Germany’s economy has been struggling lately as weak demand and high energy prices have hampered growth. But the biggest long-term problem probably stems from a demographic crisis that began decades ago.
Like most developed countries, Germany’s population is aging, meaning a relative increase in the number of retirees and fewer workers – a combination that threatens economic growth and public finances.
The impact is minor for now, but as the International Monetary Fund warned in its report, report on TuesdayAn aging population could cause serious problems in a few years.
What’s new?
Nothing. Policymakers have known for decades that Germany’s demographics would increase the dependency ratio: the number of people not working per person working. It’s just now starting to have an effect.
Although it sounds innocuous, the dependency ratio is a vital economic indicator. Other things being equal, the fewer workers there are in relation to the rest of the population, the higher the tax burden on each working person and the lower the output per capita.
IMF predicts that Germany’s annual working-age population growth rate will fall by 0.7% over the medium term (it hasn’t specified this, but that typically means single-digit years in the economy) – more than any other G7 country as baby boomers begin to emerge retirement and the influx of immigrants is weakening.
“An aging population … will negatively impact government finances as tax revenue growth slows and pension and health care costs rise,” the organization said in its report.
The German pension system, which has its origins until 1889, relies on contributions from current workers to support retirees. However, since the 1960s, the ratio of workers to retirees has plummeted from 6:1 to just 2:1.
Aging within the workforce is also a concern. While effect varies Depending on the region and industry, there appears to be a negative relationship between the average age of workers and productivity growth in the knowledge economy.
What does it mean?
It will be even worse, and not only for Germany. Japan is the world’s greatest testing ground for an aging population, with decades of low birth rates and little immigration. But a lot Europe also faces a similar problem.
Let’s take Greece for example. It has the lowest birth rate on the continent, with the fewest registered births. at 92 years old in 2022. In Italy and Finland, fertility rates are also well below replacement level, meaning that each new generation is smaller than the previous one.
Germany will feel the downturn more acutely in the coming years due to ongoing difficulties with labor shortages. Its economy is already struggling with the fallout from a Russian energy shutdown while coping with high interest rates. This is on top of other issues that could undermine its long-term competitiveness. including structural barriers such as underinvestment and bureaucratic red tape.
Of course, some economic forces are working in Germany’s favor. Inflation has shown signs of cooling, and the country’s unemployment rate is under control compared with some of its neighbors. But over time, resistance to an aging population will only intensify.
Is there anything that can be done?
The most obvious way to change this fate, or at least significantly delay it, is through large-scale immigration. The UK, for example, has taken this approach with record net immigration in recent years.
“One of the key indicators of long-term success or less relative decline is your ability to attract migrants and include them in the workforce,” said Jens Eisenschmidt, chief European economist at Morgan Stanley. Luck earlier this month.
But this approach creates political tension, far right parties who generally oppose the growing popularity of immigration in various European countries.
An alternative is to attract those parts of the German population who could join the labor force, for example by encouraging more women to enter full-time work. This could mean incentivizing them if they are carers by offering extra childcare support.
Changes to the current pension system could also help the government accommodate higher spending costs for an aging population.
Another strategy is to rely on technology. Germany already has a plan to expand the use of robots and artificial intelligence in roles that face talent shortages or that can be supported by digitalization.
In reality, the aging workforce is too big a problem to be solved by one measure or even several measures. Instead, governments and businesses will likely have to adapt to this, which, as with issues like old age, will require some long-term thinking.