China raising its retirement age may be unpopular but it’s much needed,

China’s top legislative body passed an official plan Friday to begin incrementally raising the nation’s statutory retirement age from Jan. 1 of next year and concluding in 2040, according to Chinese state media.

The final goal of the roughly 15-year plan is to raise the retirement age by three years for men to 63 years old, five years for women that work in factories from 50 to 55 and three years for women that work in white-collar jobs from 55 to 58.

The reforms are “overdue and very much welcome,” Erica Tay, director of macro research at Maybank Investment Banking Group, told CNBC.

China has been grappling with a shrinking workforce and looming pension budget shortfalls that could significantly damage the economy.

Economists have long called for an overhaul of the nation’s retirement age laws, currently among the world’s lowest, which was set in an era of lower life expectancies. In 2023, the average life expectancy increased to 78.6 years, from roughly 44 years in 1960.

Ageing demographics

Beijing’s low birth rates and relatively-young age of retirement means its working-age population will continue to shrink.

The country needs to be able to tap into its pool of older workers when workforce contraction becomes more acute in the next decade, Tay said. “This policy change will forestall a sharper drop in China’s potential growth, if only marginally.”

It is a prudent move that “strikes a balance between fixing the demographic stagnation and managing people’s expectations” in a gradual and measured pace, said Bruce Pang, chief economist and head of research for Greater China at JLL, an investment management firm.

Beijing had previously said it was mulling the plan of raising retirement ages but backed away after spurring public outrage.

“The plan might be unpopular but provides much-needed certainty and is good for China’s long-term economic future,” Tianchen Xu, senior economist at The Economist Intelligence Unit told CNBC. He noted that China has avoided narrowing the five-year gap between men and women.

China is treading cautiously to “avoid more social backlash,” Xu said.

Pension Crunch

Before the announcement, economists said that China’s pension system, which relies on a shrinking active workforce to pay for a growing number of retirees, is unsustainable and needs to be reformed.

Raising the retirement age would help ease local governments’ pension pool cash crunch, Sheana Yue, an economist from Oxford Economics said. “Although inflows might not change much, outflows will be delayed, buying local government time to fix their budget deficit”.

In a 2019 report, the state-run Chinese Academy of Social Sciences estimated that the pension system would be out of money by 2035.

Still, “more needs to be done to improve retirement adequacy,” Maybank’s Tay said, while stating that China needs a…