China is undergoing a sharp demographic transition: rapid population ageing, a shrinking labour force, persistently low fertility, and continued urbanisation. Using an overlapping-generations framework, this column shows that the demographic transition is a joint growth and fiscal headwind: the economy slows just as ageing-related spending pressures intensify. A recent retirement age reform mitigates some of the economic and fiscal pressures. However, a credible long-run strategy likely needs a comprehensive approach: sustainability levers, targeted adequacy improvements, and continued efforts to reduce fragmentation and strengthen portability as urbanisation continues.
China’s 2024 retirement age reform marks an important milestone in pension policy, but it does not by itself resolve the economic and fiscal pressures created by rapid population ageing. Our column quantifies the impact of ageing and the retirement-age reform and argues that a broader package – combining longer working lives, better rural protection, and more automatic adjustment to longevity – would better balance sustainability and adequacy.
In September 2024, China’s legislature approved an increase in the statutory retirement age starting January 2025, to be phased in over 15 years (Reuters 2024). The reform comes at a critical moment. China is still in the midst of its development transition, with a long-term vision of reaching ‘medium-level developed country’ status in per-capita terms by 2035 (Reuters 2025).
Yet population ageing is becoming a powerful headwind to that agenda, given the drag it poses as is the case in advanced economies, including those in Europe (Cooley et al. 2024, Cooley and Henriksen 2018). However, compared to Europe, China will also face its unique policy questions, including from much faster expected population ageing and a significant urban–rural divide (Zilibotti et al. 2014).
Getting old before becoming rich: The demographic squeeze
China is undergoing a sharp demographic transition: rapid population ageing, a shrinking labour force, persistently low fertility, and continued urbanisation (Figure 1). Annual births have declined steeply, falling to 9.5 million in 2024 from roughly 18 million in 2016, while life expectancy continues to rise — meaning retirees draw benefits for longer. The old-age dependency ratio, estimated at 21.2% in 2024, is projected to double by 2041; for context, a similar doubling took about 19 years in Japan, compared with a projected 17 years in China.
Figure 1 Demographic challenges in China
Source: United Nations
At the same time, urbanisation has progressed rapidly, with the urban population share rising from 17.2% to 64.6% over the past five decades — reshaping who contributes to which pension scheme and increasing the importance of portability and system design.
These demographic forces interact with large urban-rural disparities. Policymakers face a dual task: protecting living standards for a rapidly growing elderly population — particularly in rural areas where benefits are lower — while keeping the pension system fiscally sustainable as the number of retirees rises rapidly.
From the ‘iron rice bowl’ to near-universal coverage
China’s pension system has undergone a profound transformation over the past several decades, evolving from a state-owned-enterprise-based model to a multi-tier system with near-universal coverage (Figure 2). China’s early pension system between 1949 and 1978 was largely based on the ‘iron rice bowl’ model, under which state-owned enterprises (SOEs) provided lifelong employment and benefits, including pensions, to their workers. The restructuring and partial privatisation of SOEs in the late 1970s and 1980s gradually dismantled this system. Subsequent pension reforms therefore sought to address the resulting coverage gap for private-sector workers, while also expanding coverage to rural residents and workers in more flexible forms of employment, such as gig workers. With the establishment of the Residents Pension Scheme (RPS) and the Urban Employees’ Pension Scheme (UEPS), near-universal pension coverage was achieved by 2012. A landmark 2015 reform integrated government employees into the urban system, aligning benefits and contribution rules across the public and private sectors. After the many waves of reforms, China’s pension architecture now consists of three pillars: a broad-based public system (Pillar 1), limited occupational pensions (Pillar 2), and emerging private savings schemes (Pillar 3). These reforms have markedly reduced absolute poverty rates among the elderly and extended pension coverage to over one billion people, representing a major milestone in China’s social protection system.
Figure 2 Pension coverage over time
Notes: * The number of urban scheme pensioners is related to the male population aged 60+ and the female population aged 50+, given the earlier retirement age for women.
Sources: UN (2024); World Bank (2025); Ministry of Human Resources and Social Security (2025) and Staff estimates.
Gaps that matter: Where the system still falls short
International comparisons, however, still point to gaps. First, retirement ages remain low by OECD and regional standards, even after the reform, particularly for women, who retire at 55 or 58 years (depending on sector). Second, benefit adequacy is uneven: contribution and replacement rates in the urban scheme are significantly higher than the OECD average, while rural pensions remain modest – on average only about 3% of GDP per capita – falling short of levels seen in peer countries. Moreover, some pension parameters are not yet linked to rising life expectancy, creating additional fiscal pressures. Third, while the system has achieved near-universal old-age coverage, participation in the urban scheme is constrained by high minimum contribution requirements, undermining its role in consumption smoothing.
