Analysts argue that despite its unpopularity, China's decision to raise its retirement age is necessary.

• The official plan to gradually increase China's statutory retirement age from January 1, 2022, to 2040 was passed by the country's top legislative body on Friday.
• There have been calls from economists for years to reform the country's retirement age laws, which are among the lowest in the world and were established during a time when life expectancies were lower.

The Chinese government has approved a plan to gradually increase the retirement age from January 1, 2022, to 2040.

The objective of the 15-year plan is to increase the retirement age for men by three years to 63, for women working in factories by five years to 55, and for women working in white-collar jobs by three years to 58.

Erica Tay, director of macro research at Maybank Investment Banking Group, expressed her view that the reforms are "long overdue and greatly appreciated" when speaking to CNBC.

The shrinking workforce and impending pension budget shortfalls in China pose a significant threat to the economy.

Since the 1960s, when the retirement age was set, life expectancy has increased significantly, and economists have long advocated for a change in the nation's retirement age laws.

Ageing demographics

The working-age population in Beijing will continue to decline due to its low birth rates and early retirement age.

To mitigate a sharper drop in China's potential growth, the country needs to be able to tap into its pool of older workers when workforce contraction becomes more acute in the next decade, according to Tay.

Bruce Pang, chief economist and head of research for Greater China at JLL, an investment management firm, advised striking a balance between fixing demographic stagnation and managing people's expectations in a gradual and measured pace.

Beijing had previously considered raising retirement ages but abandoned the plan after sparking public backlash.

Although the plan may be unpopular, it offers much-needed certainty and is beneficial for China's long-term economic growth, according to Tianchen Xu, senior economist at The Economist Intelligence Unit, who spoke to CNBC. He pointed out that China has managed to avoid closing the five-year gender gap.

Xu stated that China is proceeding with caution to prevent further social opposition.

Pension Crunch

The pension system in China, which depends on a declining active workforce to fund an increasing number of retirees, is unsustainable and requires reform, according to economists prior to the announcement.

An economist from Oxford Economics, Sheana Yue, stated that raising the retirement age would ease the pension pool cash crunch faced by local governments. Although inflows may not change significantly, outflows will be delayed, providing local governments with more time to address their budget deficit.

The Chinese Academy of Social Sciences predicted in a 2019 report that the pension system would be depleted by 2035.

To ensure sustainable retirement savings, China needs a stronger pension plan and diversified investment avenues, according to Maybank's Tay, who emphasized that more needs to be done to improve retirement adequacy.

The Ministry of Human Resources and Social Security in China has introduced a system for citizens to calculate their retirement age on its website and mobile app.

Beijing urged local and regional governments to actively address the aging population by encouraging and supporting people to join the workforce or start businesses, while also considering granting exemptions to certain individuals, as stated in a translation of the Chinese by CNBC.

If China's pension fund balance is tight, it may delay again in the late 2030s, advised Xu.