China’s Aging Population Puts Growth and Pension System Under Pressure

China is aging at a speed few countries have experienced before. A new study by economists at the International Monetary Fund warns that this shift could significantly slow economic growth and strain the country's pension system in the coming decades.

The numbers are striking. China's old-age dependency ratio, which measures how many elderly people there are compared to working-age adults, stood at just over 21 percent in 2024. By the early 2040s, it is expected to double. Births have fallen sharply, and the working-age population is projected to shrink by more than 200 million people by 2050.

At the same time, China is still urbanizing. Nearly two-thirds of its population now lives in cities, compared with less than one-fifth half a century ago. Fewer workers, more retirees and ongoing structural change are combining to reshape the country's economic future.

How China Built a Massive Pension System

China's pension system has changed dramatically over the past 40 years. Under the old "iron rice bowl" model, pensions were largely provided by state-owned enterprises and covered only a small share of the population.

As China opened up its economy, that system became unsustainable. In response, the government created a new structure with three pillars.

The first pillar includes two large public schemes. The Urban Employees' Pension Scheme covers formal workers in cities and offers earnings-related benefits. The Residents Pension Scheme provides basic coverage to rural residents and informal workers, mainly through flat payments supported by government subsidies.

Today, more than one billion people are enrolled in public pension programs. Coverage of the elderly is nearly universal, a major achievement in social policy.

Uneven Benefits and Growing Pressure

Despite broad coverage, the system is uneven. Urban workers receive relatively generous pensions and contribute a high share of their wages to the system. Rural residents receive much smaller flat payments, which provide only limited income security.

There are also technical issues. The formula used to calculate pensions from individual accounts has not been updated since 2005, even though life expectancy has increased. As people live longer, the system ends up paying benefits for more years than originally planned, adding financial pressure.

According to IMF simulations, if current pension rules stay unchanged, pension spending could rise sharply from about 5 percent of GDP in 2024 to more than 15 percent by 2050. At the same time, economic growth could slow by around 2 percentage points as the workforce shrinks. National savings may also fall as more retirees draw down their assets.

In simple terms, fewer workers will be supporting more retirees, and that gap will widen quickly.

The 2024 Retirement Reform

In 2024, China took a major step by raising the statutory retirement age for the first time in decades. The increase will be gradual. Men will eventually retire at 63 instead of 60. Women's retirement ages will also rise in stages. The minimum number of years required to qualify for a pension will increase as well.

The IMF study finds that this reform helps. Keeping people in the workforce longer, it increases labor supply and boosts economic output. Pension spending as a share of GDP would be lower than under a no-reform scenario.

However, the reform does not fully offset the impact of rapid aging. Fiscal pressures remain significant in the long term.

What More Could Be Done?

The study explores several additional options.

One option is to increase rural pension benefits. This would cost relatively little compared to the overall GDP but would significantly improve living standards for elderly rural residents and reduce inequality.

Another is to update the pension formula so that benefits better reflect rising life expectancy. This would improve long-term sustainability by reducing the financial burden on the system.

A more ambitious approach would be to raise the retirement age further, possibly to 65 for all workers. This would strengthen growth and ease fiscal pressure even more.

Finally, faster urbanization could boost productivity by allowing more rural workers to move into higher-paying urban jobs. However, this could also increase future pension obligations, since urban benefits are more generous.

The overall message is clear. China has built an enormous pension system in a short time and achieved near-universal coverage. But as the population ages rapidly, further reforms will be essential. Balancing adequate support for retirees with long-term fiscal sustainability will be one of the defining economic challenges of the coming decades.