China's Aging Surge Threatens Economic Prospects; Funded Pension System, Old-Age Safety Net Required to Avoid Hardship.

Business Editors

WASHINGTON--(BUSINESS WIRE)--April 19, 2004

China faces an unprecedented surge in its elderly population that threatens to undermine its economic development and put an unsustainable burden on public budgets and extended families, according to "The Graying of the Middle Kingdom," a new CSIS report. The report finds that to meet this growing challenge of an aging population, China must implement an old-age safety net and establish a genuinely funded pension system.

The Graying of the Middle Kingdom, available at www.csis.org/gai/GrayingKingdom.pdf, reports that "the magnitude of China's coming age wave is staggering." "By 2040 there will be 397 million Chinese elders, which is more than the total current population of France, Germany, Italy, Japan, and the United States combined. How China navigates its aging challenge will go a long way toward determining whether it achieves its aspiration of becoming a prosperous and stable developed economy."

The report was written by Richard Jackson, director of the CSIS Global Aging Initiative and Neil Howe, CSIS senior associate. The research was supported by The Prudential Foundation, the nonprofit grantmaking arm of Prudential Financial. Inc. (NYSE:PRU), which makes strategic grants for social purposes.

"Global aging will have far reaching implications, especially in China, around how pension programs are reformed and how individuals will establish financial security for their retirement years," said Douglas Fergusson, president of Prumerica Financial Asia. "It is our hope that this research made possible by the Prudential Foundation will provide useful insights for government agencies, private institutions and individual investors as they address the issues associated with China's aging population," Fergusson said. Prumerica is the brand name used in China and select markets outside the United States by Prudential Financial, Inc.

"Aging is a significant issue domestically and abroad, and the well being of citizens are of great concern," said Gabriella Morris, president, The Prudential Foundation. "It is through initiatives such as this report on global aging that we help achieve the Foundation's goal of raising public awareness and stimulating discussion on critical and emerging social issues."

CSIS President and CEO John Hamre said: "The age wave may pose an enormous challenge, but it need not cut short China's astonishing rags to riches story--provided that China makes the correct policy choices today. If China fails to confront the aging challenge, it will face a future of diminished economic prospects and limited influence in world affairs. If China rises to the occasion, its horizons are limitless."

The Graying of the Middle Kingdom describes China's coming demographic transformation, the economic and social challenges it poses, and how it will affect China's competitiveness in the global economy. According to the report, the aging of its population will soon compel China's leaders to confront new and unprecedented challenges:

-- A shrinking working-age population: China's working-age

population will peak in 2015 and then begin to decline. All

told, China is on track to lose between 18 and 35 percent of

its workforce by mid-century.

-- A burgeoning elderly population: Thirty-five years ago,

children in China outnumbered the elderly six to one.

Thirty-five years from now, the ratio will be two to one--the

other way around. China's demographic transformation is

occurring with remarkable speed. By the 2030s, China will be

an older country than the United States.

-- An inadequate old-age safety net: Overall, three out of four

Chinese workers have no formal retirement provision at all.

Without reform, China will soon have tens of millions of

indigent elders who lack nearby families, pensions, and access

to healthcare.

The report urges China to put in place a broad-based floor of old-age poverty protection supplemented by a genuinely funded pension system. According to the report, funded pensions can help an aging China maintain adequate rates of savings, investment, and living standard growth. They will also give workers a stake in the success of economic reform, broaden and deepen China's capital markets, and speed its integration into the global economy. As individually owned pension funds grow, so will the size and liquidity of China's capital markets. Professional fund management would increase accountability, transparency, and long-term returns. "Funded pensions are the ground zero where China's development and aging challenges meet," the report states.

Modernization Puts Stress on Retirement System, Previous Reforms Fall Short

China's state-owned and collectively owned enterprises have historically offered workers generous pension and health-care benefits. "But as the state-owned sector has downsized, many workers have moved to the private sector, where they have no pension or health care benefits at all," the report states. "Most Chinese still depend on their children to care for them in old age, but as birthrates decline and urbanization breaks up extended families, this informal safety net is beginning to unravel."

China is taking serious steps to address the challenge. In the late 1990's, the State Council began to extend pension coverage to private sector enterprises. At the same time, it initiated a transition from the old pay-as-you-go system, in which current workers are taxed to pay for current retirees, to a new two-tiered system consisting of scaled-back pay-as-you-go benefits and personal retirement accounts. But according to The Graying of the Middle Kingdom, the reforms are running into serious trouble. "Private businesses are resisting joining the pension system, since their contributions mostly go to pay off the unfunded liabilities of the state-run enterprises," the report states. "As for the personal accounts, they are entirely unfunded. China's municipal and provincial social security bureaus routinely divert the contributions to cover deficits in the system's pay-as-you-go tier."

Successful Reform Would Boost China's Economic Influence

The Graying of the Middle Kingdom concludes that China's success in meeting the aging challenge will help determine its future stature in the global economy. "If China fails, it may face a serious economic and social crisis later in the century. If China is successful, the future will not only be one in which elders retire in greater comfort and families live with less worry, it will also be a future in which capital formation is stronger, living standards are higher, and public trust in government is firmer," the report states. "Most of all, it will be a future in which China's maturing role in the global economy undergoes a basic shift - from a vast reservoir of unskilled labor to a dynamic, high-saving, high-investing, high-value-added economy. The whole world thus has a stake in the outcome."

Founded in 1977, The Prudential Foundation is the nonprofit grant-making organization of Prudential Financial, Inc. It is part of Prudential's Community Resources Department, a strategic combination of three units: the Foundation, which strives to build children and families' self sufficiency; the Social Investment Program, which originates and manages socially beneficial investments; and Local Initiatives, which coordinates employee volunteerism and fosters community outreach.

Prudential Financial companies, with approximately $432 billion in total assets under management as of December 31, 2003, serve individual and institutional customers worldwide and include The Prudential Insurance Company of America, one of the largest life insurance companies in the U.S. These companies offer a variety of products and services, including life insurance, mutual funds, annuities, pension and retirement related services and administration, asset management, securities brokerage, banking and trust services, real estate brokerage franchises and relocation services. Prudential Financial is not affiliated with Prudential plc of the United Kingdom. For more information, visit www.prudential.com.