If the aging process in China were the natural result of a demographic transition that in most developed countries is accompanied by an increase in productivity and per capita income, China would have no particular difficulty in coping with it, and could simply follow what other countries have done by upgrading its industrial and technological structures and establishing an effective pension system. However, demographic transition in China has been the mixed result of socioeconomic development and implementation of a rigid family-planning program, which have made the transition not only the world’s largest, but also the fastest.

    Accordingly, the age structure of the Chinese population has transformed from a typical pyramid (characterized as a broad base of youth and rapidly tapering top of the elderly) to a barrel-shaped pyramid. According to the United Nations’ prediction, the population age structure of China will become much more of a reverse pyramid with a large proportion of elderly and a small proportion of youth in 2030.

　 This demographic transition essentially means that China will grow old before it grows rich. The U.N. predicts that China’s ratio of working-age population to total population will not stop increasing until 2015, and that the absolute size of the working population will reach its peak of approximately one billion people at that time, then begin to shrink afterwards. Observing this already diminishing net growth of working-age population, along with the constantly increasing demand for workers in non-agricultural sectors in the recent economic booming, one can have little wonder why the migrant labor shortage has been spreading from coastal to interior regions of China.

　

　

    Although China’s pension system reform has aimed to build up a two-pillar scheme (pooling and individual account), due to the contribution rate of individual account is very low, it is not expected to be significant in terms of assuring the future use. Therefore, the current pension system in China is a pay-as-you-go (PAYG) type.

    According to international experiences, a successful PAYG system is conditioned on three factors, without which it’s difficult to sustain the system. The first is a relatively young demographic structure. That is, a working-age population large enough to support the existing retired. The second is an effective taxation system that enables the state to collect the contributions needed for the pension fund. A third is soundly operated management and governance of the fund to ensure that pension funds are correctly invested and provided. It is apparent that the second and third conditions do not yet exist in China, and the first condition—a working population large enough to support those who are already retired—is increasingly problematic. Therefore, it’s inevitable for this system to produce a huge deficit in order to support China’s elderly.

    As a consequence of overall increase of income and changes in social structure, China’s traditional family values are also changing. The 2005 Population Sampling Survey conducted by National Bureau of Statistics shows a decline in family size—the average number of family member was 3.13, compared to 3.44 in 2000, 3.96 in 1990 and 4.41 in 1982. Among families having one person aged at 65 and above, 16% were single elderly families, and among families having two persons aged 65 and above, 42% were families in which an old couple lives alone. Comparatively speaking, this only-child generation is more likely to be spoiled and self-centered—only children are sometimes referred to as “little emperor” or “little princess.”

    Low legal retirement age regulation and actual premature retirement greatly enhance the burden of society and families in supporting the elderly. Generally speaking, individuals can decide at what age to retire, a decision that depends on their preferences between work and leisure, and between their own consumption and their children’s inheritance. Given the increasing supporting ratio and pension fund shortage in China, universal early retirement can further aggravate the situation.

    According to a survey conducted in 2002, average retirement age in urban labor market is 57 years old for male workers and 50 years old for female workers. With the life expectancy at birth being 70 years for male and 75 years for female, we can take a rule of thumb that the male can expect to live for 13 years after retirement and female for 24 years. Assume the numbers of male and female are approximately equal, the average life expectancy at age of retirement is over 18.4 years, which is close to the average of OECD countries. By 2020, life expectancy in China will increase to 73 years for men and 79 for women, suppose the actual retirement ages remain as their present levels, life expectancies at age of retirement will be 16 years for male and 28 years for female, averaging as 22.3 years and surpassing present levels in OECD countries. By then, older dependency will be too high to bear.

　

　

    The population aging is in fact a matter of development, and there are a variety of ways to achieve sustained economic growth in an aging but not affluent era, depending on whether or not sound choices can be made by the society. Fortunate enough, those issues are clearly addressed in the just ended 17^th National Congress of Communist Party of China.

    First, as the demographic dividend diminishes, it is vital for the Chinese economy to dig out an alternative source of sustainable growth, which requires a transition from inputs-based growth pattern to productivity-based one.

    Secondly, as the demographic precondition for a PAYG pension scheme is gradually replaced by income precondition supportive of a fully-funded scheme, a transformation of PAYG to fully-funded pension scheme is urgent.

    Thirdly, since for a long period of time the Chinese elderly still need diversified sources to support, a renaissance of Chinese family values helps families take advantage of intra-family transfers and living arrangement to support their elderly.

    Lastly, since whether or not the trend of early retirement can be restrained depends on employment opportunities, raising retirement age is not a sufficient condition for solving the increasing old age dependency, instead, creating more jobs for all groups of age through developing labor market is a fundamental solution.