In this article:

Japan is the most advanced - both in age and in working out how to deal with an ageing population. China is at the tipping point as the effects of the one-child policy, which turned off the supply of ever more young workers, take hold. But we start with Saudi Arabia, in the press a lot lately for unrelated reasons, but subject to demographic upheavals which will change the future shape - and perhaps destiny - of the country.

Source: World Bank, Fidelity International, 2018. Young population as percentage of working age population.

Source: World Bank, Fidelity International, 2018. Elderly as percentage of working age population.

Saudi Arabia

Saudi Arabia is a demographic outlier. While many countries are dealing with slow growing, ageing populations, Saudi Arabia’s population has more than doubled in the last 30 years. And that growth has kept it young, with 58 per cent of Saudi nationals yet to hit their 30th birthday.

Source: World Bank, Fidelity International, October 2018. Includes Saudi nationals and expatriates.

Source: World Bank, Fidelity International, October 2018. Includes Saudi nationals and expatriates.

All those new additions require jobs. Saudi Arabia has a working population of only 14 million yet needs to create half a million jobs in the next five years just to keep pace with the growing workforce, according to the IMF. And if female participation rises by just 1 per cent each year, which could happen as social norms develop, the number of jobs needed increases to 1.4 million. That represents almost twice the rate of job creation seen over the past five years.

Historically, many young Saudis have found roles in the public sector. Private sector jobs, especially low-skilled positions in construction and other oil-related activities, are mostly filled by migrant workers. But with oil revenues expected to decline, the public sector will not be able to accommodate the growing population. The Kingdom urgently needs to diversify its economy, attract foreign investment and dramatically increase the number of private sector jobs available. Last year policymakers enacted austerity measures, including reducing subsidies on petrol and introducing a value-added tax, as part of a plan to bolster state finances.

More work please

Creating jobs is one thing, encouraging greater numbers into the workforce is another. The Saudi labour force participation rate is only 40 per cent, compared with a global average of 63 per cent. Men start to leave the workforce from around the age of 50, despite the official retirement age recently rising from 60 to 62. The 18 per cent of women who work drop out even younger than that. Given the size of the population under 30 and rising life expectancies, this will create substantial pressure on the pensions system in years to come.

In an effort to encourage employment of its own nationals, the government has taxed firms with a majority of foreign workers, raised the price of work visas for migrants, and started training the local workforce.

Source: World Bank, Fidelity International, October 2018.

Policymakers have gone so far as to require firms in certain industries to hire a set number of local staff per expatriate on the payroll. From this year, retailers selling anything from medical supplies to carpets to sweets will only be able to employ Saudi nationals.

However, the younger generation have grown up with parents in secure public-sector jobs and many see careers in hospitality and retail as beneath them. The youth unemployment rate for Saudi nationals is rising at a time when the number of unskilled visas for migrant workers granted is also increasing. Changing attitudes may yet prove to be the biggest challenge facing the authorities.

A bigger role for women

Encouraging more women into the workforce has also become a priority. Living standards and basic education levels among Saudi women are high. Yet Saudi Arabia has one of the largest gender employment gaps in the world. To address this, authorities are increasing the provision of childcare facilities and have recently allowed women to start their own businesses without the permission of a male guardian. Lifting the ban on women drivers has made it easier for them to get to work. However, increasing female participation brings its own problems. Cultural norms are hard to change and until they do, practical issues like segregated workplaces will need to be introduced where required.

Source: World Bank, Fidelity International, September 2018. Female labour force participation as a percentage of total, 2017 figures.

The effect of these labour market policies is questionable. The IMF has calculated that an increase in female labour force participation by 1 per cent a year for the next five years would increase real output by around 2 per cent. But there is evidence to suggest that setting quotas for Saudi nationals is a significant administrative and compliance burden on the private sector, forcing some companies to shut down and decreasing total employment at surviving firms.


Education participation levels and attainment in Saudi Arabia have historically been very low by international standards. In 2014, 31 per cent of 25-34-year-olds did not have an upper secondary education, compared to the OECD average of 15 per cent. Authorities in the country are updating the school curriculum to have a greater focus on science, maths and vocational skills, as part of a drive to make future generations of Saudis more employable. Thanks to public investment, university enrolments have increased dramatically in recent years, up from 31 per cent of the official tertiary age population in 2008 to 67 per cent in 2016.

Social contract is changing

Saudi Arabia’s social contract is changing and as the country diversifies away from oil young Saudis will not enjoy the same generosity from the government as their parents.

As economic freedoms decline, the authorities are offering more social freedoms to replace them. Last year, the first public screening of a film in 35 years was the Hollywood superhero movie Black Panther. Last year Riyadh hosted the first live music concert in the country for 25 years. There are plans to develop sports facilities and increase participation rates in physical activity. Girls were allowed to take part in physical education in schools for the first time last year.

The challenge facing policymakers is one of balance. They will have to provide younger generations with enough social freedom to compensate for tougher working lives, without offending the more conservative elements of society.


