Sara Hsu
Sara Hsu

A fast aging work force is one of the setbacks of China´s one-child policy. China has now relaxed that regulation, but that might not be enough to deal with the negative effects, writes analyst Sara Hsu in Triple Crisis.

Sara Hsu:

Brutal in practice, the One-Child policy has left a lasting impression. Even though many families are now allowed to have another child, they have been loath to do so, as couples adjusted to smaller families, higher levels of consumption, and urban living. The cost of living has risen dramatically in many urban areas, making it difficult to raise a larger family.

As a result, China faces an aging population, with fewer working adults supporting the elder generations. The demographic dividend became a demographic handicap, as the working-age population peaked in 2011 and began to decline in 2012. This generates less GDP and puts strain on social spending which counts on more sluggish tax revenue. In addition, the outlook for family businesses has declined as fewer children are willing and able to take them over from their parents. Scholarly research has also shown that only children in China are more risk averse, and less likely to start their own businesses.

The aging population, an issue in Japan, the United States, Europe, and Russia, is a problem for a country like China that has an underdeveloped social safety net and slowing growth. While more developed nations have well-funded social insurance programs and structurally advanced economies, China does not. Despite the fact that the Social Insurance Law of 2011 required coverage of all employees, it has been laxly enforced. As a result, under one-third of China’s workforce had a basic pension in 2013, and others must rely on savings or adult children for support. This social burden is unlikely to ease up as growth slows. China is in dire need of innovation and entrepreneurial energy to revamp itself into a services-based economy and expand growth, but under current circumstances, a shrinking working age population ratio constrains labor resources. Under these conditions, it is possible that structural reform toward a more advanced, service-based economy will be stalled.

Policy must work to ease some of these challenges. One policy solution may be improving immigration law to allow for increased permanent residence in China and creation of immigration strategies. Currently, China’s immigration law is immature and the nation faces irregular migration and few means to promote regular migration. This can be used to increase the working-age population. Another solution may be to increase the upper limit of the retirement age, so that individuals remain in the workforce longer and draw pensions at a later age. To this end, some changes are in the works as pressure on pension funds rise.

Solutions to China’s demographic dilemma need to minimize fiscal stress, which is already great in the face of increasing social safeguards. This means that an excess burden would be caused by policies that, for example, subsidize families to have more children, as countries like France have carried out. Policies that place minimal financial stress on the state make sense in terms of where China is structurally and demographically. While one should not place the burden of retirement savings on individuals alone, it would behoove the government to allow for private alternative types of saving that yield higher returns, so that retirees may have a savings pool that supplements meager pensions.

More in Triple Crisis.

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