An Aging Society: Implications of Population Control Policies on the Chinese Social Security System

Abstract

In 1979, the Chinese government established the one child per couple policy (OCP) in an attempt to institute population control and slow the growth of the rapidly increasing population rate. However, since its institution, the population has undergone significant demographic shifts, especially when examining population distribution by age. For example, the median age has increased from twenty-four years in 1950 to thirty-five years in 2010 and is expected to approach fifty years in 2050, a rapid upwards age shift in a country which once had a young, fast-growing population. Because it is estimated that one out of every four Chinese citizens will be over the age of sixty-five by 2050, and therefore already past retirement age, this poses significant questions about the sustainability of China’s current Social Security system.

This paper examines the long-term implications of China’s historical population control policies on the current Social Security system, and the financial feasibility of its continuance by the year 2050. Specifically, Bayesian hierarchical probabilistic models are used to estimate the distribution of key demographic parameters (e.g. age-specific fertility rates, survival rates) in order to create a predictive model to forecast the sub-national (rural vs. urban) dynamics of the population distribution by 2050. This population distribution, in conjunction with Monte Carlo simulation analysis techniques, is used to estimate necessary Social Security pension requirements until 2050 to quantify the incremental impact caused by the change to a two-child policy.

Because such population control has resulted in increased Social Security costs, without comparable increases in payments collected, it has placed a burden upon the “sandwich” generation to support both the younger and older generations. As a result, this paper also examines the effects of three policy changes on the success or failure of the Social Security system: an increase in the retirement age by n-years, a change to an n-child policy, and reform of the existing Social Security policy itself through modification of the individual contribution rate and income replacement rate.