China’s Aging Population Prepares for TomorrowVice Chairman of Marsh & McLennan
Ensuring people are prepared to thrive in the global workforce of the future is a top concern of most nations. Technology continues to rapidly shift skilled labor requirements, but social and demographic shifts are equally dramatic realities. The aging population raises the critical questions of continued workforce participation, retirement sufficiency and health care for this growing group. For China—the world’s most populous nation and second largest economy—the issue calls for vision and action, especially in the face of the latest data.
For example, by the year 2050, China’s older population—those over age 65—will likely swell to 330 million, or nearly three times as many as now. Complementing this statistical reality is another one: A recent report from the Chinese Academy of Social Sciences said the fertility rate in China is 1.4 children per woman, close to the global warning line of 1.3, the so-called “low fertility trap,” or the point at which no country has been known to return to population replacement level. This is an even more concerning number because most experts believe Chinese data on this issue to be highly conservative.
China’s older population—those over age 65—will likely swell to 330 million by 2050.
It’s no surprise then that only 6 percent of China’s workers expect to receive income support from their children when they retire, as might have been traditionally expected, according to a study on East Asia retirement by the Global Aging Institute. Meanwhile, the global shift toward defined contribution pension plans further places the problem of retirement income adequacy—or, to put it another way, financial independence—in the hands of individuals who are generally not well-equipped to manage the financial challenge just yet.
Indeed, the outcomes of tomorrow are absolutely determined by the actions taken today, although the answers are not simple. Nobel Laureate William Sharpe, a leading economist, in discussing retirement research—specifically, “decumulation,” or the conversion of pension assets accumulated during an employee’s working life into pension income to be spent during retirement—declared it “the hardest problem I’ve ever considered.” In China and other Asian nations, the focus is shifting from the accumulation of funds to the drawdown phase.
But that doesn’t mean there are no answers, and, in our increasingly interconnected world, we would do well to focus on the opportunities and solutions this presents. While there are few more significant issues in our lifetime than the aging population, I, for one, refuse to look at this as a “longevity catastrophe.” The fact that people are living longer is a positive thing, with upsides for consumer markets, and opportunities for older workers to contribute for longer, and in new and productive ways, to society.
In designing solutions, an important place to start is in looking at the nations and systems where this issue is being addressed with positive impact to business, society and individuals. For the past several years, Mercer has published the Melbourne Mercer Global Pension Index to provide a framework for comparing and rating retirement savings and income systems around the world.
The index has become influential with policymakers and industry professionals owing to the aging population phenomenon in most markets around the world. It is regarded as unique in its ability to examine such indicators as benefit scheme design, total assets under management, demographics, government debt and regulation, while weighing the impact of those and other factors on the adequacy, sustainability and integrity of each pension system.
Among the 25 countries examined in the 2015 Melbourne Mercer index, China—along with the four other Asia-Pacific nations studied: Japan, Korea, India, and Indonesia—has a pension system with some desirable features, but also major weaknesses that, if addressed, could better the situation. China’s system could be improved by:
- Offering more investment options to members and thereby permitting a greater exposure to growth assets
- Improving the level of communication and transparency required from pension plans to members
- Continuing to increase the coverage of workers in the pension system
- Introducing a requirement that part of the lump-sum retirement benefit must be taken as an income stream
- Increasing the state pension age (a state proposal to do so is now being discussed)
Clearly, there will be more income drawdown legislation in the coming years. It’s going to be interesting to see if, for example, traditional annuities will prevail, or if there will be more drawdown products that use the capital markets to hedge investment and longevity risk.
One capital-market approach is to bolster pensions with diversified income streams such as investment earnings and bonus payments. For example, longevity pools (pools of money to which plan members contribute payments) can yield bonus payments to surviving plan members based on how long they have been contributing to the pool. (These are features of Mercer’s LifetimePlus product, currently offered in Australia’s pension market.)
A critical takeaway from the Melbourne Mercer Global Pension Index and other analyses is that the pension systems in China and other nations facing similar aging-population challenges can only keep delivering if they are adjusted for the realities of longevity. Beyond some of the improvements recommended for China, that would include appropriate regulation as well as more diversified asset classes, minimum funding level requirements and increased workforce participation among older cohorts.
The challenges can seem daunting, but there is the opportunity, as well as the obligation, to meet the issues of longevity and retirement adequacy head-on. It requires what I call the “triple play” of government, companies and individuals to do all they can to encourage and ensure greater—and earlier—savings for retirement. The strategies are within reach, but there must be commitment on the part of all stakeholders in China and everywhere, so that our workforces can build their tomorrow today.