Wednesday, April 8, 2020

Meeting the challenge of China’s changing population

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The shrinking demographic dividend and managing an ageing population are now major challenges to China’s economic development. According to the most recent population projections released by the Population Division of the United Nations, World Bank and China’s Population and Development Research Center, the ageing of China’s population will have four main characteristics in the coming years.

First, the elderly population will enter a period of sustained high growth, especially after 2030 when the average annual growth of the population aged 65 or above will exceed 11.2 million. In 2050, the number of people over 65 is expected to exceed 400 million, close to one-third of the population. At that time, about 10 per cent of all households will have at least one member over 65. The proportion of the elderly in China will not only be higher than the average for OECD countries, but twice that of less developed countries.

Second, the growth of the elderly population will gradually transition from the young-old (60–80) to the oldest-old (over 80). While the proportion of the young-old is decreasing year by year, the growth rate of the oldest-old can be expected to increase. Around 2050, the number of the oldest-old will reach 144 million and exceed the total number of oldest-old in Europe and North America.

Third, the total dependency ratio will continue to increase and will reach about 73 in 2050. That is, every 100 people of working age will need to support 73 people, including 22 children and 51 individuals aged 65 above. At that time, China’s total dependency ratio will be 32 points higher than it was in 2018 at 41.

Fourth, by around 2030, the old-age dependency ratio will be greater than the child dependency ratio. This means the obligation of care for the elderly is increasingly becoming the main burden for the working-age population. By 2050, the old-age dependency ratio in China will have risen to 49.9, which is 6 points higher than the average level of the OECD countries.

The decline in household size in China is occurring primarily because of the country’s demographic transition. The country’s average household size started to decrease in 1982 when strict family planning policies were launched. Since then, the average family size has continued to drop, from 4.4 in 1982 to 2.89 in 2015. Over the next 30 years, China’s average family size will decrease to 2.51 and the downtrend will be most dramatic in rural areas.

Correspondingly, there will be unprecedented growth in the number of elderly individuals living alone. The number of ‘empty-nest elderly’ suffering from insufficient care and companionship from family members is projected to increase from 17.5 million in 2010 to 53.1 million in 2050.

In general, there are two mechanisms through which population ageing is likely to affect economic growth in China. The first mechanism is the decreasing supply of labour. With a low overall fertility rate, the ever-expanding population of people over age 65 will continue to compress the growth of the working-age population. By 2050, the number of working-age people will fall by about 200 million.

While delaying the retirement age somewhat alleviates the problem of a shrinking labour supply, older workers are not perfect substitutes for younger workers and productivity per worker may decrease.

The second mechanism is the effect of ageing on savings and investment growth. A growing elderly population tends to reduce the savings rate as savings become the source of spending. As a result, it will be difficult for China to maintain high levels of domestic savings. A larger ageing population will also lead to an increase in government spending, especially on health care, pension security and other welfare benefits.

The resources available for productive investment will reduce, which will ultimately affect economic growth. Private consumption may also weaken. This might drive down aggregate demand and the incentive for businesses to invest.

The Chinese government will not only have to promote the reform and innovation of its social security system, but also address urgent issues such as building a long-term care system and providing medical security for ageing workers. It is also necessary to make full use of modern technology to improve the utilisation and efficiency of human resources and to cope with the challenge of a shrinking future labour supply.

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