Fiscal Implications of Population Aging and Social Sector Expenditure in China

BUILDING ON ITS ECONOMIC BOOM and wealth accumulation over the past few decades, China has taken ambitious steps to revamp and rebuild the social programs, especially since the start of the newmillennium. A new social benefit regime is now taking shape, including expanded healthcare coverage for both the rural and urban population, a new pension system that includes rural residents, and an increase in public education funding that provides free, nine-year basic education for all. Many of those efforts are to address the social ills which emerged in China’s economic liberalization, such as rising inequality and skyrocketing health care costs. But they are also responses to demographic pressures—accelerated aging among the most obvious and prominent ones. China has announced its intention to further expand social spending and improve the quality of its health care, pensions, and education programs. While such reforms are generally popular, there is also a strong wariness about their fiscal sustainability in the longer term. First, China’s population ageing has been and will continue to occur at an accelerating pace, to reach a scale unprecedented in human history. According to the United Nations Population Division’s 2017 medium fertility scenario, which assumes a moderate and gradual fertility recovery, China’s population aged 65 and over is expected to increase from 135 million to 246 million between 2015 and 2030, and to 359 million by 2050; over one in four (26.3 percent) of the total population. Rapid ageing makes reform of social protection for the elderly population— pensions, social assistance, health, disability, etc.—a top priority, as many of the elderly are unlikely to rely fully on traditional family support in light of the fertility reduction and the large number who have only one child.