This month in The Economist, an analysis of China's state-run pension system shows why long-term trends matter just as much as -- if not more than -- short-term availability of funding for retirement benefits.
Chinese officials in the Ministry of Human Resources and Social Security reported a 3.1 trillion yuan ($500 billion) surplus in the nation's pension funds at the end of 2013. However, that rosy outlook could change soon as China's population continues to age and the proportion of working-age citizens falls. China's retirement age is still 53 years, a level set about six decades ago when the average life expectancy was only 45 (it's not nearly 75); and while 9 percent of the population is over the age of 65 now, that number is projected to jump dramatically to 24 percent by 2050. That means pension deficits will likely appear by 2030 and could total 90% of GDP by 2050.
The looming crisis has Chinese officials considering an adjustment to the national retirement age; polls show 70 percent of the population would oppose that decision, but it's long overdue if China expects to keep the promises it's made to workers.
The graphic below, courtesy of The Economist, illustrates the problem:
The fiscal impact of demographic shifts is being felt here in America, too: as the population ages and fewer workers are contributing to health and retirement costs, entitlement spending is making up a larger proportion of the federal debt. The Government Accountability Office (GAO) estimates that by 2029, more than 11,000 baby boomers will reach the retirement age every day, and nearly 20 percent of the population will be 65 years or older. GAO describes the growth in health and retirement spending as "unsustainable" and projects that it will "limit the federal government's flexibility to address future challenges.
When it comes to retirement benefits, demographic shifts could soon force governments to act on reform whether they want to or not.