Li Zhong, who sells traditional Chinese medicine and is 58 years old, won’t worry about his pension when he retires in two years. He’s scared about his daughter.
He got a mortgage not long ago to help her buy a house in a suburb of Shanghai. China’s housing bubble burst in 2021, and now prices are the lowest they’ve been in years. This is a great time to buy, but it’s terrible for people who bought years ago, and it’s a huge drag on the economy.
Statistics from the government show that about 70% of Chinese households’ wealth is locked up in property.
Li’s real estate investments could lose even more value if home prices fall even more, but he’s not worried about his short-term savings. Concerns about the future of China’s pension system are on his mind. The system is in a tough spot that not many experts can see a way out of.
The country’s economic problems are putting a strain on those funds. The International Monetary Fund says these problems will likely get worse over the next few years.
At the same time, China is getting close to a demographic time bomb very quickly. The country has one of the lowest birth rates in the world, and people are getting older and fewer. People no longer expect China to “get rich before it gets old.”
China’s pension system was once a robust government-only program. But, under strain, it has splintered.
When people talk about this problem, Japan is often used as an example. But in China, the crisis affects 10 times as many people.
In China, about 300 million people are expected to retire over the next ten years. This will put a huge amount of stress on the younger generation, which already has millions of young people who are overworked, disappointed, and burned out.
The Chinese Academy of Social Sciences, which is China’s top government think tank, says that the basic pension fund for city workers will run out of money by 2035.
China used to have a strong pension system that was only run by the government. But because of stress, it has broken into three parts: a government fund that everyone must use, a company-based enterprise system, and private plans that people can choose to join or not.
People are less likely to sign up for the optional programmes because China’s economy is weakening.
The government says that by the end of 2023, more than 50 million private pension accounts had been opened, but only 20% had contributions. The average amount of money put into each account was about 2,000 yuan ($275).
Beijing was looking into ways to save the company, such as raising the retirement age. Currently, the retirement age is 50 for women workers, 55 for female managers and executives, and 60 for men workers. This is one of the youngest retirement ages in the world. But there has been strong opposition in a country where such opposition is rare.
Zhou Xiaochuan, who used to be governor of the central bank, recently said that these kinds of extensions could hurt the incomes of older people and make workers less productive. South Korea and Japan show that even if it is done, it takes more than ten years because of things like the lack of workers, differences in income between generations, and the vague effects of an ageing population.
China is no longer expected to ‘get rich before it gets old.’
Since the end of the pandemic, Beijing has made it even more well-known for being a light stimulus giver. When it does choose to use this strategy, it almost always focuses on supply-side areas like infrastructure. It hasn’t done enough to help households directly or to speed up the long-awaited rise of China’s potentially huge consumer class, which Beijing hopes will lead the country’s economic recovery.
“In the long run, strengthening the pension system would definitely lead to more spending, but in the short term, it wouldn’t have much of an effect.” “That’s because a stronger pension system would need to be tested over many years before it was believed enough to change how people spend their money,” senior fellow at the Carnegie Endowment Michael Pettis told MarketWatch from Beijing. “But if China gave more money to retirees in the form of pensions, that would make people spend more now.”
Chief China Economist and Head of Asia Economics at UBS Investment Research Wang Tao agreed with MarketWatch that the government should give people money to spend in order to get people to spend more.
Taking these steps could make people feel better about the future, which would make them save less and spend more, he said.
