Download full article

China: Coping with a Silver Society

Key points

  • China’s population is getting older at a speed and scale the world has never seen before. This ageing trend is attributed to longer life expectancy as a result of living standards, but has been exacerbated by the country’s decades-long population-control policies. While the latter has now been relaxed, its impact on China’s demographic structure will linger for many decades to come.
  • The changing demographic trend will have profound impacts on the Chinese economy. Just as the “demographic dividend” was important in fuelling China’s economic take-off, the forthcoming “demographic tax” will bring risks and challenges, and contribute to the economy’s structural slowdown in the coming decades.
  • A rapidly ageing population will raise the pension burden for the society and put pressure on public finances. Compared to others, China’s challenge is particularly acute as its population is getting old before they get rich.
  • While it presents a daunting prospect, it needs not end up in a crisis. A combination of proper pension reforms, better allocation of state and private-sector assets, and greater utilization of new technologies, such as robotics and automation, can help the country to defuse the demographic bomb and mitigate the ageing shock for its economy and society.

China is ageing faster than most

Population ageing is a global phenomenon, and China will soon be at the forefront of this demographic shift. According to projections from the United Nations (UN), the world’s old-age dependency ratio – defined as the portion of the population over the age 65 divided by the working-age (15-64) population – is at the cusp of a steep ascent after growing steadily over the past decades (Exhibit 1). While both developed (DM) and developing (EM) countries will face the same challenge, albeit to different degrees, the speed and scale of China’s ageing trend stands out.

Exhibit 1: China’s ageing trend plays “catch-up” to DM

Source: UN and AXA IM R&IS calculations

The share of China’s elderly population has been on a steady rise, similar to other EM countries, since the 1950s. But it will soon break out of the current trend, and start a steeper ascent towards the DM average over the coming decades. By the middle of the current century, China will be the home to the world’s largest elderly population, accounting for one in four people over the age of 65 (Exhibit 2). Over 350 million elderly people will reside in China by the 2050s, more than double the current level, and will represent the largest demographic cohort in the country.

Exhibit 2: China will account for a quarter of the globe’s elderly population

Source: UN and AXA IM R&IS calculations

Apart from its sheer size, the speed at which China is turning silver is also quite alarming. Our analysis shows that China took less than fifty years to complete the transition from a “young” (1950-1970s) to “adult” (1980s-1990s) and “old” society (since 2000s) – a transition that typically takes an EM country 70 to 80 years, and some DM countries over 100 years, to complete (Exhibit 3). Such a compressed process of demographic transition means that, compared to others, China has far less time to prepare for the impacts of a rapidly ageing demographic.

Exhibit 3: The speed of ageing is alarming

Source: UN and AXA IM R&IS calculations

Costs of One-child policy start to bite…

There are many factors that have contributed to China’s changing population structure: some are common drivers of ageing globally, while others are unique to China. The former includes a steep decline in the mortality rate and a large increase in people’s life expectancy, both as a result of improved healthcare, nutrition and people’s living standards. The average life expectancy of Chinese people now stands at 76, up more than 30 years from the level in the 1950s, and is expected to rise further to over 81 years by the 2050s. Increased longevity is therefore one of the root-causes of China’s demographic shifts.

In addition, domestic policy choices made a difference too. China started the era of population control in the early 1970s by introducing the “later, longer, fewer” campaign, which encouraged its citizens to get married later and have fewer children with longer intervals between births. The campaign was so successful that the total fertility rate fell by half, from 6.2 children per woman to three, in less than a decade. These changes were later superseded by the formal implementation of the “one-child policy”, which profoundly changed Chinese people’s attitudes towards giving birth. Even though this policy was abolished in 2015, the momentum of population changes that it set in motion will linger for many decades to come.