The generation that drove China up the economic league tables is about to clock off for good. Through the Cultural Revolution of the 1960s and 70s, the message for families in China was the larger the better. And people listened. In 1970, China’s population grew by 2.7 per cent, the median age was 19 and the fertility rate stood at an eye-watering 6.25.

For three decades, China reaped the demographic dividend of its huge population, the largest of any country on earth. Its booming young workforce provided the backbone of a flourishing manufacturing sector, which helped launch it into the orbit of global economic super powers.

However, in 1979 authorities applied the brakes. Daunted by its population explosion, China implemented the one-child policy for urban couples. Concurrently, better healthcare services, particularly across rural areas, helped push life expectancy from 43 in 1960 to 76 by 2016. These policies sparked a fundamental shift in China’s demographics, the social and economic consequences of which will reverberate for decades.

Today, its population is growing by around 0.4 per cent, the median age is 37 and fertility has dropped to 1.61. The large pool of low-cost workers who helped drive China’s manufacturing success is reaching retirement. The over-60s are forecast to comprise almost 39 per cent of the population by 2050, each one supported by a mere 1.3 workers. China’s state pension system is under-developed and, in some provinces, underfunded. All of which begs the question of who will provide for the coming wave of retirees.

Source: World Bank, Fidelity International, October 2018

Source: World Bank, Fidelity International, October 2018.

The only child’s burden: The four-two-one family structure

Traditionally, it falls to children to support their parents through their twilight years; a duty that, in previous generations, might have been shared across several siblings. However, due to the proliferation of one-child families, tens of millions of working-age Chinese will have to shoulder the responsibility alone. Not just for two parents, either. Leaps in longevity mean each child might also have to support up to four grandparents.

China has long had one of the highest rates of household savings in the world, underpinned by factors such as government policy, a lack of confidence in the state’s safety net, and a national culture of thriftiness. But this is unlikely to provide enough of a retirement cushion for most and their offspring might not be able to plug the gap. As living costs soar, particularly for housing in larger Chinese cities, people are accruing more debt.

Source:, Fidelity International, October 2018

This doesn’t bode well for halting the declining birthrate. People tend to have fewer children when their household costs are already high and rising. Faced with a reversal in China’s demographic fortunes, the government relaxed the one-child policy in 2013, allowing couples to have a second child where either parent was an only child. Authorities predicted an additional two million births in 2014; but only 470,000 extra babies arrived. The revised policy was extended to all couples in 2016, but the birthrate remains below replacement levels.

Consumption concerns

As the population ages and financial pressures grow, consumption patterns will change. Concerns are already mounting that the vaunted rise of the Chinese consumer might have run its course, with the revived popularity of cheaper products such as instant noodles offered as evidence of a consumption ‘downgrade’.

Too old, too soon

China risks growing old before it gets rich. It will take 20 years for its proportion of elderly to double from 10 to 20 per cent (2017-2037) of the population - a process that took 61 years in Germany. But at its core, China is still a developing economy; per capita GDP is only a fifth of Germany’s.

The government has been explicit about its desire to move away from the investment and export-led growth typical of emerging economies, to a more sustainable service and consumption-driven model. For now, the manufacturing sector is still largely focused on lower-end, high-volume output; but its shrinking workforce and rising wages will increasingly squeeze profits and blunt its competitive edge. Meanwhile, the working population does not currently have the skills to propel China up the value chain and position it as a global hub of technology and innovation.

Addressing these issues will require considerable investment, at a time when retirees will increase their demands on the public purse.

Is the government ready?

China’s three-pillared pension system is currently ill-equipped to meet the needs of the growing influx of pensioners. The first pillar consists of the centrally-managed National Council for Social Security Fund (NCSSF) and the Public Pension Fund (PPF), run at the provincial level. Some provinces are already facing a funding shortfall, exacerbated by meagre returns. The PPF, which is only allowed to invest in cash or government bonds, had an average annual rate of return of only 2.5 per cent between 2012 and 2016.

Meanwhile, the state system has no individual accounts, so contributions can’t be tracked, nor can they be transferred between provinces when workers move. The household registration system is a challenge in itself: millions of economic migrants, who’ve shifted from their home provinces, often lose their automatic entitlement to a range of benefits, such as health insurance or the pension.

The government has launched a range of reforms, including allowing provinces to outsource PPF management to the NCSSF (which, thanks to its ability to invest across wider asset classes, averaged returns of 7.1 per cent a year in the 2012-2016 period). Yet changes are not broad enough.

The second and third pillars, covering enterprise and occupational annuities, and private individual pensions have yet to gain much traction, although the government pledged progress on both in its 13th Five-Year Plan (2016-20). Education seems the main focus, stressing the importance of saving for one’s own retirement. Tax incentives would probably be more persuasive, but there is no sign of these yet.

The same Five-Year Plan proposed gradual increases to China’s official retirement ages. They are among the world’s lowest, at 60 years for men, 55 years for female white-collar workers and 50 years for female blue-collar employees. These planned increases have not yet been enacted, showing that political will has not caught up to China’s looming demographic challenges.


No country is older than Japan. It has the world’s highest proportion of over 65s, at 28 per cent of the population. Not that 65 is particularly old in a country where one in five is over 70 and citizens can, on average, expect to live into their mid-80s. By 2040, roughly 35 per cent of Japanese will be 65 or older; by 2050 there is likely to be only 1.5 people of working age supporting every retiree.