Quantifying the stakes: Ageing and the 2024 reform
In our paper (Bonthuis et al. 2026), we employ a state‑of‑the‑art overlapping‑generations framework, calibrated to China, with explicit differentiation between urban and rural sectors and pension structures. We quantify the growth impact of the demographic transition (Figure 3). Between 2024 and 2050, ageing alone reduces annual real GDP growth by around two percentage points in the model, reflecting a shrinking labour force and weaker capital accumulation. At the same time, pension spending rises sharply — from 5.4% to 15.3% of GDP — as the number of beneficiaries increases relative to contributors. In other words, without further policy adjustment, China faces a joint growth and fiscal headwind: the economy slows just as ageing-related spending pressures intensify. With the 2024 retirement age reform, gradually raising the retirement age mitigates some of the economic and fiscal pressures by increasing labour supply and encouraging capital accumulation. This reform boosts GDP by 5.6% by 2050, equivalent to lifting average annual growth by roughly 0.2 percentage points and reduces pension expenditures from 15.3% to 11.9% of GDP.
Figure 3 Macro-fiscal impacts from additional reform options compared with legislated policy
Note: Each panel shows the percent difference relative to the baseline legislated policy for key macroeconomic indicators — Capital, Labour Supply, GDP, and Pension Expenditure — under five reform scenarios: Increase in Rural Benefits, Increase in Urbanisation, Align Urban Benefits with LE (LB), Faster retirement age increase (Fast 65), and Align Urban Benefits with LE (Baseline). The y-axis represents percentage changes for Capital, Labour Supply, and GDP, and percentage point changes for Pension Expenditure. The x-axis spans the years 2025 to 2050.
No silver bullet: Need for a comprehensive set of reforms
To balance sustainability and adequacy, we draw from international experience, and evaluate four additional scenarios that each target a different weakness in the current system:
- Improving adequacy (doubling Residents Pension Scheme benefits). This reform directly addresses the rural–urban disparity in old-age protection. RPS benefits are currently very low — on average only about 3% of GDP per capita as mentioned above – partly reflecting lower contributions. Doubling RPS benefits is the way to reduce rural old-age vulnerability at modest fiscal cost — pension spending rises by about 0.6% of GDP by 2050 relative to the baseline. At the same time, the model implies substantial consumption‑equivalent welfare gains for elderly rural residents — exceeding 10% for some cohorts — while narrowing overall consumption inequality.
- Linking benefits to longevity (aligning Urban Employees’ Pension Scheme parameters with rising life expectancy). As life expectancy rises, keeping benefit rules unchanged implicitly expands years in retirement and pushes up long-run costs. A longevity-linked rule shifts part of the adjustment into the benefit formula, strengthening sustainability in a more ‘automatic’ way than repeated ad hoc reforms. It delivers material fiscal relief (up to ~1.3% of GDP lower pension spending by 2050) while still supporting activity, largely by tightening benefit growth as people live longer.
- Accelerating the retirement-age increase to 65 for all workers. Even after the 2024 reform, China’s statutory retirement ages — especially for women — remain low relative to many international peers, like Indonesia or Korea, where retirement ages for both men and women are 65 years. Raising the retirement age to 65 for all workers boosts GDP by about 3% by 2050 and reduces pension spending by an additional 1.8% of GDP relative to the status quo. The trade-off is feasibility: accelerating retirement-age increases is generally unpopular (IMF 2025), and in China the debate is sharp across government, academics, and households (Bonthuis et al. 2026).
- Faster urbanisation (greater migration of rural youth to cities). There is still room for further urbanisation. Urbanisation can raise productivity and earnings, supporting growth, but it also changes the composition of contributors and beneficiaries across pension schemes. For the fiscally challenged urban pension scheme, it may strengthen the contribution base in the near term, yet it can also increase future obligations if more workers move into schemes with higher promised benefits.
Taken together, the message is that there is no single silver bullet. The legislated retirement-age reform makes a meaningful dent in both the growth and fiscal effects of ageing, but a credible long-run strategy likely needs a comprehensive approach: sustainability levers (retirement ages and longevity-linked parameters), targeted adequacy improvements (especially for rural elderly), and continued efforts to reduce fragmentation and strengthen portability as urbanisation continues.
Source : VOXeu
