A leading Chinese economist has outlined a raft of potential measures to deal with the impacts of its ageing population upon economic growth, after China just posted its first year of demographic contraction in over four decades. In addition to improvements to the aged care and education systems, an increase to levels of foreign immigration could also be on the cards.
Yin Yanlin (尹艳林 ), member of the 14th National Committee of the Chinese People’s Political Consultative Conference (CPPCC) and deputy director of the Office of the Central Committee for Financial and Economic Affairs, wrote in a recent opinion piece that China’s ageing demographic structure is an inevitability and will create a range of challenges for China’s economy.
“In 2022, China’s total population experienced negative growth for the first time since the beginning of the reform and opening-up period, and the total population has peaked,” Yin writes.
“There are three factors affecting economic growth: the labor force, capital and total factor productivity. In the short term, it can be assumed that total factor productivity will remain unchanged, while economic growth largely depends on labor force and capital input. For this reason, negative population growth will have a direct impact on the economy.”
According to Yin, the negative growth of the population will have various negative impacts on China’s economy, including a downtrend in the potential economic growth rate and greater dependence on investment, which has long hovered at an unusually high percentage of Chinese GDP.
The ageing of the Chinese population will also create the potential for China to “grow old before becoming rich,” putting far greater pressure on the basic pension and medical insurance system.
The negative economic impacts of China’s ageing population
Yin said the ageing of China’s population will have several profoundly adverse impacts upon its economy in years to come.
1. The downward trend in the potential growth rate of the economy will become exacerbate. After entering a state of negative population growth, the supply of labor in China will decline. The seventh national census data shows that in 2020, the total size of the working-age population aged 16-59 was 880 million, for a decrease of more than 40 million compared with 2010. “It is estimated that from 2022 to 2035, the average annual decrease in China’s working-age population will reach 0.83%, which will reduce the potential growth rate. This in turn will be reflected in terms of actual economic performance, labor shortages and rising wage costs.”
2. Economic growth will become more dependent upon investment. In order to maintain stable economic growth and offset the impact of slowing or even decreasing labor force growth, China’s economy will rely even more on investment expansion. When capital investment grows faster than labor input, however, the return on investment will decline. At the same time, negative population growth will also directly affect domestic demand, especially the growth of consumer demand. “When the total population is large, the basic consumption is also high,” Yin writes. “Once the total population decreases, the corresponding basic consumption level will also decrease or its growth rate will slow down. Therefore, the exercise of China’s super-large-scale market advantages will also be affected.”
3. Pressure on the basic pension and medical insurance systems is increasing. The pension insurance funds of a number of provincial-level administrative regions have already “bottomed out” – a problem which Yin expects to worsen. Yin warns that China cannot ignore growth in medical insurance fund expenditures that are in excess revenues, while the accelerated increase in the dependency ratio of the population will weaken the sustainability of the basic pension and medical security systems. “Because China’s basic pension insurance and medical insurance systems are “pay-as-you-go” systems – meaning that the payment and expenditures of social insurance are completed simultaneously in a given period, the sustainability of the system will come under pressure as the number of people drawing pensions increase and the number of people making payments declines.”
China must increase innovation and productivity to deal with ageing population
Yin points out that the impact of population ageing is deepening, which means China could soon face the dilemmas of “growing old before growing rich” as well as “growing old without preparation.”
“In 2021, the average per capita GDP of high-income countries was US$47,887 while China’s per capita GDP was US$12,500 – still only 26.1% of the former.”
For this reason, transforming China’s model for economic development has become an urgent priority for top policymakers, and heightened the need for productivity improvements.
“With the decreasing labor force and the decline in the rate of return on investment, China will need to depend primarily upon the improvement to total factor productivity to drive economic development,” Yin writes.
“Data from the seventh national census show that in 2020, the average number of years of education received by people aged 15 and over in China was 9.91 years, an increase of 0.83 years compared to 2010,”
“With the improvement of the quality of the population, the demographic dividend will gradually transform into a talent dividend, and the advantages of population resources will be effectively brought into play.”
Yin also highlighted the need to accelerate the implementation of an “innovation-driven development strategy;” accelerate the realization of high-level scientific and technological self-reliance, strengthen basic research, and improve the efficiency of scientific and technological investment.
