Economics of aging population

The National Bureau of Statistics has released the results of the sixth national census. China remains the most populous country in the world with more than 1.3 billion people and continues to experience population growth at a moderate pace of about 0.5 percent a year.

Related readings:  Preparing for effects of population trends  Aging population a challenge  The population explosion  Census: Population hits 1.37b

China's fertility rate is so low, however, that population decline and rapid population aging are imminent. These demographic changes will have profound implications for China's economy, the role of the public sector and families concerned about their prosperity and economic security.

To understand the enormity of the demographic changes facing China one need look no further than children's population trend. In 1976, the population under the age of 15 years reached a historic high of nearly 360 million according to United Nations estimates. The 2010 census shows that the country now has only about 222 million children (0-14 years old).

During the last 35 years the number of children has declined by about 138 million, and over the next 35 years the UN projects a further drop of more than 80 million. China is experiencing a "baby bust", which is unprecedented for its magnitude and the speed with which it has occurred.

Until now China's "baby bust" has been favorable for economic growth yielding what is often described as the "demographic dividend". Children contribute nothing to GDP because they do not work, but they are very costly. Most of the cost for children is borne by families - by parents and grandparents. Children impose a cost on taxpayers who help pay for their schooling, healthcare and other material needs.

The decline in the number of children has freed up resources that have been put to good use by the public and private sectors both. Some of these resources have been used to improve standards of living and reduce poverty, some have been saved leading to increased capital accumulation and some have been used to increase per child spending on education and healthcare.

Generally speaking, China has used part of its demographic dividend to raise current living standards and part to invest in the future. China's current age structure is now the most favorable in its history. Its population is heavily concentrated in the ages where people are most productive and have the highest earnings. Relatively few people are young or old when production is low and consumption is high. The age structure is highly favorable for public finances, too. Taxes are paid predominantly by working-age adults, while benefits go predominantly to the young as well as the old.