The Challenges of Population Aging in the People’s Republic of China (Observations and Suggestions 2021-02)

摘要 • Population aging increases pressure on the provision of health care services and the sustainability of pensions. It also creates labor shortages that, if unaddressed, can slow down economic growth. 人口老龄化加剧对提供医疗卫生服务和可持续养老金的压力。如果不加以解决,还会导致劳动力 短缺,从而减缓经济增长。 • While aging poses great challenges, if managed well, it can generate new employment opportunities with the emergence of new professions related to elderly care. However, capturing these benefits requires labor market reforms, higher public spending to finance long-term care and pensions, and policy support for the silver economy. 尽管老龄化问题带来巨大挑战,如果管理得当,可以借助老年护理新职业的兴起创造新的就业机 会。然而,获取这些利益要求劳动力市场改革,提高长期护理和养老金方面的公共支出,并为银 发经济发展提供政策支持。 • This note aims to present policy recommendations to address selected socioeconomic implications of rapid population aging in the People’s Republic of China (PRC) with a focus on labor market changes, effective long-term elderly care, and measures to address the increasing old-age dependency ratio. 此政策说明旨在提出相关政策建议,重点关注劳动力市场变革、长期老年护理以及解决不断上升 的老年抚养比率,帮助在中华人民共和国(中国)应对人口快速老龄化所产生的特定社会经济影 响。


1
The Challenges of Population Aging in the People's Republic of China 中华人民共和国的人口老龄化挑战 Abstract 摘要 • Population aging increases pressure on the provision of health care services and the sustainability of pensions. It also creates labor shortages that, if unaddressed, can slow down economic growth.

人口老龄化加剧对提供医疗卫生服务和可持续养老金的压力。如果不加以解决，还会导致劳动力 短缺，从而减缓经济增长。
• While aging poses great challenges, if managed well, it can generate new employment opportunities with the emergence of new professions related to elderly care. However, capturing these benefits requires labor market reforms, higher public spending to finance long-term care and pensions, and policy support for the silver economy.

尽管老龄化问题带来巨大挑战，如果管理得当，可以借助老年护理新职业的兴起创造新的就业机 会。然而，获取这些利益要求劳动力市场改革，提高长期护理和养老金方面的公共支出，并为银 发经济发展提供政策支持。
• This note aims to present policy recommendations to address selected socioeconomic implications of rapid population aging in the People's Republic of China (PRC) with a focus on labor market changes, effective long-term elderly care, and measures to address the increasing old-age dependency ratio.

I. INTRODUCTION
1. The repercussions of population aging in an economy are greater than the better-known spiraling costs of pension and health care. Aging constrains economic growth as it results in labor force shortages. The population in the PRC is aging rapidly. The proportion of people aged 60 and above is expected to increase to 35% by 2050-turning the population into one of the oldest in the world, at a very fast pace. The latest census data show that those aged 60 and above already account for 18.7% of the country's total population in 2020. This trend results from increased average life expectancy levels and declining fertility rates. 1 2. The PRC's favorable demographics between 1975 and 2005 caused its total dependency ratio-defined as the share of children and older persons to the working-age population-to fall by about 50%. The working-age population doubled from 400 million in 1978 to 800 million in 2005, generating a large demographic dividend that added about 2 percentage points per year to gross domestic product (GDP) growth. 2 However, in 2016 the working-age population peaked at 1 billion, but has been declining since-creating labor force shortages that increase labor costs, undermining the country's production capacity and export competitiveness. The country is already losing competitive advantage in labor-intensive industries, but losses are not being compensated by an advantage in knowledge-intensive industries. 中华人民共和国的人口老龄化挑战 to catch up with technological change. More specifically, new skills are needed to accommodate products and services to the health, travel, care, and recreational needs of older persons. These challenges can be translated into opportunities through improved labor mobility and training or retraining efforts. To address the challenge of aging, policy actions are needed to increase labor supply and productivity. The following policy recommendations are suggested： (i) Enhance labor mobility. Mobility restrictions in the PRC-the household registration system (hukou) and the non-portability of social security benefits-discourage transfers from labor-surplus provinces to labor-deficit ones. These institutional barriers hinder natural migration flows and deter urbanization, resulting in an inefficient allocation of labor to sustain growth. Reallocating labor from low-to high-productivity sectors could add several percentage points to GDP growth. It is recommended to accelerate the ongoing relaxation of the hukou policy underpinned by social security reforms for migrant workers to gain access to social services and benefits in their place of residency.
(ii) Foster human capital: education. Investing in human capital is essential to increase labor mobility and productivity in the PRC. While the past decade has witnessed a substantial expansion in secondary and tertiary education in the PRC, gross enrollment rate in senior high schools and the percentage of population with tertiary education in scientific and technical subjects need to increase. The growing digitalization of the economy and the provision of more sophisticated services require changes in education policies. Learning methods should encourage lifelong learning, creativity, innovation, and problem-solving skills. Efforts should be complemented with incentives for firms to provide on-the-job training, and initiatives to retrain workers with obsolete skills to prolong their participation in the labor force. This would matter most in rural and less-developed areas, where improvements in human capital would be indispensable for future growth. In this regard, given the high propensity to drop out in main migrant-sending areas, subsidies could be provided for children to access early childhood education, as being an essential foundation for higher educational attainments, and to increase senior high school enrollment and completion, as being critical to meet the future demand for highly skilled labor. Reforms to improve quality and relevance of vocational and academic high school education could also foster human capital.
(iii) Foster human capital: health. Health-care services will also play a role in supporting the human capital needed to increase labor supply. Health services will need to be provided in such a manner as to maintain optimal health and function for older persons. Health, cognition, and vitality-not chronological age-are key for labor productivity and the ability to work of the older population. As life expectancy rises and educational attainment increases, the health of the older population will also rise, and older persons will need less care and be better able to work.
(iv) Encourage female participation in the labor market. Increasing female participation in the labor market will reduce labor shortages. While gender gaps in education have largely closed, female workforce participation has declined over the past decade to about 58% and is lower than that of men (76%). 5 Women in the PRC continue to bear a disproportionate responsibility for unpaid care work within the home and remain underrepresented in scientific research and high-technology industries and services. Women's participation in the labor force can be encouraged through the introduction of policies for equal employment opportunities; increased maternity leave; and improved support for childcare, elderly care, and single mothers.
(v) Open up to immigration. Welcoming workers from countries with younger populations is the most direct way to increase labor supply. This is best illustrated by experiences in Australia, some European countries, and the United States, where imported labor has contributed to address labor shortages and boost population growth. The PRC could consider opening up specific sectors of its labor market (i.e., high-tech industries, health care) to specialized workers to rapidly address talent shortages. Similarly, incentives could be developed to facilitate the return of Chinese nationals educated abroad.

