Raising retirement age

Raising the retirement age has been on the reform agenda in many industrialized countries during the last years. It was taken as an effective policy solution to the problems of pension adequacy and fiscal sustainability. It is argued that if governments succeeded in raising the average retirement age by 2 or 3 years, they would be able to finance most of the costs of population aging (OECD 2001; von Nordheim 2004). Furthermore, Gruber and David (2005) calculated that Raising retirement ages in existing social security systems by three years would generate savings of over 40 percent in the United Kingdom, about 30 percent in the United States, and slightly over 15 percent in Italy. It is also pointed out that a higher retirement age would allow citizens to achieve higher pension benefits for a higher living standard after their retirement58. In case of China, based on the calculation of MOLSS, an increase in the retirement age for one year will increase the revenue of the basic pension fund for 4 billion Yuan (550 million USD), reduce the expenditure for 16 billion (2.2 billion USD), thus lead to offset the fund gap for 20 billion Yuan (2.75 billion USD).

57 ISSA, “Analysis: Social security in a time of financial crisis” , 08.12.2008, http://www.issa.int/aiss/News-Events/News/Analysis-Social-security-in-a-time-of-financial-crisis

58 Hering 2006, P.2

As introduced in previous sections, the retirement ages for both men and women are relatively low in China, compared with that in most of industrial countries with retirement ages of 65. According to government’s rule, men retire at the age of 60 (55 for men workers in the hazardous industries), while female enterprises workers quit work at the age of 50 (45 for women workers in the hazardous industries). For women working for government institutions and managerial position in companies, the retirement age is 55. Despite the fact that the retirement ages in China are not notably lower than in other significant Asian economies like India, Indonesia, Thailand, Malaysia and Singapore, which set the retirement ages for both men and women at 55, as well as Philippines and Korea, which regulate the pensioner to retire at 60 for both men and women, the effective retirement age (the average age of withdrawal from labor force) appears to be significantly lower, reported to be as low as 51.2 years for 2006⁵⁹. It is partly due to the early retirement incentives and the intention of the local government to transfer the social burden to central government (as discussed in previous sections).

It is worth of noting that China’s retirement ages were set in 1950s, as the life expectancy at birth was only 41 years. Today, a new born in 2007 can expect to live for 72.88 years, this means an average

“life-extension” of approximately 32 years compared to a Chinese who was born in 1950. Compared to the current effective retirement age of 51.2 years, an average pension lifetime of more than 20 years at a replacement rate of 59.2% seems difficult to finance, even with a high contribution rate of 28 percent. The financing difficulty would arise more concern if taking into consideration that the urban population would have longer life expectancies than the average, given disparities in health and economic wellbeing between the urban and rural populations, for example the average life expectancy in urban Beijing has already reached 79.6 years in 2005 (People Daily, September 26, 2005).

Another noteworthy aspect relating to the retirement ages is the discrepancy in retirement ages for women and men in China. It is argued that particularly there is much scope to lift the retirement age for women, considering that women’s life expectancy is higher than men’s: a female/male born in 2007 can expect to live for 74.5/70.8 years respectively. According to the regulation on retirement ages, male pensioners would on average collect benefits for less than 11 years, but female pensioners would enjoy approximately 24.5 years of paid benefits, while only 10 years was anticipated under the present method of calculation for the current basic pension scheme. In addition, it is also argued that it is a loss of human resources that a lot of well-educated women retire at an age when they are still able to perform well at work.

Therefore, it would seem desirable that the formal and more importantly the effective retirement age need to be increased in order to achieve a sustainable contribution-benefit ratio. However, the issue of raising the retirement age has brought with considerable concerns among employees and policy-makers as well. Restrictions of early retirement opportunities and proposals to increase the retirement age remain highly unpopular among citizens⁶⁰ and the government faced huge obstacles in reforming

59 China Daily from 29/11/2006

60 Only about 19 percent of voters agree with the proposal of prolonging the retirement age, about 77 percent disapprove, according to a survey jointly conducted by the Social Investigation Center of China Youth Daily and the News Center of Sina.com, covering 2743 people.

the existing retirement policies. One of the key arguments disapproving the increase in the retirement age is the major pressure in the labor market in China. Urban unemployment has undoubtedly grown into a serious problem since 199361. For workers who are long-term urban residents, the adjusted unemployment rate was at an high level of 7,3 percent by 2002⁶².(see table 25) Registered urban unemployed total roughly 8 million, together with about 10 million new entrants into the labor market every year. In addition, rural surplus labor is estimated to number at least 140 million (in 2003) people.

Statistics from MOLSS shows that in coming years the average annual work force will rise to 24 million people, with only 11 million jobs provided each year. Raising the retirement age would have significant adverse effects on the labor market.

Some argued that the employment issue should not be linked with the adjustment of retirement ages.

The continuous output growth would promote the employment in China. It is for sure that further rapid growth, especially in the private sector, would be able to create new jobs to absorb the surplus of labor in China. But to what extent the output growth would promote the employment is uncertain. Data in table 26 showed that the average output growth of 9.3% in China led to an employment growth rate of 0,8% from 1990 to 2002. China State Statistics Bureau analysis indicates that a 1% increase in GDP growth (beyond a minimum growth level of around 7%) creates about 800,000 jobs63. Even though it could be realized, the friction in the labor market is likely to remain in existence for a long period, because the current rapid growth rates of around 8-10% is not sustainable and a slowdown is already estimated after 2010.

Table 25: output growth and employment in China (1990-2002)

Source: Gohse 2005

Although prolonging retirement age faces significant political obstacles, it may be prudent to lay the

61 See Gohse (2005)

62 Statistics from SSB shows the registered urban unemployment is 4%, because the official estimates of registered unemployment, based as they are on a narrow definition, seriously understate the magnitude of the problem. More details on China’s employment and the adjusted unemployment rate are in Gohse (2005) and Giles, Park and Zhang (2005).

63 See China state statistic bureau website, www.stats.gov.cn

groundwork now in order to be able to accelerate the implementation of this reform measure in later years. At present, the government should strictly restrain early retirement and eliminate early retirement abuses. At the same time, flexibility in retirement ages can be supported by paying higher benefits to workers who retire at later ages. Early retirement increases expenditures by increasing the number of retirees. It also reduces the tax revenues generated by people in the labor force. As a result, reforms that increase the early retirement age, or impose reductions in retirement benefits for those who retire earlier, could reduce overall program costs in some cases by 20 to 50 percent. In the long run it is unwise to use early retirement to diminish the unemployment problem. This only shift the payment pressure from unemployment insurance to old age security.