirement savings.

The reform plan, which will be rolled out gradually, includes a complex calculation system for determining the new retirement ages. The Ministry of Human Resources and Social Security has introduced tools on its website and mobile app to help citizens check their adjusted retirement ages.

Beijing has also indicated that exemptions may be granted in certain cases and is encouraging local governments to actively support the aging population by promoting workforce participation and entrepreneurial activities. However, Xu cautioned that further delays in the retirement age might be necessary in the late 2030s if the pension fund balance remains tight.

In summary, China’s decision to incrementally raise the retirement age is a critical response to its evolving demographic and economic landscape. While the reforms may face some resistance, they are a necessary step to ensure the sustainability of the country’s pension system and to address the challenges of an aging population.