Raising the superannuation age will be good for China's labor market and help the basic pension scheme become sustainable

China will raise the retirement age in gradual steps, as proposed by the communique issued by the Third Plenum of the 18th Communist Party of China Central Committee, ending the debate on whether raising the retirement age is good for the country's labor market.

The retirement age is related to people's immediate interests, and most of the respondents to a recent online opinion survey said they were opposed to raising the retirement age. The government, nevertheless, has decided to go ahead with the plenum's decision because the basic pension insurance scheme cannot be sustained if the mandatory retirement age is not raised.

The existing pension scheme faces three main problems. First, the country's aging population is increasing at a rapid pace. By the end of last year, the population of people over 60 years of age in China had crossed 200 million, accounting for nearly 15 percent of the total. By 2030, the population of the elderly will add up to 26.5 percent of the total, and peak to 440 million, or 35 percent of total population, in 2051.

The large proportion of senior citizens in the population is the result of the family planning policy, which has been followed for the past more than three decades. China's aging population will ultimately surpass the global average, demanding more funds for senior citizens' welfare through endowment insurance and medical benefit schemes. And given the current wide gap between income and expenses, the existing insurance system faces a huge operating risk in the near future.

Second, that current income levels cannot cover expenses is already evident in some regions of the country, and their number is growing. By the end of 2012, 19 of the 32 provinces and regions failed to cover their expenses, which means many regions have to depend on financial aid to ensure that pension is paid to retirees on time.

Third, to a certain extent, the current basic pension insurance system has become "accounting on cash basis", increasing the cash payment pressure. China has been following the model of "combining social pooling and individual account", in which social pooling funds are used to pay the basic pension and the individual account pays for old-age insurance. This means the system is designed to work as a "partly funding" model, which is ideal for modern society to ease the pressure of cash payment.