III. POPULATION AGING AND ELDERLY CARE
5. Long-term care (LTC) systems in developed countries differ depending on the role of the state and the structure of the health and social protection systems. France, Germany, and the Netherlands rely on the social insurance system for LTC because functional dependency is seen as an area where society must be able to provide a pooling mechanism. In Scandinavian countries, LTC is financed through taxes and managed by public providers. Most countries have separate schemes for medical and social care as integrating LTC into the health-care system tends to lead to inefficiencies if LTC patients are treated in general hospitals at a higher cost. 6 Since its 12th Five-Year Plan, the PRC has promoted the establishment of an integrated health and three-tiered elderly care system (residential, home, community) and strengthened involvement of the private sector in investing in elderly care services. However, progress has been slow and both supply and utilization of services have been limited.
6. Public social safety nets for older persons and LTC services are at the early stages of development in the PRC. In rural areas, where a majority of older persons reside, the needs are more acute, low pensions result in family members being the primary source of support for 85% of older persons. However, the support mechanism provided by family members is put at risk by the socioeconomic changes brought about by economic development, modern lifestyle, and low fertility rates. For this, developing an efficient LTC is a priority that requires different models considering the socioeconomic variations within the PRC. This section draws on earlier ADB work on the subject as per footnote 2.

中华人民共和国的人口老龄化挑战
(i) Strengthen the three-tiered elderly care system for the provision of LTC. The lack of affordable elderly care facilities results in unnecessary admissions in acute care hospitals and a waste of health-care resources. Improved home-and community-based LTC can address this as shown in Denmark, where this approach has released 30% of hospital beds. Greater and the correct incentives (financial, regulations) to develop home and communitybased services, such as home help, home care, and home-nursing services, and centerbased services to support older persons, are required to meet the "90-7-3 older persons care pattern" from the 12th Five-Year Plan (90% of the older persons should receive home-based care, 7% community-based care, and 3% residential care). Development of preventive health-care services to older persons at community level to defer the need to use LTC should also be prioritized.
(ii) Increase LTC financing. Larger-scale resources are needed to develop elderly care in the PRC. Public health-care expenditure in the country stands at 2.9% of GDP compared with a 6.5% average in Organisation for Economic Co-operation and Development (OECD) countries, where LTC alone amounts to 1.7% of GDP. The increased financial needs should not threaten fiscal sustainability. A more progressive taxation system, further liberalization of energy and resource prices, the introduction of environmental and property taxes, and the transfer of a larger share of dividends of state-owned enterprises into public expenditure will allow increases in social spending without straining public finances.
(iii) Expand health insurance for financial protection. The PRC has made significant progress in extending health insurance coverage universally, but out-of-pocket payments still account for about 50% of total health expenditure, exacerbating the vulnerability of lower-income households. It is recommended to further expand the health insurance coverage, reduce co-insurance rates, and introduce ceilings on maximum out-of-pocket payments, including programs to address the needs of the most vulnerable groups. This approach could pave the way for the introduction of LTC insurance in the future, coupled with increased pension benefits to ensure the ability of the elderly to pay for it.
(iv) Promote private sector participation. While elderly care facilities catering for the well-off are proliferating, there is an urgent need to increase affordable elderly residential care for those who need assistance and have limited means to pay. In other countries, such facilities are usually financed by a mix of government support, individual pension contributions, and private sector involvement. In OECD countries, state-owned facilities are often privately managed, with private sector participation incentivized through tax relief or subsidies. This approach is also emerging in the PRC and needs to be strengthened and mainstreamed. It is recommended that the role of the PRC's government in the provision of LTC shifts from supplier to regulator for setting policies and standards, and to purchaser for subsidizing not only the poorest section of the population but also the middle class who cannot afford the private facilities. Developing effective models of public-private partnership (PPP) is key to support these efforts. 7 (v) Develop a professionalized elderly care workforce. Human resources, incentives, and policies to retain and train LTC givers are insufficient in the PRC. Many other professions crucial to a well-functioning elderly care system, including nurses; allied health professionals (i.e., physiotherapists, occupational therapists, nutritionists); medical specialists (i.e., geriatric physicians, neurologists); social workers; service providers; and managers are also lacking. It is urgent to address the shortage of human resources and raise its quality by improving staff retention incentives and prioritizing training and skills development initiatives for the caregivers. In addition, the availability of professionals in paramedical, medical, social work, and elderly care management has to increase to fill the skill gaps in the sector. This will in turn generate new employment opportunities.

