Retirement Age Reform:Background,Debates and Policy Suggestions

 

Zhang Chuanchuan （Central University of Finance and Economics）

 

Abstract:According to the report given by the Ministry of Human Resources and Social Security of China,the retirement age reform will be initiated by the end of 2017 and given full effect after a transition period of five years.The introduction of the retirement age reform is surrounded by tons of debates among scholars,policy makers and the public.As a public policy,the success of the retirement reform heavily depends on whether it can be agreed by all parties or not.To clarify confusions and build consensus,this paper firstly introduces socioeconomic conditions and the social old-age support system in China,and then summarizes the current debates on the coming retirement age reform and successively reviews them one-by-one based on findings in previous studies.Finally,the paper argues that a set of research and policy questions need to be addressed to ensure the policy reform scientific,fair,flexible and comprehensive.

The broad social background of the retirement age reform is the rapid population aging,which brings a couple of big challenges to the Chinese economy.First,the population aging leads to shortage of young labor forces and rising labor costs,which make the manufacturing firms less competitive in the global market.Second,the population aging leads to increasing old age dependency ratio,which implies more and more heavy burden of old-age support on the young generation.The increasing burden of old-age support will depress household consumption,and crowd out resources that can be allocated to the production sector.Based on international experience and previous studies,postponing the retirement of workers and enhancing human capital are two most important policy solutions to challenges of the population aging.On the one hand,given the improved health status of old workers and a much longer life expectancy,human resource can be more efficiently utilized if the workers retire later.On the other hand,the human capital investment can mitigate the decrease of the labor force in quantity by an increase of the labor force in quality.

The other primary background of the retirement age reform,which is probably more relevant in China,is the potential deficit of the pension fund.The policy makers and scholars have long been worrying about the deficit of the pension fund.The most important part of the Chinese pension system is the urban employee basic pension,which is essentially a pay-as-you-go system.As a pay-as-you-go pension system,the deficit of the pension fund is theoretically inevitable with a rapid population aging.The sustainability of the pension system crucially depends on three institutional parameters:(1) ratio of retirees (pensioners) to workers (contributors); (2) contribution rate,i.e.the pension premium,and (3) replacement rate of the pension benefits.These parameters,in turn,depend on the age structure of population,life expectancy,and wage growth.Given all other factors,the population aging,which means an increase of the ratio of retirees to workers,will eventually lead to deficit of pension fund.There are four possible policy solutions:(1) postponing the retirement age to decrease the ratio of retirees to workers; (2) increasing the contribution rate; (3) reducing the pension benefits; (4) increasing the fertility rate.The last one is a long-term policy,while the second and third ones are almost infeasible as the Chinese government is trying hard to reduce the policy burden of firms and maintain the life standard of the retirees.The second solution implies an increase of the burden of the young generation,while the third one implies a decrease of the wellbeing of the old generation.And either one is unwelcome and inappropriate.Given the improved health status of old workers and a much longer life expectancy,postponing the retirement age is the most efficient and reasonable policy choice.

The debates on the retirement age reform mainly lie on four aspects,which I list below with comments followed:

(1) The fairness of the pension system.The pension system has long been criticized by the public for its duality.The employees in government and institutions do not need to contribute and their pension benefits are financed by the government.On the contrary,the employees in firms need to contribute and withdraw pension benefits from their own fund account.I personally agree that the fairness of the pension system is the priority to building consensus as only a policy with fairness can be fully supported.But I do believe that the fairness of pension system is another issue,which is literally irrelevant with the efficiency problem related to the retirement age reform.

(2) The relationship between elderly employment and youth employment.The pubic and several scholars frequently declare that postponing the retirement age will crowd out youth employment,but without giving any empirical support.Previous studies using data from the U.S.and European countries consistently show that the crowing out hypothesis,which is based on a box-theory of employment,can never be supported by empirical findings.Some recent studies using data in China also have similar conclusions.Although further studies may be needed to obtain decisive conclusions,professional scholars should not frequently express viewpoints without scientific reasoning and empirical supports.

(3) The capacity of the elderly for working longer time.One primary concern about postponing the retirement age is whether the health status of the older workers can support extra years of working.This is obviously an empirical question,and should be examined rigorously.Some tentative analysis shows that male workers age from 60-74 are capable to work for another 2.74 years,while the female workers age from 50-64 are capable to work for another 2.16 years.I call for further empirical studies on this issue.

(4) The welfare loss of some specific groups.The retirement age reform is not a pareto improvement,and there would be welfare loss among some specific groups.The welfare of workers who are near the retirement age and have potential very high replacement rate are more likely to decline.Such a group could be those with low wage rate and working in labor-intensive sectors.At the beginning of the reform,appropriate compensation packages are needed to win the support of these groups.

As a short conclusion,the retirement age reform is both necessary and urgent,as the population is aging rather rapidly and brings us big challenges on the social security system and economic growth.The approaching reform has been invoking a lot of debates and concerns.However,most of the oppositions and concerns are based on no empirical evidence or misleading reasoning.But a systematic review on concerns about the retirement age reform suggests that the government has to carefully design and implement the reform.I suggest the policy makers properly address the following three aspects:

(1)The reform should be based on solid academic research,to make sure that the policy is scientific.

(2)The reform should be carried out step by step and with emphasis,to make sure that the policy is flexible and fair.

(3)The reform should be systematic with supporting policies,to make sure that the policy is complete and coordinated.

In conclusion,the retirement age reform is initiated in a broad social background featuring with rapid population aging and a pay-as-you-go pension system.Because of the substantial impacts of the reform,the corresponding policies should be scientific,fair,flexible and coordinated,which are the prerequisites for obtaining maximum support from the public and a success of the reform.

 

Key words:postponed retirement；aged tendency of population；employment of the elderly；social endowment insurance