This article examines China’s retirement age hike sparks urgency: 8 critical fixes the U.S. retirement system needs now. If you wish to skip our detailed analysis, you may go to China’s Retirement Age Hike Sparks Urgency: 5 Critical Fixes the U.S. Retirement System Needs Now
Learning from China’s Retirement Age Hike
With countries around the world grappling with aging populations and shrinking workforces, governments are being compelled to figure out how to fund their retirement systems. China’s bold move to raise its retirement age is a natural consequence of such circumstances, implying how many other countries could soon be (and already are) following suit.
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Proposals to gradually raise the statutory retirement age were approved by the top legislative body, with the retirement age for women in blue-collar jobs increasing from 50 to 55, while those in white-collar jobs increasing from 55 to 58. Men, on the other hand, will see an increase from 60 to 63.
This move is being undertaken to make the “best use of China’s human resources”, according to Mo Rong, director of the Chinese Academy of Labor and Social Security. The country has had its life expectancy rise from 40 years in the 1950s to over 78 years today, on par with the United States.
“The previous ages were set in the early 1950s. In 70 years, the country’s economic, social and demographic situation has changed enormously, and workers’ needs have diversified too, necessitating adjustments to the legal retirement age”.
-Wang Xiaoping, Minister of Human Resources and Social Security
As of today, China’s retirement age is still among the lowest globally—60 for men, 55 for women in white-collar jobs, and 50 for working-class women. The proposed increase in retirement ages is part of a set of resolutions approved during the Third Plenary Session, a top-level Communist Party meeting held every five years.
The Chinese Academy of Social Sciences projected in 2019 that China’s main state pension fund would be depleted by 2035, even before the economic impact of the COVID-19 pandemic. Meanwhile, the country’s population has continued to decline, with birth rates falling for the second year in 2023. Similarly, the U.S. faces a projected depletion of its Social Security Trust Fund by the mid-2030s, raising concerns about the financial readiness of Americans nearing retirement.
In the US, 55-year-olds are, in particular, critically “underprepared” for retirement. The lack of sufficient savings among Americans highlights the increasing reliance on Social Security, which, as mentioned, is itself projected to face significant shortfalls in the coming years. According to a report by Prudential Financial, Inc. (NYSE:PRU), 55-year-olds are far less financially secure than their older generations, which is going to make their retirement time quite challenging.
This challenge is further exacerbated by the fact that Social Security funds are projected to be depleted by the time this generation retires. Ultimately, they are going to be the first ones to experience retirement without full Social Security benefits.
“Attention today is rightly centered on the approximately 11,000 65-year-olds entering retirement every day, but we must also focus as an industry on the opportunity to help a slightly younger generation of workers entering the critical 10-year countdown to retirement. Further, the financial futures of certain cohorts — such as women — are especially precarious,”
-Caroline Feeney, CEO of Prudential Financial, Inc. (NYSE:PRU) U.S. Businesses.
Prudential Financial, Inc. (NYSE:PRU) is capitalizing on a significant global opportunity driven by aging populations and the growing demand for retirement products. With historic numbers of Americans turning 65, known as the Peak 65 trend, and millions of 55-year-olds entering the critical decade before retirement, the U.S. retirement market alone is projected to reach $137 trillion by 2050.
Being a leader in pension risk transfer and individual annuities, Prudential Financial, Inc. (NYSE:PRU)’s Retirement Strategies division is delivering solutions that secure customers’ financial futures. With nearly $22 billion in sales in the first half of the year—a 67% increase—the company is well-positioned to meet the evolving needs of retirees both in the U.S. and abroad.
While we acknowledge the potential of PRU as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PRU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Methodology
To compile our list of 8 Critical Fixes the U.S. Retirement System Needs Now, we analyzed China’s recent retirement reforms, focusing on the factors driving the changes, such as an aging population, a shrinking workforce, and pension fund sustainability. We then identified similar challenges facing the U.S., including the projected depletion of Social Security funds by 2035, rising life expectancy, and under-preparedness of near-retirement workers. Drawing parallels between these issues, we evaluated existing proposals and emerging trends, making our final list.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any government, agency, or institution. The information provided is for educational and informational purposes only
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Here are 8 Critical Fixes the U.S. Retirement System Needs Now:
8. Bolstering Bipartisan Support
Last but not least, the US must learn to navigate its complex political divides. A key fix for the U.S. retirement system is building bipartisan support for comprehensive reform. This could include a combination of raising the retirement age, adjusting taxes, and expanding immigration. Building consensus across party lines will be essential to enacting meaningful change, which China can achieve more easily under its political system.
