COMMENTARY

------By Daniel Inman

Growing old is a fact of life - not just for individuals, but for populations as well. Tackling the problem of an ageing society has become an industry for demographers; but for most countries, the potential consequences still seem somewhere in the distance. Demographic trends in China suggest that effects of having an old society are in the near horizon and its population is rushing straight towards them.

Communist China's early decades were marked by a population explosion. In 1957, there were 646 million Chinese people; by 1978 there were 958 million - a 49 percent increase in just 21 years. Growth was curtailed by the famous one-child policy, which is credited with preventing a further 400 million births. A generation later, the result is the world's fastest-ageing society. In 1990 the ratio of people in the workforce to people over 60 was ten to one - a healthy proportion. By 2003, however, it had shrunk to three to one, and by 2020 there are expected to be only two and a half workers for each sexagenarian and above. Last month, a government agency projected that the average Chinese person's life expectancy will jump from 72 to 85 years by mid-century.

China is becoming top-heavy with the elderly, a shift that necessarily carries with it profound economic repercussions. It is commonly predicted that China's economy will veer away from investment-based growth as returns become lower, and towards growth driven by an increase in consumption levels. What is uncertain is whether China's rising levels of senescence will encourage higher spending in the future, or whether it will promote its antithesis, higher levels of saving.

Young savers, old spenders?

Economists tend to believe that old people are inclined to spend more than younger segments of society. The idea is that when people are young, they should borrow money to put themselves in a position to maximise their earnings; when their earnings are at their peak, they should save; and when they retire - thus reducing their income to its minimum - they should spend the money they saved in their youth. How well does this theory pan out for China?

It could be instructive to look at East Asian countries that have had similar experiences. Japan and South Korea, for instance, have already undergone rapid development while ageing at rates comparable to what China is seeing now. Both countries seem to correspond with theory: Both countries saw an increase in consumption as they aged.

It is true that as China ages, more money spent will be coming out of old peoples' pockets: by 2010, China's elderly will be spending RMB1.4 trillion (?139 billion) a year, and in 2020 that figure is expected to reach RMB4.3 trillion. This does not necessarily mean that Chinese consumption is increasing overall, since increased spending of the elderly could be the result of them becoming a larger segment of society. It could be that there being more elderly people spending the same amount on necessities as they did when they were younger.

Comparing China with its much richer Asian neighbours can be misleading: the Chinese, being poorer on average, are subject to a greater number of financial constraints. In fact, there are reasons to think that China's ageing could lead to a society that continues to save.

One effect of the one-child policy is that there simply aren't as many young people as there used to be. As China's elderly grow in numbers, so do its middle-aged. Another interpretation of the situation is that China is steering towards a peak in savings rather than one in consumption. The reason being that the group of people who are at the height of their earning powers, those who are mostly likely to be saving, is creeping up in size - from a youthful average of 28 in the 1980s to the distinctly middle aged 46 that will be seen in 2050. There are now a lot of thirty- and forty-somethings in China who will be saving for when they retire in 20 years' time.

Another income related difference between China and its richer neighbours is that the pension and social security situation in China is such that the people retiring in the future are more likely to be dependent rather than self-sufficient. The people most likely to be responsible for them are their children, who will already be doing their best to save for their own retirement.

Help the seniors

What makes China demographically unique is not how far down the ageing process it is, since many countries are already at the same stage or even further down, but that it is a developing country with an old population. Other developing countries which are expecting or undergoing economic growth, such as India, have a much younger population. If China wants to make the switch from an investment based economy to a consuming society, the problem it will have to face is how to get people spending whilst they are caring for their elderly parents.

There are a number of ways that this could be done. One is a gradual increase in the retirement age, which currently stands at 55 for women and 60 for men. If people are living longer, healthier lives, then it could be necessary to ask them to work a little longer. This would give people more time to save for their future and reduce the time that they might be dependent on others.

The government could step in by providing more in terms of benefits for the old. There is already a medical care programme designed to help the elderly that started in 2003. Since then, it has been extended to enough regions that it covers nearly three quarters of all China's old people who live in rural areas. It is this kind of measure that eases the burden on the elderly themselves, as well the people responsible for their care. Only when the elderly can afford a decent life will they start to spend.