May 28, 2016
It is amazing how often we hear that China is experiencing some sort of crisis because of its aging population. This is supposed to lead to a situation in which it won’t have enough workers to support an aging population.
If folks have been following events in China recently its big problem is too few jobs and unemployment. It has closed a number of coal mines in recent years, leading to the loss of tens or even hundreds of thousands of jobs in the coal mining industry. Currently, it is hugely subsidizing its steel exports to keep its steel factories running. Without these subsidies, hundreds of thousands of workers could lose their jobs. There are comparable stories in many other industries.
So China’s big problem for the foreseeable future is going to be too many workers, that is 180 degrees at odds with the too few workers story that the demographic crisis people keep pitching, as in this Reuters article that appeared in the NYT today. This piece includes the ominous warning:
“For the first time in decades China’s working age population fell in 2012 and the world’s most populous nation could be the first country in the world to get old before it gets rich.”
Actually, China is pretty close to getting rich. If the I.M.F.’s projections prove correct, then it will be as wealthy as countries like Portugal and Greece by the end of the next decade. (This assumes that the per capita growth rate over the rest of the decade is the same as is projected from 2019–2021.) In an international context, that would count as “rich,” and in any case many countries with lower per capita incomes already have high ratios of retirees to workers. Given its extraordinarily rapid growth over the last three and half decades China is far better positioned to care for its population of retirees than almost any other country in the developing world.
Addendum: Numbers for Arithmetic Fans
In response to requests from Twitterland, I will show the simple arithmetic of why China need not be worried about its declining ratio of workers to retirees. This is highly stylized, but it should make the basic point.
Suppose that China starts out with five workers per retiree, each with a wage before payments for retirees of 100. Let’s assume that the living standard of retirees requires that them to have 80 percent of the income of an average worker. In this story, we would need a tax rate of 13.8 percentage points on wages to maintain this living standard for retirees. This makes the wage net of payments to support the retired population equal to 86.2.
Now suppose that over two decades the population ages so that the ratio of workers to retirees is just two to one. However, suppose over this two decade period productivity growth (output per worker hour) averages 5.0 percent annually. If we first calculate the tax rate needed to maintain a living standard for retirees, it is now 28.6 percent, leaving our worker with 71.4 percent of their pre-tax wage.
But as a result of 5.0 percent annual productivity growth, the before tax wage will 265.3 percent of its level from twenty years earlier. This means that the pay net of the tax to support retirees would 189.3 percent of the average before tax wage from twenty years earlier. If we compare after-tax wages for the two periods, the after-tax wage in the second period would be 219.6 percent of the after-tax wage in the first period. The living standards of retirees would also be correspondingly higher. So what’s the problem?
This example is obviously highly stylized, but the assumptions used are almost certainly more negative than the reality. The demographic transition is taken place over 3–4 decades, not the two decades I have assumed here. Also, productivity growth has average 7–8 percent, not the 5.0 percent I assumed in these calculations. In short, China should have no problem supporting its retirees at a far higher standard of living than they enjoyed during most of their working lifetimes even as workers also see rising standards of living.
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