…turning demographic ‘dividend’ into a ‘tax’

The dramatic transition of China’s population demographics has had, and will continue to have, important implications for its economy. Since late 1978 – when China started the “open-up and reform”, almost half a billion working-age (15-64) people have entered the labour force, providing an abundant source of young, cheap and willing workers to fuel China’s economic take-off. Our estimates[1] show that the increase in labour inputs alone was responsible for over 10% of China’s trend growth between 1978 and 2008. In addition, a large and rising share of working-age population tends to increase domestic savings and investment, and raise productivity growth – all of which are key to lifting long-term growth in an economy. Altogether, these favourable demographic changes – known as the “demographic dividend” – were responsible for as much as a quarter of China’s trend growth since 1978.[2]

However, the favourable demographics will not last forever: what has contributed to the economic take-off will eventually turn into a force that pulls the economy back to earth. Indeed, the ratio of working-age population in China has already peaked and is expected to decline precipitously in the coming decades (Exhibit 4). As the demographic “dividend” turns into a “tax”, China’s potential growth is expected to suffer from a smaller and older labour force, along with a falling saving rate that constrains capital formation.[3]

While the direction of change is clear, there are debates about the exact turning point of the population cycle. Based on total working-age population, China is either at the peak of the cycle in absolute terms, or already passed the peak in the ratio to total population. However, recent literature on the economic impact of ageing suggests that, compared to total working-age population, the differences in prime-age population can better explain the growth variations across economies.[4] The latter is derived from a ‘hump-shaped‘ relationship between labour productivity and a worker’s age (Exhibit 5), where the prime-working age is defined as the period of peak labour productivity. In contrast to the peaking of total working-age population, the share of China’s prime-age (35-50) workers will continue to increase, albeit slowly, in the coming decades (Exhibit 6). And even after the peak in 2025, the ratio is not expected to decline noticeably until the middle of 2040s. Therefore, depending on which matrix is used to define the population cycle, the conclusion on the impact of ageing can be different for China.

Exhibit 4: Demographic ‘dividend’ is turning into a ‘tax’

Source: UN and AXA IM R&IS calculations

China is getting old before getting rich

Notwithstanding these nuances, few would disagree that most of China’s demographic dividend has already been exhausted, and what lies ahead – the demographic costs – will require some careful planning and preparation. An ageing society will force a reallocation of resources towards pensions and healthcare, away from productive sectors of the economy, leading to a weakening of aggregate productivity growth. It will also put pressure on public finances by testing the ability of the government to meet rising demand for ageing-related benefits and services.

Many developed countries have already tasted the bitter medicine of ageing. In places, like Japan, the rapid demographic shift was one of the root-causes of its economic stagnation over the past decades. For China, the economic challenges could be even more arduous, given its much lower level of per-capita income at the turning of its population cycle. China therefore faces the daunting prospect of “getting old before it gets rich”.

Exhibit 5: Life cycle of labor productivity


Source: Manson et al (2017) and AXA IM R&IS calculations

One piece of corroborating evidence for this can be found in China’s pension system, which is already showing signs of cracks. After running almost two decades of surplus, the social security fund posted its first deficit in 2015, and the gap has widened since then. These deficits are currently being financed by running down existing pension assets and government subsidies. However, a persistent gap between pension revenue and expense is not sustainable, and at the current run-rate, the system could run out of assets by the middle of the next decade.[5]

Exhibit 6: China’s prime-age will stay high despite falling total working age population

Source: UN and AXA IM R&IS calculations

Making matters worse, China currently spends only 4-5% of its GDP on social protection, much lower than the average for middle-income countries at 9% and high-income countries at 15%.[6] But this ratio is expected to rise substantially in the coming decades, to more than 13% of GDP by the end-2050s.[7] Some fear that such a steep increase in pension expenses could create insurmountable pressure on public finances, and eventually bankrupt the government.

Ageing poses a challenge, not an inevitable crisis

China’s pension challenge is clearly daunting, but, in contrast to the doomsday predictions above, we do not think it is insurmountable. Beijing can deploy many tools – some of which are unique to China – and carry out social and economic reforms to smooth the transition towards an ageing society. Below are some of the measures that we think can help China to fix its “broken” pension system:

Increasing pension contributions: Contrary to popular belief, China actually has one of the highest social-security contribution ratios in the world.[8] The problem is that the compliance rate is very low, with merely 24% of corporates meeting their full obligations in 2017.[9] Under-payments or payment evasions are common in many parts of the country, where the collection of payments by the Ministry of Human Resources and Social Security (MOHRSS) is weak. This is expected to change after the recent reforms, which transfer the responsibility of payment collection from MOHRSS to the State Administration of Taxation (SAT) from January 2019. The latter possesses the most comprehensive database on labour income and has more teeth when it comes to enforcing and policing the collection of payments than MOHRSS. This strengthening of the payment infrastructure is a critical part of the overall social security reform, and is expected to raise payment compliance, expand the contribution base, and ultimately generate greater inflows to the social security coffers.

