Demographic Armageddon

Aging population on course to wipe out Germany’s finances within 30 years

Oma und Enkelin untersuchen Teddy
On the upside, the teddy bear should be fine. Source: DPA

It doesn’t look like it, but Germany’s best years may well be behind it. It’s common knowledge that the country’s population has been steadily aging for decades. As a result, the share of retirees in the overall population is becoming a greater burden on public finances. But a new study by the Bertelsmann Foundation shows just how tremendous the problem could become in a matter of decades if nothing is done about it. And the picture looks bleak.

The study, which Handelsblatt has seen ahead of a conference of Germany’s government pensions committee next week, predicts that as millions of baby-boomers retire within the next few years, Berlin’s sacrosanct budget surplus will be wiped out as early as 2020. And things will go downhill from there.

While in 2020 there will three workers for every person over 65, the ratio will drop to 1:1 by 2035, the Bertelsmann Foundation has calculated. That does not bode well for a country where pensions, health care and old-age care are mostly funded with mandatory social contributions paid by workers. Their contributions are set to balloon to almost 50 percent of their incomes by 2040 from 40 percent today if Berlin fails to reform its pensions system.

“Germany’s public finances under current laws are unsustainable.”

Martin Werding, economist, Bertelsmann Foundation

That won’t be nearly enough to keep Germany’s finances afloat, however. The country will witness an “explosion” of its budget deficit and public debt from 2040 onward, the report says. By 2032, the deficit of Europe’s largest economy will exceed the 3 percent limit dictated by the European Union. And by the end of the 2040s, it will mushroom to 9 percent of the country’s GDP. As a result, Berlin’s debt will start rising again in less than two decades, to 80 percent of GDP by 2040 and 208 percent in 2060 (see charts below). That’s more than Greece’s current public debt-to-GDP ratio. “Germany’s public finances under current laws are unsustainable,” the study emphasizes.

The analysis also extrapolates that in 2080, Germany will have accrued an eye-watering 467 percent of its GDP in debt. Of course, this calculation is unlikely to be accurate, as are most predictions on such a long time span. But the extrapolation shows how dangerous the current trend is. Yet, Bertelsmann economist Martin Werding, who authored the study, is fairly confident that his predictions up to 2040 are reliable.

Worth still, he believes little can be done to change course until then. The economist based his calculations on fairly conservative assumptions: more than one percent of GDP growth per year over the next decades, net migration at 150,000 annually, and a birth rate of 1.4 children per woman. But, Mr. Werding notes, “the evolution of costs and contributions remains nearly identical until 2040 regardless of the demographic scenario.” The booming labor market, higher birth rate and high immigration Germany has seen in recent years have just slightly reduced the long-term demographic risks, he finds.

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Those findings fly in the face of policies the German government has enacted in recent years. The labor ministry has backed up the costs of the pensions system until 2030, so until then the welfare state is financially viable. But after that, it’s a leap into the unknown.

In the longer term, Germany can mitigate this evolution by bringing more women and seniors to the job market. But the government is not doing much to address this. In the last election campaign, economists urged Chancellor Angela Merkel’s conservative Christian Democrats to start a discussion on raising the legal retirement age to 70 from 67 currently. But their calls fell on deaf ears.

Germany will also need a higher birth rate and more immigrants to take up jobs as baby boomers retire. But this means the government will have to spend a lot more on education and on family policy instead of hoarding budget surpluses.

Or Berlin could just keep doing what it has done until now: Do nothing and hope things will magically sort themselves out. Maybe that’s why the government’s pensions committee will convene at the Berlin headquarters of the German Lutheran Church next Wednesday — the commissioners will pray for a miracle to save us.

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Martin Greive and Gregor Waschinski are political correspondents for Handelsblatt based in Berlin. Jean-Michel Hauteville adapted this article for Handelsblatt Global. To contact the authors: greive@handelsblatt.com, g.waschinski@handelsblattgroup.com, hauteville@handelsblatt.com.

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