China’s retirement age hikes are necessary as the population ages, but its people will likely need personal pension plans — also known as the third pension pillar in China — to be financially comfortable post-retirement.
Chinese lawmakers agreed to adopt a plan to increase the retirement age for the first time since the 1950s, Bloomberg reported on Sept. 13.
Starting in 2025, over a period of 15 years, the retirement age for men will rise to 63 from 60, and the retirement age for women in white-collar jobs to 58 from 55, and 55 from 50 for women in blue-collar jobs.
Workers will also be allowed to postpone retirement for a maximum of three years if employers agree. The minimum number of years of pension contributions required to receive monthly benefits will also be raised to 20 years, from 15 years, according to the report.
China retirement age lags
However, even with these changes, China’s retirement age lags many countries, where the retirement age typically ranges between 65 and 67 years, said Jingxia Dai, senior manager research analyst at Morningstar.
China's increase in retirement age will mostly affect the first two pension pillars of China, said Dai, who is based in Shenzhen.
The first pillar, which is currently the main source of retirement income. refers to the government-led public pension plan, which includes the approximately 2.53 trillion yuan ($365.7 billion) National Social Security Fund, Beijing. The second pillar refers to employer-sponsored pensions which comprise enterprise annuities and occupational annuities.
“The country’s aging population places significant pressure on this pay-as-you-go (public pension) scheme,” she said.
“With fewer workers contributing to public pension and a growing number of retirees to support, China’s public pension fund is expected to face a shortfall in two decades.”
In 2019, the Chinese Academy of Social Sciences wrote in a report that the public pension will be in deficit in 2028 and depleted by 2035.
China has one of the fastest growing aging populations in the world, where the proportion of elderly people increases at a faster rate than the working population.
The share of people over 60 in China is projected to reach 28% by 2040, compared to 14% in 2023, and 9% in 2010, according to data from the World Bank and the World Health Organization.
“The retirement age increase can help temporarily alleviate some of the pressure on China’s pension system, but it does not tackle the underlying issues (of fewer workers to support a growing number of retirees),” Dai said.
“Looking ahead, we expect private pensions to play an increasingly important role in China's pension system, helping Chinese citizens meet their retirement needs,” she added.
Amy Shang, head of wealth solutions for China at Aon, agreed that the retirement age hike will have the most direct impact on pillar one — the public pension plan — but pillars two and three, which refer to corporate and personal pension plans respectively, will be affected as part of a chain reaction.
“If individuals are not going to get much, and much later, from this first and second pillar, they probably need to do more with this third pillar,” said Shang, who is based in Shanghai.
Personal pension accounts
Government data showed that 60 million personal pension accounts have been opened in China with an average balance of around 2,000 yuan ($282.1) as of Dec. 31, far below the allowed contribution of 12,000 yuan per year, she said.
“The policy was rolled out at the end of 2022, so it’s been less than two years. The government needs time to digest and assess how successful the policy has been, even though it has been rolled out for 36 cities — it’s not nationwide,” she added.
The government will likely roll out more incentives and policies to encourage people to contribute to the third pillar, but Shang believes that more broadening of the investment portfolio — for both pillars two and three — will also help.
“For the second pillar, the upper limit for equity investment is 40% but in reality, most of the enterprise annuity plan managers actually allocate the equity to around 15%. It's very low,” Shang said, adding that portfolios should also be broadened to include international bonds and equity.
