Demography is China's Achilles Heel (and Its Source of Strength)

I have been reading The Economist for a long time and it is one of my favorite sources of information about the world. So, I was extremely disappointed by the article in their China section this week highlighting the demographic issues that face China.

Alongside the other many problems it faces, China too has its deadly point of unseen weakness: demography.

Unseen? Really? You don't have to have read my book, or have kept up with my blog to know that the aging of the Chinese population is not "unseen." The Economist has been on top of this for a long time, but this week its writing staff seemed to have lost that institutional memory.

As a reminder, the rapid drop in fertility that is now the country's Achilles heel was the very source of strength that allowed the Chinese economy to build steam (see the discussion of this in Chapter 8 of my book). The Chinese government very deliberately applied the brakes to the already declining fertility in the 1970s precisely so that the population would not overreach the country's ability to feed itself. As the economy took off in the wake of the advantageous age structure (the "demographic windfall") the Chinese government began planning for the time when the population would age. Hence the push into Latin America, Africa, and elsewhere for resources and assets that can sustain a population as its labor force ages. Indeed, as The Economist itself points out:

Sarah Harper of the Oxford Institute of Population Ageing points out that China has mapped out the age structure of its jobs, and knows for each occupation when the skills shortage will hit. It is likely to try to offset the impact by looking for workers abroad. Manpower, a business-recruitment firm, says that by 2030 China will be importing workers from outside, rather than exporting them.

A huge issue faced by every aging population is how to support the older population after people leave the labor force. 

In the traditional Chinese family, children, especially sons, look after their parents (though this is now changing—see story on next page). But rapid ageing also means China faces what is called the “4-2-1 phenomenon”: each only child is responsible for two parents and four grandparents. Even with high savings rates, it seems unlikely that the younger generation will be able or willing to afford such a burden. So most elderly Chinese will be obliged to rely heavily on social-security pensions.
China set up a national pensions fund in 2000, but only about 365m people have a formal pension. And the system is in crisis. The country’s unfunded pension liability is roughly 150% of GDP. Almost half the (separate) pension funds run by provinces are in the red, and local governments have sometimes reneged on payments.

The story of filial piety in "the traditional Chinese family" is, of course, largely mythical because in the traditional family of rural peasants for most of Chinese history, mortality was high and the probability was very low that parents would survive to an age where they would become dependent, so few people really had to make good on that idea. Furthermore, even though the burden technically falls to the son, it is usually his wife who is assigned the real chores of looking after her aging in-laws.