Population Aging, Retirement Income Security, and Asset Markets in China.

AuthorFang, Hanming

Among the many challenges facing the Chinese economy, population aging is no doubt one of the most important. The old-age dependency ratio in China increased from 10 percent in 2000 to 13 percent in 2015, and is expected to increase to 44 percent by 2050 [Figure 1]. Both increasing life expectancy and declining fertility contributed to China's rapid population aging. Family planning policies, including but not restricted to the one-child policy, have led to a rapid decline in total fertility, from 5.7 in 1969 to 2.7 in 1978, when the one-child policy started, to about 1.6 currently [Figure 2, on the next page]. According to World Bank data, the average life expectancy at birth in China has steadily increased from 57.6 years in 1969 to 65.9 in 1978 to 76.4 in 2017.

Population aging has important implications for China's social insurance programs, retirement income security, and asset markets, including the housing market. In a series of papers, my coauthors and I have studied the impact of population aging in China from a variety of angles.

What is the current status of the Chinese pension system? To the extent that it is inadequate, what are the roles of alternative financial products such as reverse mortgages in providing retirement income for the elderly? What are the consequences of family planning policies on the physical and emotional well-being of the elderly? What are the impacts of population aging on asset markets? What are the likely impediments to and distributional consequences of policies that increase the retirement age?

It should be noted at the outset that population aging is a challenge that almost all industrialized nations face. The elderly face an amalgam of risks about income, health expenditure, long-term care expenditure, and mortality, and at the same time have more-limited income sources than their younger counterparts. In developed economies, the elderly rely on a mixture of self-savings, social insurance programs, and private insurance products to cope with these risks. (1) The population-aging challenge China faces is particularly acute for several reasons. First, the trend is accelerated by China's family planning policies since the early 1970s; second, the current social insurance system in China tends to have low and unequal benefit levels; and third, the private insurance markets for the risks the elderly face are not yet well developed.

Family Planning Policies and the Life of the Chinese Elderly

Family planning policies introduced in the early 1970s in China contributed to the population-aging challenges China faces today. It is therefore important to examine how these policies have reshaped the quality of life, including the physical and mental well-being of the Chinese elderly. (2) In an effort to curb population growth, China implemented its one child per couple policy nationwide from 1979 to 2015; somewhat less known, however, was the "Later, Longer, Fewer" (LLF) campaign also initiated in the early 1970s. In fact, it was the LLF campaign that started the rapid decline of China's total fertility rate from 5.7 in 1969 to 2.7 in 1978 [Figure 2]. (3)

LLF campaigns offer a valuable opportunity to study how family planning policies affect the life of the Chinese elderly for three reasons. First, in contrast to the one-child policy, the rollout of LLF varied across provinces. Second, LLF policies during the 1970s explain about half of the decline in the fertility rate but, in contrast to the one-child policy, they did not result in an increase in the sex ratio [Figure 2]. Third, the first cohorts affected by LLF are now entering their 60s. Yi Chen and I identify the causal effect of LLF policies from two types of province-level variations. The first is different years for the establishment of Provincial Family Planning Leading Groups, which were in charge of LLF implementation at the provincial level. The second is different profiles of the age-specific fertility rate in 1969 prior to the enforcement of any effective family planning policy.

How family planning affects the quality of life in old age in China is ambiguous. While children historically play critical roles in providing old-age support, the reduction in the number of children does not necessarily reduce the quality of life for seniors, for three reasons. First, having fewer children spares resources that could be redirected to parents themselves. Second, parents can potentially turn to other measures of old-age support--for example, more savings--to substitute for having fewer children. Third, a quantity-quality tradeoff may result in higher transfers from fewer children.

We use data from the China Health and Retirement Longitudinal Study (CHARLS) to examine the long-term consequences of China's family planning policy on a set of outcomes including support from children...

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