Population aging and its economic consequences for China

Abstract

Population aging in the People’s Republic of China (PRC) is mainly due to rapid fertility decline after 1970, a third of which was due to government policy, and the balance to social and economic development. Relaxing fertility policies now would probably not have a large effect on fertility, and rising educational attainment may reduce future fertility by 0.3 births per woman. The successes and failures of European fertility policies can guide policy. In any case, the PRC’s population will age rapidly, with the old-age dependency ratio (OADR) more than tripling by 2065. This will cause severe fiscal problems for current old-age programs, particularly for pensions. The general economic impact will be less severe, as partially offset by rising education and increased capital per worker. Focusing on a particular age, like 65, is a mistake. Health, cognition, and vitality are more important than age itself and these will improve due to past increases in education and better living conditions for children. The retirement age should be raised. One good approach is building automatic adjustment mechanisms into old-age programs like pensions. For example, retirement age, taxes, and benefits can be linked to life expectancy and to the OADR as in some European countries. This would increase the labor supply of the elderly and avoid pension-related political problems in the future.