Growth Challenges

未富先老 Getting Old Before Getting Rich – China is not alone

The notion of ‘Getting old before getting rich’ in a China context refers to the combination of incomplete industrialisation, and millions of citizens still in poverty, arising when a relatively high proportion – nearly 10% of persons – are aged over 65. The latter places them forever outside of the formal workforce, lowering the proportion of available productive formal workers while also straining the fiscal envelope. 

In China’s case, the median age of the population is now 34 years old. By 2050 half of the population will be over 50, assuming a fertility rate of 1.6. An ‘ageing’ population is commonly defined by such measures as the ratio of elderly to children, the age median, and the proportion of elderly in the overall population. According to all related thresholds, China is now considered an ageing society. 

In the 1980s a researcher at Beijing’s Renmin University recognised that China, unlike neighbours Japan and South Korea and Western economies, would be an ‘ageing’ economy long before reaching the goal of high-income country status. And he was right – when about 25% of the population are aged 60 years and above, their level of per capita income will be, at best, only a third of the level of OECD ageing countries.

Aside from fiscal pressures, additional consequences will include caring pressures. According to The Economist homes for elderly people in China care for only about 1% of over-65s, a much smaller proportion than in the West. Added to China’s dwindling population of young, itself related to national population growth restrictive policies, creates what is typically referred to as the ‘4-2-1’ problem. That is, and given increasing longevity, a typical child of today being responsible for the caring of four grandparents and two parents in future.

Managing the consequences of ageing in line with short and long-term national needs, China’s government is experimenting with a series of social security policies. These include adjusting the pension system and expanding health care insurance. The scale of the challenges however mean that even these risk being fiscally unsustainable long-term. The Economist cites a UBS figure that under the current pension system the government could face liabilities up to 6% of GDP annually for decades forth. Solutions such as increasing the retirement age in line with recent gains in life expectancy are deeply unpopular.

To ensure China’s old are able to stay healthy affordably the government is also setting out a plan for comprehensive reforms that will lead to China having a widespread basic health-care system by 2020. Establishing these systems without transferring the financial burden onto future generations is a challenge. Persistent growth rates above the the international average may help.

In contrast, not only is growth now sluggish in the West, where wealth came before ageing, pension and healthcare obligations are vastly greater. It might even be that getting rich before old is a different and more powerful long-term political economy and macroeconomic challenge than its reverse. What happens when your old have the expectations of rich youth, and the legal entitlement to back up their expectations? A recent report by the Intergenerational Foundation of the UK has labelled the extraordinary public expenditure promises that are to be delivered to even the most wealthy ageing sections of society as ‘fiscal abuse’. The World Economic Forum’s (WEF) 2011 Global Risks Report estimated that the undisclosed cost of age-related spending in the UK is roughly 3.5 times the size of the UK economy – around GBP5trn.

According to the report, “Whilst government borrowing and pension debt have increased steadily, there has also been an increased shift in favour of the older generation through higher charges for education, rising youth unemployment and high housing costs”. The Foundation’s Intergenerational Fairness Index furthermore uses a methodology to capture comparative wealth distribution between poorer generations. The index uses a weighting of indicators including housing, government debt, pension obligations, and the environment. They findings suggest that young people are financing much richer old people, at a time when society is grappling with how to manage increasing longevity and in the face of a less flexible fiscal purse.

Indeed, not only is the gap large, but the rate of increase of the gap is also increasing – from an average of just 2% between 2000 and 2008, to 6-7% since 2008. According to the index, the intergenerational gap grew by 28% over the decade to 2010, owing to youth unemployment, housing costs, stagnant salaries and substantial increases to the costs of education. Finally, the cost of housing against average salaries for those in their 20s was six times annual salary in 2000, but had reached ten times average salary by 2010. The number of new homes being built has meantime all but stagnated. An addition point relates to the fact that the indices uses retrospective data rather than is a forecasting instrument. Looking forward to Asia’s rising competitiveness in areas of science and innovation, it may even be expected that the inequality indices to rise increasingly rapidly.

And it is not just in the UK that these trends are arising. The WEF’s report cites Daniel Hofmann, Chief Economist for Zurich Financial Services, as stating: “Under a proper accounting framework, most advanced economies would be fiscally insolvent.. in the absence of far-reaching structural corrections, there will be a high risk of sovereign defaults”. With America’s national debt about as large as its entire GDP, there is little room to bail out bankrupt councils, like Scranton, Pennsylvania, which declared itself bankrupt earlier this year. 

It seems that policy makers in China and in the West have their hands very differently full in addressing challenges around the idea of Getting Old Before Getting Rich. In China’s case this is a broader cross-generational development issue. In the West rather, it is a between generations issue, with many young finding their own private accumulation of wealth all but halted by the shadow of the consolidated wealth of a dominant older demographic. As the fiscal and company promises made to the same generation are honoured over time, public services and private sector opportunities will also become more scarce.

A fairer distribution between generations is made difficult by not only the ageing demographic’s size, but their relative tendency to vote giving them an extra large impact on politics. As Central Bankers all the while look for new tools with which to kick-start laggard economies, it might rather be that, in the presence of lumpy demography and voluntary voting that policies of intergenerational easing, as much as quantitative easing, may instigate a structurally shift in the marginal ability to consume, changing the marginal propensity to consume, and thus lifting aggregate demand.

In Chinese there is a saying that wealth does not pass three generations (富过三代). In the coming decades it may end up that workers will take home wages less than the pensions their work is paying out, while their taxes similarly pay off the bailed out bets of bankers rather than the basic community services enjoyed by earlier generations. For the younger demographies of the West, caring for Asia’s old on behalf of Asia’s middle-aged rich may come to be a lucrative career choice, as it has been for the poor of developing economies for generations.

 

References:

China’s Predicament, Getting Old Before Getting Rich, The Economist, 2009, http://www.economist.com/node/13888069

China Risks Getting Old Before it Gets Rich, Reuters, 2011, http://www.reuters.com/article/2011/04/27/us-china-demography-idUSTRE73Q1SC20110427

Global Risks Report 2011, World Economic Forum, www.weforum.org/reports/global-risks-resport-2011.


Lauren has worked in economic policy and research at the World Bank, World Economic Forum, EIU and for the governments of Sierra Leone and Guyana. She has learned Chinese since 1995, and lived in Beijing for almost six years, on and off since 1997. Lauren has a PhD in Economics from Peking University, an MSc in Development Economics from the School of Oriental and African Studies (SOAS) and a B.A/B.Com from the University of Melbourne.

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