As a big country having a population of close to 1.4 billion, China is experiencing a historical demographic shift, which has already brought the country a structural contradiction unprecedented in human history.

Aging before getting rich, the country faces major challenges in medium and long-term economic growth. China's population aged 60 or older reached 250 million in 2018, with 167 million people aged 65 or over, accounting for 11.9 percent of the total population. And the United Nations predicts that China's working-age population will shrink by 200 million by 2050.

This demographic shift puts China's macroeconomic policies in a dilemma. The downward pressure on the economy and the acceleration of the aging process push macroeconomic policies in two directions. Taking fiscal policy as an example, to effectively unleash market vitality, the country needs more tax cuts and fee reductions, including significantly mitigating the burden on enterprises of the endowment insurance premium. But the aging population requires expanding the scale of public expenditure to help meet the needs of the elderly.

China has to break the contradiction between economic growth and elderly care with structural reform. Reform of the current retirement system with the introduction of a flexible retirement policy is urgent. International experience shows this would not only help postpone the appearance of a labor shortage but also help mitigate the pressure of pension payments.

Pro-fertility policies are also needed to encourage more couples to have a second child, including maternity leave, paternity leave, health insurance support for the pregnant, and obstetric and pediatric medical care. At the same time, the country should speed up exploration and establishment of longtime effective economic incentive mechanisms such as tax reductions for parents raising children.

The accelerating population aging in China has produced a comprehensively rapid growth in the consumption of elderly services. The "silver economy" contains important driving forces for China's economic growth. According to a conservative estimate, the consumption scale of the elderly population in China will reach 18 trillion yuan ($2.68 trillion) by 2030, and 61 trillion yuan by 2050.

Looking at the supply of elderly service, the total supply of products and services for elderly care is seriously insufficient and of low quality. For example, China at present needs at least 10 million elderly care and nursing staff, but the actual number of practitioners is less than 1 million.

Therefore, transforming the rapidly expanding and constantly upgrading consumption demand of the elderly for care services into a real driver for industrial development and economic growth should be a major task for supply-side structural reforms. This could be achieved by opening up market for services for the elderly, which could not only solve the prominent problem of the inadequate supply of services, but also effectively unleash the market's growth potential.

In the past few years, China has launched a series of policies to open up its elderly care market, and especially lifted the restrictions on access for social elderly care organizations. In order to better address the challenges of the aging population, it is necessary to further open the service market with elderly care as the priority with the principles of "open market, fair competition and fair supervision".

Elderly care organizations of different ownerships should enjoy the same policies regarding fiscal subsidies, taxation, loans, land, human resources and government procurement as well as equal treatment in terms of water, electricity and gas prices. Public old age homes with low utilization rate and idle resources should be handed over to social capital to operate.

According to international experience, long-term care insurance is an institutional arrangement that is necessary to adapt to the continuously growing demand for elderly care, which is also an important way to solve the problem of the shortage of public funds. China has already launched pilot programs to establish long-term care insurance. In the next step, more international experience and practices should be drawn upon to accelerate improvement of its coverage. At the same time, adjustment of the pension structure should be advanced. While strengthening the basic pension system, both an enterprise supplementary pension system and individual savings pension system should be established, thus reducing the pressure on public finance.

Also a large number of young working-age people flow from rural to urban areas resulting in a high proportion of aged people in rural areas. This difference in the size of the elderly populations in urban and rural areas leaves room for policy maneuvering to tackle the dilemma between maintaining economic growth and guaranteeing elderly social insurance.

In 2016, the aging level in China's rural areas reached 15.4 percent, more than 2 percentage points higher than the national average. In 2017, residents aged 65 and over accounted for only 7.7 percent of the total population in the economically developed Guangdong province.

Therefore, population aging-incurred risks could possibly spread across regions by attracting young people to flow back from the eastern region to the central and western regions through preferential policies, such as supportive population policies, employment policies and tax policies. Meanwhile, an urban-rural unified residence permit system should be comprehensively implemented to replace the lingering urban-rural dual household registration system, so as to unleash the potential of the consumption demand of aged people in rural areas.

Last but not least, more efforts should be made to ensure that migrant workers enjoy the same basic public services and welfare benefits as urban workers by 2020, so that migrant workers can better integrate into urban areas in order to form a stable and efficient industrial workforce.

This requires realizing the nationwide pooling of funds for a single unified urban employee basic pension fund as soon as possible, in addition to further improving the central adjustment fund system and accelerating reform of the provincial basic pension system.

The author is the president of China Institute for Reform and Development. The article is an edited version from his speech at the opening ceremony of 2019 Sino-Norwegian Social Policy Forum. 

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.