Delaying retirement: Like many DM countries that face rising pension costs, extending the retirement age has been discussed as a way to alleviate the ageing pressure in China. Currently, the official retirement age for Chinese men is 60 and for women is 50-55; both are below the OECD average of 64 and 63. If China does not amend the retirement age of its workers, the gap in the pension system will continue to widen in the coming years. Exhibit 7 shows how pension adequacy will change under this scenario, as well as two other proposals of retirement age extension. Under the more aggressive scenario of full pension adequacy in 2035, the model requires the male retirement age to be extended to 71 while that of female to 61. While this represents a substantial increase from the current official retirement age, it is not a large change from the effective retirement age of Chinese workers, which is already 69 for men and 62 for women.[10]

Exhibit 7: Pension adequacy under different retirement arrangements

Source: Hua, et al (2018) and AXA IM R&IS calculations

Allocating more resources to pension funds: While delaying retirement is a powerful tool, relying only on it to solve the pension challenge is risky, as it is both socially unpopular and economically detrimental given its impact on productivity growth. Complementing the pension reforms, China can deploy more state and private-sector assets to meet future pension obligations. In the public sector, Beijing has already announced a plan to transfer its vast holding of official assets, mostly in the stakes of state-owned enterprises, to the social security fund. A reallocation of 10% of these assets,[11] currently valued at RMB 174tn, could significantly beef up the coffers of the social security fund, making it more likely to be self-sustaining in the face of rising pension expenses. For the private sector, Chinese households are the world’s largest savers and have accumulated a large retirement nest egg precisely because the public safety-net is weak. In contrast to the western pension system, where the government trends to shoulder a large part of the payment responsibility, the Chinese system puts more onus on the individuals to support their own retirement. Therefore, to assess the overall sustainability of pensions in China, one has to consider the savings accumulated by the private sector. IMF (2012)[12] shows that all the major economies face pension deficits in their private sectors, but China’s deficits are not as large as others (Exhibit 8). Moreover, this analysis ignored real-estate assets held by households, which, in China’s case, is the most important form of household savings. One study estimates that real-estate assets represent 65% of Chinese households‘ portfolios, much higher than those in DM countries at 18%-49%. Once the physical assets are accounted for, China would have shown a positive pension position.

Exhibit 8: China fares better than many DM countries on pension sustainability for the household sector

Upgrading the economy via automation: New technology may offer some answers to the problems associated with an ageing population. Major breakthroughs in robotics, automation and artificial intelligence (AI) over the past decade have led to strong growth in these technologies that could help the global economy to cope with a shrinking and ageing labour force. Indeed, recent research[13] shows that the types of jobs that will be most affected by ageing – involving physicality, speed, learning and memory – are precisely those that will most likely be replaced by machines in the future. In contrast, jobs that require experiences, verbal communication and emotional connections are found to be least affected by ageing, and are also those that face less competition from machines. This implies a great complementarity between the humans, despite their older age, and robots. China has already started to experiment with the substitution of machines for labour (Exhibit 9). For example, Foxconn, the world’s largest iPhone assembler in China, had replaced 60,000 workers with robots in 2016, and has plans to automate 30% of its production facilities by 2020.[14] China’s E-commerce giant,, now runs fully automated logistics centres, which can handle over 200,000 packages a day with only four employees.[15] In AI, while the US remains the world leader in basic research, China is doing much better in the application of these technologies by leveraging its strengths in big data, cloud technology and data processing. Overall, we think a greater utilisation of machine power and a better allocation of human and capital resources could help China to alleviate, if not overcome, its demographic challenges.

Exhibit 9: China leads the world in robotic production

Source: IFR and AXA IM R&IS calculations

Despite possessing a full toolkit, China should not underestimate the risks associated with an ageing population. It should particularly try to avoid overly relying on any one of these tools to counter the challenge, given the potential for unintended consequences. But if all the measures are deployed in concert, we think China stands a chance to defuse the demographic bomb, and avoid what many may consider to be an inevitable looming crisis.

