Aging may spur pension, wealth and fund products, and help optimize human capital

Liu Meng (right), a caregiver, cleans the feet of an elderly person at a nursing home in Xiangtan, Hunan province, on May 17. People aged 65 and above constituted 14.2 percent, or more than 200 million, of China's 1.413 billion population at the end of 2021. (CHEN ZEGUO / XINHUA)

A demographic conundrum has been baffling economists in China of late. On the one hand, life expectancy has increased. On the other, aging is raising the specter of labor shortage when the economy is trying to shake off the COVID impact as well as myriad other domestic and overseas headwinds in order to stabilize growth, and pursue consumption upgrade and high-quality development.

To ensure aging and "deep aging"-that is, 14 percent of the population being aged 65 or older-do not hurt growth but aid it, experts are focusing on turning adversity into opportunity.

Market competition in China is expected to intensify with the introduction of the personal pension scheme as wealth management firms, insurers and mutual funds will strive to provide more products.

Wang Hongying, head of the Institute of Financial Derivatives of China

Thus, the multibillion dollar potential in pension and wealth management products for the elderly is being sought to be harnessed, raising hopes this will eventually lead to innovative utilization of resources, including human resources, and support long-term economic growth.

This narrative started gaining traction since July 12 when the National Health Commission announced that the average life expectancy in China rose from 77.93 years in 2020 to 78.2 years in 2021.

From a general perspective, rising life expectancy bears testimony to improving medical services, food safety, life quality and proliferation of physical exercises.

China now ranks higher among upper-middle-income countries in terms of key health indicators, said Mao Qun'an, director of the commission's department of planning and information. In China, however, longer life expectancy coincides with aging and deep aging.

Data released by the National Bureau of Statistics in late January showed that people aged 60 and older accounted for 18.9 percent, or around 267 million, of China's population (1.413 billion at the end of 2021). Those aged 65 and above constituted 14.2 percent, or more than 200 million, of the population by the end of last year.

China also seems to have entered the societal deep aging phase much earlier. When the United States reached the tipping point of deep aging in 2015, its GDP per capita was above $56,000. In Japan, the GDP per capita was around $35,000 when the country faced deep aging in 1993.But China's GDP per capita was sharply lower at $12,551 last year.

In experts' consensus view, the immediate impact of the rapidly aging Chinese society will be labor shortage. The NBS said there were 882.2 million working age population in China last year. But, Zhu Qin, professor from the School of Social Development and Public Policy at Fudan University, estimated that figure will shrink to 743 million in 2035, further contracting to 666 million in 2050.

Worse, the demographic dividend, which helped China's economic growth to gallop over the past four decades, is waning.

Women take a dance class at a community center for retirees in Tianjin on Aug 30. Elderly Chinese have shown a strong demand of late for top-quality post-retirement life. (LI RAN / XINHUA)

So, experts are certain China's aging population will drag down GDP growth rate if nothing is done to offset the effect. Citing global experiences, Yuan Yue, a researcher at Perseverance Asset Management, said that a 1 percentage point rise in the number of people aged 65 and above will translate into a 0.13 percentage point decline in annual GDP growth rate.

China's GDP growth rate, therefore, will likely be pulled down by 0.39 percentage point every year in the next 10 years, given the country's current aging speed, which will exert pressure in terms of elderly care and accentuate the current pension shortage, Yuan said.

Basic pension provided to retirees, considered the first pillar of China's multilayered pension system, has been rising in China for 18 consecutive years, with the growth rate coming in at 4 percent this year. But the related shortage was already as much as 700 billion yuan ($104 billion) last year. The Insurance Association of China estimated the shortage will surge to a staggering 10 trillion yuan in the next 10 years.

In China, the government, the employer and the employee all contribute toward basic pension. Both the employer and the employee submit pension insurance during the employee's working years as per a mandatory ratio set by the government.

But this triangular structure, which was once regarded as strong, has come in for intense scrutiny of late. The Social Insurance Law of the People's Republic of China states that the government fiscal expenditure should fill in the gap when the basic pension is insufficiently paid.

The situation is complicated by employers' lowering of the rate of pension insurance they pay out, after the central government allowed them to do so to lighten their financial burden, in light of China's economic slowdown in the past few years.

As a result, a new regulation introduced in April 2019 stated that the pension contribution rate of employers in China will be reduced from 20 percent to 16 percent of the overall wage bill while employees will pay 8 percent of the salary toward pension insurance. The shortfall burden is transferred to the government or the fiscal budget.

Annuity, or occupational benefits insurance, serves as the second pillar of China's pension system, a practice similar to the one in many other countries. But, according to Sun Jie, deputy head of the School of Insurance and Economics at the University of International Business and Economics in Beijing, the so-called second pillar still develops at a slower-than-expected pace, and covers only a very small portion of the total workforce.

Elderly customers wait for their turn at a branch of Shanghai Pudong Development Bank in Shanghai in June. Elderly people's investments in financial products are up. (LIU XIN / FOR CHINA DAILY)

Data from the Ministry of Human Resources and Social Security showed that by the end of 2021, annuity plans were launched at 117,500 employers, up nearly 12 percent year-on-year. However, that was still on a small scale compared to the 48.42 million registered companies by the end of last year. Meanwhile, 28.75 million employees, or just 3.9 percent of all the working population, joined the annuity plans.

Therefore, the State Council, China's Cabinet, announced in mid-April the launch of a personal pension scheme framework in China. In market parlance, this is the "third pillar".Funds held in the personal pension account, which is part of the scheme, are allowed to be invested in banks' wealth management products, deposits, commercial pension insurance and mutual funds.

Independent financial analyst Guo Shiliang said he believes the personal pension account is similar to the 401(k) plan in the US, which is an employer-sponsored, defined-contribution personal pension account.

The 401(k) plan offers clear and reasonable investment choices with which the capital under personal pension accounts can be diversely invested. It has resulted in the higher participation in the 401(k) plan, said En Xuehai, group chief investment officer of asset allocation and retirement fund investment at China International Fund Management Co Ltd.

Xie Jiu, a prominent financial writer, said the development of the second and third pillars is crucial to the wholesomeness and sustainability of China's pension market, 83 percent of which is still dominated by basic pension or the first pillar. In contrast, the contribution of the second and third pillars to the US pension market tops 90 percent, indicating the US government is responsible for only very fundamental support.

"Market competition in China is expected to intensify with the introduction of the personal pension scheme as wealth management firms, insurers and mutual funds will strive to provide more products," said Wang Hongying, head of the Institute of Financial Derivatives of China.

"The participation of institutions will make the investment under the personal pension accounts more diversified and stable. And only in this way can personal pension see its value significantly appreciate," he said.

As for the feared labor shortage, Yuan of Perseverance Asset Management said China still has room to stimulate the overall potential in the labor force. First of all, the surplus labor in the agricultural sector can be transferred to the nonagricultural sector. The participation rate of the senior group aged between 50 and 65 in the labor force can also be further elevated, he suggested.

More importantly, the education level of the labor force in China should be further improved, said Yuan. "The major drivers of long-term economic growth are the optimized allocation of various resources and the improved production efficiency. China's labor potential will mainly come from the improvement in labor quality and the more effective allocation of labor resources among industries. In other words, quality-based labor potential, rather than the demographic dividend derived from sheer quantity, will be more important."