China’s top legislative body approved a plan on Friday to gradually raise the statutory retirement age, starting January 1 next year and concluding in 2040, according to state media reports.

The 15-year plan aims to increase the retirement age by three years for men, reaching 63 by 2040. For women, the retirement age will rise by five years for those in factory jobs (from 50 to 55) and by three years for those in white-collar positions (from 55 to 58).

Erica Tay, director of macro research at Maybank Investment Banking Group, described the reforms as “overdue and very much welcome” in comments to CNBC. She highlighted that China is facing a shrinking workforce and potential pension budget shortfalls that could harm the economy.

Economists have long advocated for changes to China’s retirement age laws, which are among the lowest globally and were set during a time of shorter life expectancies. The average life expectancy in 2023 is 78.6 years, up from approximately 44 years in 1960.

With declining birth rates and a relatively young retirement age, China’s working-age population is expected to continue shrinking. Tay noted that the policy will help mitigate a sharper decline in potential growth, even if only marginally.

Bruce Pang, chief economist and head of research for Greater China at JLL, praised the plan as a prudent move that balances demographic challenges with public expectations. Beijing had previously considered raising retirement ages but retreated due to public backlash.

Tianchen Xu, senior economist at The Economist Intelligence Unit, acknowledged that while the plan might be unpopular, it provides much-needed certainty and benefits China’s long-term economic outlook. He noted that China has avoided narrowing the retirement age gap between men and women and is proceeding cautiously to minimize social backlash.

Before the plan’s announcement, economists had warned that China’s pension system, reliant on a shrinking workforce to support an increasing number of retirees, was unsustainable. Sheana Yue, economist at Oxford Economics, explained that raising the retirement age would alleviate the pressure on local government pension funds, delaying outflows and providing time for budget adjustments.

The Chinese Academy of Social Sciences projected in 2019 that the pension system could run out of funds by 2035. However, Tay stressed that additional reforms are needed to enhance retirement adequacy, including a stronger pension system and diversified investment options.

The plan will be implemented gradually, with a complex calculation system. The Ministry of Human Resources and Social Security has provided tools for citizens to check their new retirement age on its website and mobile app.

The government has indicated that exemptions might be available and encouraged local governments to respond proactively to the aging population by supporting workforce participation and entrepreneurship. Xu warned that there may be further delays in the retirement age in the late 2030s if pension fund balances remain tight.