Appendix: An Overview of China’s Pension System

China’s pension system has three pillars, similar to many developed countries, but with different compositions (Exhibit 10). Pillar One is the state-run pension scheme that consists of pensions for urban workers and basic pensions for urban/rural residents. Pillar two is made up of enterprise and occupational annuities that are encouraged by the government but self-managed by companies themselves. The final pillar is private pension insurance for individuals, which is still in its infancy.

Exhibit 10: China’s three-pillar pension system

The current pension system is still very reliant on the state-run scheme, the first pillar, which accounts for nearly 80% of the system. The second pillar grew strongly since inception a little over a decade ago, but its growth has levelled off lately due to rising costs for private-sector enterprises. The government’s push to lower business costs/fees and increased assistance for occupational annuities should help to remove some roadblocks for future growth. The private pension insurance market – the third pillar – is under-developed. But the scope for future growth is strong if households start to transfer their existing savings to pension assets to be managed by professional managers. One estimate suggests that the market can grow to RMB2.5tn in size, providing an annual income of over RMB400bn to pensioners.[16] Compared to the Chinese system, which is dominated by the first pillar, the US pension system is exactly the opposite, with nearly 80% of the assets managed by the non-public sector under the second and third pillars.

Composition of the China pension system

Composition of the US pension system

Longevity series

Chapter 1 - Q&A: Dani Saurymper & Emeritus Professor Thomas Kirkwood

Chapter 2 - The economic impact of the impending demographic decline

Chapter 3 - Ageing populations are not a death knell for asset prices

Chapter 4 -  Longevity on the one hand, fertility declines on the other

Chapter 5 - China: Coping with a Silver Society

Chapter 6 - The impact of longevity on the insurance business

[1] Yao, A and Shen, S “China: stepping onto a new economic path” AXA-IM Research & Strategy Insights, 28 February 2018

[2] Cai, F and Yang, L (2015) “A new age of Chinese growth” East Asia Forum, 12 April 2015.

[3] Our estimate of China’s trend growth slowing to 5% by the end of 2020s has incorporated a negative contribution from declining labour inputs.

[4] See for example: Gomez and Hernadez de Cos (2008) “Does population ageing promote faster economic growth?” Review of Income and Wealth, Series 54, No. 3, September 2008.

[5] Hua, et al (2018) “Population ageing and pension deficit: a path to proactive fiscal policy” Guo Tai Jun An Research, September 2018

[6] World Bank (2012) “China 2030, Building a Modern, Harmonious and Creative Society” Washington, DC.

[7] Dong, Keyong (2016) “Population Ageing and Its Influences on the Economy and Society in China” Component article of EU-China Social Protection Reform Project, August-2016

[8] A standard social security payment in China includes five components: pension, healthcare, unemployment, work-related injury and child-birth. Together, they account for 29.2% of a worker’s pre-tax salary, much higher than the DM average of 16.3%.

[9] According to China’s Social Security White Paper 2017.

[10] For an average woman, she is already working long enough to meet her pension liability, and we think a two-year extension for men is not too much an ask given the anticipated increase of their life expectancy (5 years from 75 to 81) in the coming decades. Research, such as Bloom et al (2007) “Demographic Change, Social Security System and Savings” Journal of Monetary Economics, 54:92-114, shows that people tend to respond to longevity by allocating the longer life proportionally between work and retirement.

[11] nt_ 34715815.htm

[12] IMF (2012) “The Financial Impact of Longevity Risk” Chapter 4 of Global Financial Stability Report, April 2012.

[13] Skirbekk, V (2008) “Age and Productivity Capacity: Descriptions, Causes and Policy Options” Ageing Horizons, Oxford Institute of Ageing, Issue No. 8, 4-12, 2008


[15] / Chinese-e-commerce-company-JD-com-running-nearly-autonomous-warehouse.html

[16] Zhang, H and Harte, J (2017) “China Pensions Outlook” KPMG China Strategy Research.



This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

In the UK, this document is intended exclusively for professional investors, as defined in Annex II to the Markets in Financial Instruments Directive 2014/65/EU (“MiFID”). Circulation must be restricted accordingly.