The Economic Support System and Changing Age Structure in China

Abstract

This chapter provides insights into some important features of the recent changes in intergenerational resource allocation in China. By comparing three periods, 1995, 2002, and 2007, we emphasize the importance of support systems for economic growth and other policy issues. The study utilizes the dataset of National Transfer Accounts, which measures how people at each age in the life cycle acquire and use economic resources. The results show that there were tremendous changes in economic life cycle and intergenerational resource reallocation between 1995 and 2007 in China. First, it appears that the public sector played a very important role for resource allocation by generation during the period. Among age groups, private consumption increased most rapidly for young people ages 0–19 in both periods due to the increase in education and health consumption for children. Within transfers, public transfers for children increased substantially between 1995 and 2007, in large part due to a rapid increase in public education transfers. Public transfers to the elderly, especially for very old ages (80 years and older) are becoming very large due to public health consumption. Finally, there was an increase in asset-based reallocation of the elderly, which rose consistently as their labour income decreased. This suggests that the elderly in China have some degree of autonomy despite population ageing, loss of labour income and the deterioration of the familial support system.

Conclusion

The challenges resulting from rapid population ageing and extremely low fertility are of great concern to China. This chapter provides insight into some important features of intergenerational resource allocation in the nation between 1995 and 2007, using the three periods (1995, 2002, and 2007) of data sets.

It appears from the present study that young adults are producing more than others through their labour. The mean age of labour income fell rapidly from 44.4 years in 1995 to 42.8 in 2002, and further decreased to 40.3 in 2007. On the contrary, total consumption for children and the elderly increased much more than the average. In addition, public consumption increased much more rapidly than private consumption for all age groups. Thus, the small increase in consumption compared with labour income appears to be entirely due to private consumption, which increased much more slowly than labour income or public consumption.

Public transfers became much larger between 1995 and 2002 for both children and elderly, and remained practically unchanged between 2002 and 2007. It is noteworthy to mention two events in China that occurred between the three periods, namely the Asian financial crisis during 1997–1998 and the SARS outbreak in 2003. Most researchers claim that China was much less affected by the economic crisis of 1997–1998 than Southeast Asia and South Korea. This might be because China’s foreign investment took the form of physical capital rather than financial intermediaries, which insulated the country against the shock from the external financial market. Nevertheless, China’s GDP growth slowed sharply between 1997 and 1999, calling attention to the potential impact of the crisis on its economy. In general, during an economic downturn, a lot of workers are forced to leave employment, and many of them are not able to re-enter the labour market even when the economic crisis is over. At the same time, there is usually a large increase in social expenditure, mainly due to changes in the economic and social environments, as well as some political factors. A decline in the family support system appears to be a new threat to the Chinese economy that is accelerating the ageing process. Rapid population ageing imposes a burden of old age support. As the traditional familial support system is breaking down, the number of families living with their aged parents is also in decline. We see that this notion is consistent with what we observed in China between 1995 and 2002: a much larger reduction in private transfers between 1995 and 2002, offset by an increase in public transfers during the period. The 2003 SARS outbreak was a public health event and GDP growth rate was not severely affected.

Perhaps the most important and striking result is the change in asset-based reallocation. It declined substantially for adult aged 25–40 mainly because saving increased much faster than asset income for this age group. On the other hand, the asset-based reallocation for people aged 65 and older is almost entirely due to the decrease in private saving, and not to an increase in asset income. This means that the elderly in China have some degree of autonomy (i.e. ability to dissave) despite population ageing, the deterioration of the familial support system and loss of labour income. When the younger Chinese grow old in the future, they will be much wealthier because they will have had resources to accumulate wealth. This is good news for China, because it means that fewer public resources will be required by the old, which in turn will mitigate the financial burden caused by rapid population ageing.

However, China is facing two challenges in addition to those generally associated with population ageing. One is the increasing demand for public transfers. In 2009, China committed itself to building a universal public pension system in rural areas, funded by individual contributions and government subsidies. China had already made public health insurance available to urban employees in 1998, to rural citizens in 2003, and to urban citizens in 2007 (Li et al. 2011). A rapid increase in public pension funds will not be sustainable. Thus, increased reliance on asset accumulation will be critical in the future. The other challenge is related to the so-called “middle-income trap”. Eichengreen et al. (2011) argue that economic growth in China will slow down sharply in the near future in large part because China has reached middle-income status. Can China break the middle-income trap sooner than other countries? Exactly how these challenges will play out in China remains to be seen.