While a long life is a good problem for an individual to have, at a state-wide level it can be economically disruptive.

Source: World Bank, Fidelity International, October 2018.

Source: World Bank, Fidelity International, October 2018.

Labour pains

One of Japan’s greatest challenges is a dearth of workers. Not only is the country ageing, it is shrinking too. According to government estimates, its population of roughly 127 million could fall to 86 million by 2060. The economic implications are numerous and severe: declining productivity, falling income tax revenues, and further downward pressure on inflation in a country that has struggled to get consumer prices off the floor for years.

Source: Fidelity Investor Education Institute, April 2018, National Institute of Population and Social Security Research: population forecast.

Technological advances in robotics and artificial intelligence may plug some of the gap by boosting labour efficiency. And Prime Minister Abe has signalled another rise in consumption tax from 8 to 10 per cent next year, which has the benefit of distributing the tax burden across a wider swathe of the population. However, these measures will not be enough and the government seems to recognise this.

Women in the workforce

More babies would help. Japan’s fertility rate of around 1.4 is well below the 2.1 required to keep the natural population ticking over. Yet, couples could be forgiven for holding back given the financial strain of raising and educating children, while also caring for ageing parents. And that’s before they confront their own uncertain retirement.

In the shorter-term, working-age women could provide at least part of the answer to Japan’s chronic labour shortage. Men have long outnumbered their female counterparts in the workforce, partly due to ingrained attitudes about the traditional role of women in society. According to some estimates, closing the gender employment gap could boost economic growth by almost 13 per cent.

It requires more than a shift in mind-set: there are also structural obstacles, particularly for mothers. Daycare spots are limited and few families can afford nannies. The prime minister’s pledge to expand childcare to every mother who wants to return to work has yet to be realised in a meaningful way. The number of women working is rising, but it’s difficult to discern how many of these are part-time or in lower-paid contract roles.

Laying out the welcome mat

Opportunity also lies outside its borders, in the form of foreign workers. How willing Japan is to tap this source of labour is another matter; immigration has proved a contentious topic in one of the world’s most homogenous societies. Many fear that opening the doors to an imported workforce will have a detrimental impact on the country’s social fabric, highlighting the lack of infrastructure to support non-Japanese speakers, especially.

However, it seems to be dawning on the government that it has little choice. In recent years, it has loosened rules and created new residency statuses for workers in areas where shortages are most acute, such as agriculture, social care, construction and hotels. Last year the number of foreign workers in Japan reached 1.28 million, up 18 per cent on the previous year. Although, to put this in context, foreign nationals still represent only around 1 per cent of the population, compared with over 12 per cent in Germany.

Embracing longevity

Few people look forward to ageing. It can be an expensive time of life, for both society and individuals. As people retire they can lose their sense of identity and networks, health can deteriorate and they often require care. By 2025, it’s estimated that one out of every 20 people in Japan will suffer from dementia; this could grow to one in 10 by 2050.

However, many remain fit and healthy well into their later years. Prime Minister Abe has latched on to this, forming a ‘Council for Designing the 100-year Life’ to galvanize the population, encouraging people to consider both the necessary preparations, as well as possibilities of living close to or beyond a century.

Many of the committee’s key recommendations revolved around increasing employment opportunities for older generations. This serves the dual purpose, of plugging holes in the workforce, as well as benefiting those who are motivated to work beyond 60, the official retirement age. Plans are already afoot to gradually push this out to 65 and Mr Abe has said he would like to see it eventually move beyond that, with people allowed to defer their pension until 70 or later.

However, this would require an overhaul of labour policies. Anyone over 60 is allowed to work, but many companies move them off the regular payroll into lower-paid contracts with fewer or no benefits. The seniority-based salary system would also need to change to reflect longer working lives, though this would be a tough sell to fans of the status quo. Meanwhile, it hardly seems fair to expect 70-year-olds to keep pace with Japan’s fabled hard-working salarymen.

In a 2017 survey, 37 per cent of Japanese youth said they expected to work until they die. While that sounds pessimistic, the government is doing its best to increase their opportunities to do so.

Playing catch-up

Though demographic changes typically occur at a glacial pace, they are not always adequately prepared for in advance. This is partly why Japan, home to the world’s oldest population, is searching high and low for labour capacity, while China finds itself potentially stalled half-way up the economic ladder as past policies come home to roost. And, at the other end of the spectrum, why Saudi Arabia is trying to ensure its ever-expanding workforce has somewhere to work.

Each is facing a different set of challenges, driven by history and circumstance. However, their quandaries are similar in some respects: solving them will come at a cost and require compromise. Shifting tectonic plates can change the physical environment, but demographic moves can radically alter a country’s social and economic landscape.

Satoshi Nojiri

Satoshi Nojiri

Head of Investor Education Institute

Stella Xu

Stella Xu

Institutional, China and Hong Kong

Vanessa Glennie

Vanessa Glennie

Investment Writer

George Watson

George Watson

Investment Writer