The Washington Post is absolutely obsessed with the costs of an ageing population and it refuses to let arithmetic stand in the way. Today it ran an editorial complaining about China’s “premature social ageing process, saddling China with a large dependent elderly population before it’s truly rich enough to support it.”
As the piece correctly notes, China has had very slow population growth over the last three decades by deliberate design, primarily its one child policy. While some results of this policy have been horrible (e.g. infanticide of girls by parents who wanted a boy), the slower population growth has been a huge plus helping China to sustain rapid economic growth with less damage to the environment than would otherwise have been the case.
China’s economic growth has been so rapid that it can easily support an ageing population. Those familiar with arithmetic can see this by comparing the experience of China with Mexico, our NAFTA partner whose economic policies have been frequently been touted by the Post.
If we look at the IMF’s data, we see that per capita GDP has rise by 740 per cent over the last 25 years while Mexico’s per capita GDP has risen by just over 26 per cent [warning: more arithmetic ahead]. Now let’s assume that China’s per capita income doesn’t rise at all over the next decade (absolutely no one expects this), while Mexico’s continues to grow at the same pace as it has over the last quarter century. This means that in 2020, per capita GDP in China will still be 740 per cent higher than it was in 1985, while in Mexico per capita GDP will be 38.6 per cent higher.
Let’s suppose that China’s ratio of workers to retirees fell from 5 to 1 to just 2 to 1 over this time horizon (a more rapid decline than actually is taking place). Let’s assume that in Mexico the ratio remains unchanged at 4 to 1. Then let’s assume that retirees consume 80 per cent as much as workers. We will ignore children to make the calculation more favourable to the Washington Post’s beloved country.
In this story, in China’s workers will be able to enjoy living standards in 2020 that are almost 7 times as high as they were 35 years earlier, even though they will be supporting a much larger population of retirees. This will be the case even though the implicit tax on their wages will have risen from 13.8 per cent to 28.6 per cent. China’s retirees will also be enjoying a standard of living at age 70 that is more than 5.5 times as it high as it was when they were 35.
By comparison, Mexico’s workers will have seen their after tax pay increase by just 38.6 per cent over this period. The income for a 70 year-old retiree will be just 10.9 per cent higher than it was when they were a 35-year old worker.
If there is a problem in this story for China, it is difficult to see what it is.China’s extraordinary growth over the last three decades is sufficient to ensure large increases in living standards for its whole population, if it is evenly distributed. If the Post meant that China can’t support its retirees at U.S. living standards, it’s absolutely right. However, it’s not clear why on earth they would be thinking about this comparison.
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