“At present, China’s social research and experimental development (R&D) investment scale ranks second in the world,” Yin writes.
“The next key is to stimulate the vitality of innovation and continuously open up new fields and new tracks for development.”
Specific policies for dealing with China’s ageing population
Following research into the experiences of advanced economies, Yin has assembled a range of policy recommendations for dealing with what he refers to as an “unavoidable” contraction in China’s population.
1. The establishment of a fertility support policy system. Yin highlighted the necessity of reducing the cost of childbearing, childcare and education, while improving and implementing active childbearing support measures. “Starting with encouraging childbirth, efforts will be made to solve the practical difficulties faced by women of childbearing age when it comes to childbearing, such as employment and childcare. We should explore the establishment of systems such as women’s paid parental leave, family allowances, and tax relief, and promote the inclusion of childcare services and preschool education in the scope of basic public services. We should develop an inclusive childcare service system and support, encourage and guide social forces to set up inclusive childcare institutions.”
2. Delays to the retirement age and improvements to the pension system. Yin points out that the report of the 20th National Congress of the Communist Party of China has proposed the implementation of a gradual extension of the statutory retirement age, while the Ministry of Human Resources and Social Security recently stated that because the current retirement age in China is comparatively low, it is studying a specific reform plan for deferring the retirement age. With regard to retirement age deferral policy, on 13 March, Premier Li Qiang said that Chinese policymakers “will study it carefully, fully demonstrate it, and roll it out at an appropriate time.”
3. Accelerating the formation of human capital advantages. Yin called for “replacing labour quantity with quality” by means of the in-depth implementation of education promotion initiatives to optimize the allocation of regional educational resources, improve the average education level of workers and build a workforce of knowledge-based, skilled and innovative workers. At the same time, China can improve the lifelong vocational skills training system, strengthen on-the-job education and training for older workers, and promote older workers to return to the job market.
4. Accelerating the development of a modernised aged care service industry. Yin said that China should further drive the development of the aged care sector, expand inclusive aged care service, build an aged care service system that coordinates homes and community institutions and strengthens health services and management for the elderly. He called for researching the development of a policy system that supports the development of a “silver-haired economy,” as well as improving policies for the elderly to voluntarily migrate and settle with their children, and ensuring that the elderly enjoy basic public services in the place of relocation.
5. Improving the aged care welfare system. China’s improvements to the nationwide planning for basic endowment insurance should include the development of a multi-tier, multi-pillar endowment insurance system. “We should expand social insurance coverage, improve endowment insurance financing and benefit adjustment mechanisms, and gradually reduce the basic endowment insurance benefit gap between systems and groups,” Yin writes. “We should standardize the development of the third pillar of endowment insurance, and promote the development of individual pensions.”
6. Improving the medical welfare system. Yin called for promoting the province-level coordination of basic medical insurance and work-related injury insurance, improving basic medical insurance financing and treatment adjustment mechanisms, and enhancing the sustainability of the system. “We should promote organic integration between the medical assistance system, the basic medical insurance system, and the critical illness insurance system; improve the critical illness insurance and medical assistance systems, and improve the accuracy of critical illness insurance payments to elderly people in need.” China could also improve the direct settlement policy for medical treatment for elderly people in different locations.
7. The establishment of a long-term care insurance system. Yin called for reviewing and then adapting the results of long-term care insurance pilot schemes, and the subsequent establishment of a unified long-term care insurance system covering both urban and rural areas. “We should establish a comprehensive subsidy system for disabled elderly and elderly people who are economically disadvantaged, and do an effective job of linking up with the pilot initiatives of nursing subsidies for the severely disabled and long-term care insurance,” Yin writes. “We should encourage the development of commercial long-term care insurance and establish a multi-tier and sustainable long-term care insurance system.”
8. Effective utilisation of overseas human resources. In order to remedy labour shortages – especially in high-end sectors, Yin called for the development of immigration policies to attract overseas talent to immigrate to China. This would include high-level managers for the industrial sector, skilled talent in high demand areas, international students, entrepreneurs and investors. “This is a very important area in the experience of other countries, and China needs to explore it further,” Yin writes.