Lifting the official retirement age is not the answer

by Mark Williams

• China’s statutory retirement ages for men and women are low. But raising them would not make a big difference to the size of the workforce since most workers today keep working once they have passed retirement age. Only a quarter of men drop out of the workforce at that point. Indeed, despite how low the formal retirement thresholds are, the share of people aged over 65 in paid work is higher in China than it is in other major developed and emerging economies.  
• China’s statutory retirement ages of 60 for men, 55 for white collar women, and 50 for women in manual occupations compare with averages of 64 for men and 63 for women in the OECD. In many urban jobs, retirement at the statutory age is mandatory. But people can rejoin the labour force afterwards (while still receiving pension benefits). Many do.
• In fact, for men, the early retirement age in China makes no appreciable difference to employment rates relative to those elsewhere. (See Chart 1.) Pension provision is meagre and many on low incomes have few savings to rely on. More than 70% of Chinese men continue working after the statutory retirement age. Raising that threshold would allow men to remain in better paid work, which might support productivity, but it would not make much difference to the size of the workforce.
• The low retirement threshold does appear to contribute to lower employment among women in their 50s in China. Around a third of women drop out of the workforce between their late 40s and late 50s, about twice the drop-off seen in developed economies. (See Chart 2.) Raising the labour force participation of women in their 50s to the developed country average would boost the workforce by 13 million if nothing else changed.
• But that’s equivalent to only 1.8% of total employment. What’s more, China has relatively high labour force participation among women in their 20s and 30s (see Chart 2 again) and one reason is that many grandmothers provide childcare.
• According to the CHARLS survey of urban residents, employment among Chinese women in their 50s is much lower for those with grandchildren. The median woman in her 50s with a grandchild under 16 provides more than 30 hours of childcare each week. In turn, mothers of young children are nearly twice as likely to be in paid work if grandparents provide childcare.

Chart 1: Male Labour Force Participation Rates by Age (%)

Sources: ILO, Capital Economics. All data for 2019.
    
Chart 2: Female Labour Force Participation Rates by Age (%)

Sources: ILO, Capital Economics. All data for 2019.

• Delaying women’s access to pension benefits is therefore not a straightforward means to raise overall employment. It would make it harder for mothers to work. And it could lead to a further decline in the fertility rate.
• Once they pass 65, both men and women in China are more likely still to be working than people in developed economies or in the broader G20 group of high and middle income countries. (See Charts 1 and 2 again.)
• As a result, the average age of actual retirement is only a little lower for Chinese women (61) than the OECD average (62) and higher for Chinese men (66 vs 64). (See Charts 3 and 4.)  
• Raising the pension age would reduce the fiscal burden of China’s ageing population since public pensions start to be paid at the mandatory age, even if someone is still working. China will have to increase public spending on pensions by an amount equivalent to over 100% of GDP in aggregate over the next 30 years on current plans, according to the IMF – four times as much as the developed economy average.
• But raising the pension age wouldn’t make a significant difference to the impact that population ageing is having on the size of the workforce. Indeed, there is a good chance that average retirement ages will fall over the next few decades even if the statutory retirement age is raised, as increasing affluence will leaves fewer needing to stay in work past 65. In all but two OECD economies, average retirement ages are lower today than they were 50 years ago, although statutory retirement age are unchanged or higher.

Chart 3: Retirement Ages for Men (2020)

Sources: OECD, Capital Economics

Chart 4: Retirement Ages for Women (2020)

Sources: OECD, Capital Economics

Mark Williams, Chief Asia Economist, mark.williams@capitaleconomics.com