7. Public Pension Reforms
The U.S. needs to look at reforms to state and local government pension systems, which often face underfunding challenges. Introducing measures like adjusting pension benefits, increasing contribution rates, and adopting hybrid pension plans (a mix of defined benefits and defined contributions) could make these systems more sustainable in the long term.
6. Increasing Taxes on Higher Earners
As of 2024, millionaires reached the Social Security payroll tax cap of $168,800 by March, freeing them from further payroll tax obligations for the rest of the year. That said, ideas like billionaire taxes to keep the program afloat are widely being welcomed by many registered voters around the country, several polls show. By removing or raising the cap, higher-income earners would be able to contribute more to the system. This way, the Social Security program will remain solvent for longer without impacting lower and middle-income earners.
5. More Immigration
While many Americans won’t like the sound of this, America needs more immigrants to keep its labor force from shrinking. Back in 1960, an estimated 5.1 workers were supporting each person receiving a Social Security check. As of 2022, that ratio stands at 2.8 workers per beneficiary. That said, the current level of payroll taxes is insufficient to keep the program afloat. Longer lives, an aging population, a shrinking workforce, and slower birth rates have all come together to form a looming retirement crisis. According to a 2023 report from the SSA, the Social Security program can stay solvent for longer if more immigrants keep coming in. Retirement is very far away for these immigrants who come in young and work longer.
4. Encouraging Population Growth
While China’s one-child policy is responsible for its low birth rate and its ultimate retirement reforms, the declining birth rates in America are largely due to social and economic reasons. Women in the country are more motivated to establish their careers, delaying family planning in the process. Rising costs of living, lack of paid family leaves and other family-friendly policies are further leading to failing fertility levels in the country. Offering economic policies to American citizens such as affordable housing, subsidized childcare, and similar incentives will in turn encourage Americans to start family planning.
3. Incentives for Late Retirement (Additional Incentives)
While the Social Security program already provides higher Social Security payouts to those who wait until the age of 70, it isn’t apparently enough. Many seniors think they won’t be able to survive by that time or are already in need of retirement funds due to a lack of savings on their end. This is why additional incentives—such as further tax breaks, enhanced pension contributions, or healthcare benefits—could encourage more Americans to delay retirement.
2. Extending the Years Required for Social Security Eligibility
Beginning in the year 2030, the Chinese would have to contribute more to the Social Security system to receive pensions. A total of 20 years of contributions will be required by 2039. Similar to the move, the US should also consider raising the number of years individuals contribute to Social Security to be eligible for full benefits. Raising the retirement age and extending years of work can be a potential solution to the insolvency challenge that the program is facing. Even BlackRock, Inc. (NYSE:BLK) CEO Larry Fink agrees, stating that the US’s current retirement age is a bit “crazy” given the current circumstances.
“Think about someone who was 65 years old in 1952, the year I was born. If he hadn’t retired already, that person was probably getting ready to stop working. But now think about that person’s former colleagues, all the people around his age who he’d entered the workforce with back in the 1910s. The data shows that in 1952, most of those people were not preparing for retirement because they’d already passed away”.
-BlackRock, Inc. (NYSE:BLK) CEO wrote.
1. Gradually Raise the Retirement Age
Social Security benefits can start as early as age 62, but the full retirement age for those born in 1960 or later is 67. Today, the life expectancy at birth is in the late 70s, around 77 years. When the Social Security program was enacted in 1935, life expectancy at birth was approximately 61 years, while the eligibility to retire was 65. As of today, things need to change urgently for the program to keep solvent. Social Security funds are at stake due to shrinking workforces and an ever-aging population, similar to China. Just like China’s incremental retirement age is designed to address this growing imbalance, the US needs to do the same. A gradual rise in the retirement age can help the system adjust slowly, all while giving future retirees sufficient time to plan their future.
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Disclosure: None. This article was originally published on Insider Monkey.
