Fixing U.S. baby-boomer pensions in time for China's baby-bust crisis
If you think America's baby-boom retirement crisis is bad, you haven't looked at China's looming baby-bust retirement crisis. Even if you have, you may not see any linkage, but there certainly is.
Having enforced a one-child policy for almost two generations, China faces a massive demographic crisis, its so-called "4-2-1 problem": four grandparents and two parents for each child. Soon those four grandparents will retire, leaving only three workers to support four retirees. Eventually, the two parents will retire, leaving one worker supporting from two to six retirees - depending upon life expectancy - an impossible burden.
Now, China's looming crisis will not be quite that bad, because the one-child policy is enforced almost exclusively in urban China, which constitutes about 35 percent of the population. Nevertheless, the population-control policy is primarily responsible for driving China's overall fertility rate (births per woman) below 2.0 for two decades to about 1.6 today, according to World Bank data.
But there is another factor involved, the rapid deceleration of China's population growth rate from a stratospheric fertility rate of almost 6.0 in the mid-1960s. By that time, the post-WWII U.S. baby boom was over, and our fertility rate, which had never exceeded 4.0, was trending below 3.0. Because of China's abrupt slow-down, it has a huge looming old-age population bulge that is much larger than our baby-boomer bulge.
One might think that China can avoid this impending crisis by lifting its one-child policy. It can't. In the view of Chinese leaders, children represent as much of a burden as retirees. Children are seen as non-productive members of society requiring heavy investments in parenting and education.
Moreover, even if China were to lift the one-child policy, it would face the same problem the policy was instituted in 1978 to avoid: rapid growth of the world's largest population, now 1.3 billion - growth that would outstrip the country's relatively limited natural resources.
So, China faces an inevitable and daunting retirement challenge, far more severe than America's, at least in purely demographic terms.
And that is a key point. In two other dimensions, the relative positions of the United States and China are reversed. First timing. Our retirement crisis is upon us, while China's is a decade or two away.
Secondly, this country faces a dire financial crisis, since elected leaders have made unsustainable promises to retirees in the form of extremely generous benefits, whereas China offers only very thin public pension coverage and, currently, has no apparent retirement health care coverage, although it has announced plans for a universal health care program.
How we handle our crisis will determine the dynamics of competition between the world's two largest economies during the next quarter century.
If we are able to scale back our unsustainable retirement programs and survive our baby-boom transition, then we will be well positioned to compete with China when, in turn, it is weighed down by its much more severe baby-bust retirement crisis.
Actually, the stakes are even higher, because the United States and China are not just rivals; their fates are intertwined. With its enormous budget deficits, the United States has been borrowing abroad, most heavily from China, which now holds about $1.2 trillion of the country's national debt.
This relationship cannot persist. Obviously, China will need all its resources to meet its impending demographic crisis, no matter how spare the benefits that it may extend to its citizenry.
So, our retirement programs are not just "unsustainable," a term of indefinite timing; they are problems requiring resolution within a defined time horizon - within a decade or two, before China starts selling its Treasury holdings.
Our nation's prospects in the next half century will be bright if, and only if, we reduce our retirement burden, eliminate our deficits and reduce our debt before demographic Armageddon arrives in China.
The future could prove quite dismal if we do not.
Red Jahncke heads the Townsend Group, a business consulting firm in Greenwich.
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