IV. POPULATION AGING AND OLD-AGE DEPENDENCY RATIO
7. A low old-age dependency ratio and a large demographic dividend underpinned the PRC's unprecedented socioeconomic transformation since 1978. However, both trends are now reversed. The old-age dependency ratio has increased to 16% in 2019 and the demographic dividend vanished in 2016. While figures are not yet alarming, the speed of aging and its implications on the sustainability of growth and the pension system demand new actions. Suggestions are as follows: (i) Continue fine-tuning family policies. At 1.3 children per woman, and at 0.7 children per woman in cities like Shanghai, the current fertility rate is below the replacement rate (2.1). The relaxation of the one-child and two-child policies can ease the burden of onlychildren caring for elderly parents and grandparents-the so-called "4-2-1" problem-but needs supplementary policy actions. These could include more affordable social services, higher pensions, and support to women through subsidies for childcare, baby bonuses, child grants, education support, flexible hours or part-time work, and other measures as detailed in paragraph 8. Developing family-friendly cities and communities will also be important to support families with children.
(ii) Accelerate the increase in retirement age. As a result of dramatic longevity improvements, developed countries have continuously revised retirement age by increasing it to 65-67 years. As a result, in addition to increasing the labor supply, prolonging labor market participation supported the sustainability of the pension systems and was crucial for the success of a multigenerational workforce. In the PRC, the retirement age was established in 1950 at 60 for men and at 55 and 50 for women in white-and blue-collar jobs, respectively. Since then, it has not been revised. Under the current average life 7 ADB is piloting PPPs in elderly care services through investment projects with PPP components in various locations in Hubei province and Guangxi Zhuang Autonomous Region.
中华人民共和国的人口老龄化挑战 expectancy (75 for men and 79 for women), plans to gradually increase the retirement age should be accelerated and women's retirement age should be aligned with that of men to eliminate gender disparities. During the transition, schemes for voluntary retirement at an older age to allow people to continue to work, if they can or want to, could be piloted to draw lessons for the rollout of the program nationwide at a later stage. These schemes, however, need to be complemented with age-friendly policies such as providing more flexible work options; promoting lifelong learning (i.e., retraining, reskilling); and creating age-friendly workplaces, including incentives for employers to hire older workers.
(iii) Accelerate pension reform. The low coverage, structural, and financial weaknesses of the current pension scheme demand further reform. It is recommended to step up current plans to establish a three-pillar system, with the pillars complementing each other and providing the best possible financial security. The first pillar would be a defined-benefit basic flat rate pension, financed by taxes and fiscal transfers, supported by the national pension reserve fund. The second pillar, a mandatory defined-contribution scheme funded by individual accounts, already exists in the PRC; it needs to be strengthened to generate sufficient returns for the expected replacement rates. The third pillar-voluntary private pension funds, for which a first pilot was launched in June 2021 in East Zhejiang province and in a municipality of Chongqing-needs to progress faster. Further, while accelerating pension reforms, the incorporation of automatic adjustment mechanisms to link retirement age to life expectancy, so it rises as the length of life increases, and financial liberalization for the successful establishment of private pension funds should be considered. A larger variety of investment options and a less restrictive regulatory framework are needed to strengthen the individual accounts. The population in the People's Republic of China (PRC) is aging rapidly, as the proportion of people aged 60 and above is expected to increase to 35% by 2050. While aging poses economic challenges, if managed well, it can generate new employment opportunities with the emergence of new professions related to elderly care. However, capturing these benefits requires labor market reforms, higher public spending to finance longterm care and pensions, and policy support. This note presents policy recommendations to address identified socioeconomic implications of rapid population aging in the PRC, focusing on labor market changes, effective long-term elderly care, and measures to address the increasing old-age dependency ratio.

About the Asian Development Bank
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members-49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.