Large-scale public demonstrations are not seen often in a Chinese city. But in Dandong in 1998, I observed a large-scale sit-in in front of the Town Hall. Everything was perfectly peaceful, and the police were making no effort to intervene or disperse the crowd. I asked my local friend what was happening. She explained that the city's elder residents were protesting because their pensions were not being paid. Her own parents had joined the demonstration at some point. And it was true: The average age of the demonstrators was well over 60, which was probably why the police had been told not to be rough. I don't know whether the grievances of Dandong's senior citizens were resolved, but I did get an uneasy feeling that this may be the shape of things to come.

The problem, of course, was that the old "danwei" system had become unsustainable. In the pre-reform era, every Chinese had a designated work unit, which was responsible for housing, healthcare, children's education, and care in old age. Especially in the country's northeastern cities like Dandong, the old industrial enterprises had largely been left to go bankrupt, and there was simply no money to pay the pensions of the retired workers.

However, up until now, China's great advantage, and one much admired in the West, has been the strength of family ties. At the moment, older Chinese have limited expectations of what the government can do for them, preferring to rely more on their families. And most of them, having experienced extreme poverty, are satisfied with a fairly modest lifestyle. In this, my wife's parents in Chongqing are very similar to my own mother in England - they are all retired public sector workers on a modest pension, and they are still able to live with simple dignity and be generous to children and grandchildren. Yet valuable though the Confucian sense of family obligation is, it won't last forever. Among the younger generation in the cities, the divorce rate is fast catching up on that in the West. This is a tragedy both for families and for a nation. It can break ties with parents and grandparents, as well as impoverishing everyone involved except for the lawyers.

And thus China has no alternative to a reform of the pension system. As any European will agree, this will be a tall order. We too are having to look carefully at the sustainability of our pensions. There is talk in Britain of a gradual rise in the pension age from 65 to 67, 68 or even 70. It is clear that, in the 21st century, following the economic advances which have increased life expectancy to 80 and higher, China's basic retirement age of 60 for men and 50 for women (55 if she works in the public sector) is no longer sustainable. (A female friend of mine, who holds a very high position and will be 50 in August, just laughed when I suggested she might retire after working 15-hour days for thirty-five years.)

But, like China, we are also worried by the extent of youth unemployment. If those people lucky enough to be in work in their fifties and sixties carry on and on, how are young people going to find jobs? I have seen suggestions that people may retire, but still have to pay contributions into pension funds and wait a few years before actually drawing the pension. Fine in principle, but where is the money to come from if one is neither working nor receiving a pension?

I am no economist, but a recent article on China.org.cn by chief economist of Haitong International Securities Hu Yifan, pointed out that China's pension funds have not yet been compelled to find an effective investment strategy. It is about time they were, even if this involves a slightly greater degree of risk. However, even the best investment strategy may not in the end be enough. There are limits to the growth of the economy; there are no limits to the growth of expectations, as we in the West know only too well.

The Chinese government will really need to concentrate on managing expectations. Any reformed pension system will create an expectation of future benefits in an enormous number of people. The improvement of lifestyles will create a demand that these lifestyles be sustained, and this will be very difficult for either governments or insurance companies to guarantee. As China has not yet developed a comprehensive mechanism for establishing one's acknowledged rights, and for seeking redress if they are not forthcoming, there is a risk of very large numbers of disappointed people forming a dangerous mass of discontent. And they won't be as harmless and orderly as the old people of Dandong in 1998.

The author is a retired British diplomat who spent most of his career in China and Germany. He has a column at The Telegraph.