Ultra
Junior Member
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The benefits of age
China’s demographic transition will create opportunities as well as challenges. Population aging and the growing pile of pension funds are already forcing changes in the capital market and financial services sector. For example, Guangdong recently entrusted Rmb100 bn of its largely unmanaged provincial pension funds to the National Council for Social Security Fund, which may invest some of the capital in the stock market. Without well-functioning capital markets, savings cannot be put to productive use and may even lose their value. An aging society will require a more sophisticated investment sector, thereby presenting new opportunities for financial managers and investment services.
Another big growth area will be health care. Establishing better long-term insurance plans will be critical in a country with few young family members to care and provide for the old. Currently over 40% of all middle-aged Chinese couples have only one child, a figure that rises to two-thirds in cities. A sound social safety net needs to be put in place before the economy feels the full force of deteriorating demographics. That means extending and improving the fledgling national pension scheme, and creating a universal medical insurance program that is portable across regions.
Reforming the health care system is a daunting challenge. Over the past decade China made important strides to extend health care coverage across the population—yet serious challenges remain. For individuals, the two big issues are lack of access to decent treatment and paying for its often exorbitant cost. For the government, the major challenge is creating a fiscally sustainable public health care system. Funding remains a significant issue, but the system also suffers from the inefficiencies of bureaucratic control and price distortions, which set the cost of labor artificially low. As a consequence, hospitals routinely attempt to profit by over-prescribing medicine. Since elderly people account for the largest share of health care costs, getting these reforms right has important economic implications.
Preventing a train crash
Fiscal imperatives brought about by demographic changes are also set to change the political landscape. Over the next 20 years, the ratio of workers to retirees (presuming workers continue to retire at 60) will drop precipitously from roughly 5:1 today to just 2:1. Such a drastic change implies that the tax burden for each working-age person must rise by more than 150%, assuming that the government maintains its current level of tax income. During the past decade, tax receipts grew at twice the rate of GDP—but the happy days are set to end. In addition, mounting expenditure on social entitlements—especially pensions and health care—will put leaders in a difficult position. If the government demands that taxpayers pay more, the public will demand better scrutiny of how their dollars are collected and spent. The government will have no choice but to cut corruption and waste, and to deliver public services more efficiently. The alternative is a crisis of governance.
In many respects, China’s demographic transition is a reason for celebration: it reflects an unprecedented decline in mortality and enormous economic development. It has allowed women to slough off their traditional status as breeding machines and helped millions of students to gain a proper education. But the rapid decline in fertility rates has gone too far, and China will have to make major structural reforms to offset the impact. After years of demographically powered high-speed growth, the Chinese bullet train is racing towards a demographic precipice. The challenge for policy makers is to prevent it from careering over the edge.
The benefits of age
China’s demographic transition will create opportunities as well as challenges. Population aging and the growing pile of pension funds are already forcing changes in the capital market and financial services sector. For example, Guangdong recently entrusted Rmb100 bn of its largely unmanaged provincial pension funds to the National Council for Social Security Fund, which may invest some of the capital in the stock market. Without well-functioning capital markets, savings cannot be put to productive use and may even lose their value. An aging society will require a more sophisticated investment sector, thereby presenting new opportunities for financial managers and investment services.
Another big growth area will be health care. Establishing better long-term insurance plans will be critical in a country with few young family members to care and provide for the old. Currently over 40% of all middle-aged Chinese couples have only one child, a figure that rises to two-thirds in cities. A sound social safety net needs to be put in place before the economy feels the full force of deteriorating demographics. That means extending and improving the fledgling national pension scheme, and creating a universal medical insurance program that is portable across regions.
Reforming the health care system is a daunting challenge. Over the past decade China made important strides to extend health care coverage across the population—yet serious challenges remain. For individuals, the two big issues are lack of access to decent treatment and paying for its often exorbitant cost. For the government, the major challenge is creating a fiscally sustainable public health care system. Funding remains a significant issue, but the system also suffers from the inefficiencies of bureaucratic control and price distortions, which set the cost of labor artificially low. As a consequence, hospitals routinely attempt to profit by over-prescribing medicine. Since elderly people account for the largest share of health care costs, getting these reforms right has important economic implications.
Preventing a train crash
Fiscal imperatives brought about by demographic changes are also set to change the political landscape. Over the next 20 years, the ratio of workers to retirees (presuming workers continue to retire at 60) will drop precipitously from roughly 5:1 today to just 2:1. Such a drastic change implies that the tax burden for each working-age person must rise by more than 150%, assuming that the government maintains its current level of tax income. During the past decade, tax receipts grew at twice the rate of GDP—but the happy days are set to end. In addition, mounting expenditure on social entitlements—especially pensions and health care—will put leaders in a difficult position. If the government demands that taxpayers pay more, the public will demand better scrutiny of how their dollars are collected and spent. The government will have no choice but to cut corruption and waste, and to deliver public services more efficiently. The alternative is a crisis of governance.
In many respects, China’s demographic transition is a reason for celebration: it reflects an unprecedented decline in mortality and enormous economic development. It has allowed women to slough off their traditional status as breeding machines and helped millions of students to gain a proper education. But the rapid decline in fertility rates has gone too far, and China will have to make major structural reforms to offset the impact. After years of demographically powered high-speed growth, the Chinese bullet train is racing towards a demographic precipice. The challenge for policy makers is to prevent it from careering over the edge.
