China’s pension problems will not be solved by more children — Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Financial Times

On October 29, China adopted a policy of two children per family, instead of one. This change is, in large part, intended to mitigate the adverse demographic trend plaguing China’s social security system: the rapidly declining ratio of active to retired workers. The ratio is falling from over 6:1 in 2000 to under 2:1 in 2050.

However, the new two-child policy is not likely to have a big impact on the worker-retiree ratio, so China’s retirement system will remain under stress. To sustain social security, China needs to implement other reforms — moving from a local to a national system and expanding the permissible investments for Chinese pensions.

The one-child policy always had exceptions, such as for rural and ethnic communities. These exceptions were broadened in 2013 to cover couples where both were only children. Yet the birth rate did not take off.

Why? A combination of rising levels of urbanisation and housing costs, more education and jobs for women, and rapidly increasing expenses for child rearing. These factors have driven fertility rates down in other south-east Asian countries, such as Singapore and South Korea, without any government restrictions on family size.

Indeed, if China’s two-child policy were to lead to many larger families, the result could well be a lower ratio of workers to retirees for the next two decades. That is because women with two children are less likely to take jobs outside the house until their children have left the nest.

Read the full post at Financial Times.

Robert Pozen is a Senior Lecturer at the MIT Sloan School of Management.

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