Aging crisis looms for Germany, states US institute

A special report on Germany, published by the US-based Center for Strategic and International Studies (CSIS) in March 2003, examines the effects of aging and, in particular, the effects of a shrinking labour force on the German economy. It finds that, unless Germany implements sweeping reforms, it will face fiscal crisis, widespread labour shortages and slower economic growth

In March 2003, as part of its Global Aging Initiative (GAI), the Washington-based Center for Strategic and International Studies, CSIS) released a special report entitled Germany and the challenge of global aging, which examines the way that the aging population is likely to transform Germany’s economy over the next half century. The report asserts that, unless Germany implements sweeping reforms, it will face an era of fiscal crisis amid widespread labour shortages and slower economic growth - an issue which has also been under debate in Germany (DE0304103N).

The report is a follow-up study to the CSIS Aging Vulnerability Index 2003 which is, according to the Institute, the first attempt to develop a comprehensive measure that is comparable across developed countries of the 'old-age dependency challenge'. The projections underlying the Index are based on a 'no wishful thinking' demographic and economic scenario as well as on a baseline that assumes a continuation of historical trends in the 12 countries considered. Australia, the UK, and the USA rank high in the Index, and are seen as being best situated to address the challenge posed by an aging society without major fiscal or economic stress, due to favourable demographics, modest benefit systems, and strategic policy choices. Germany belongs to a group of six 'medium-vulnerability' countries that, it is claimed, will face more serious demographic changes, and heavier old-age dependency burdens than the low-vulnerability countries - see the table below.

Aging Vulnerability Index 2003
. Low vulnerability Medium vulnerability High vulnerability
Rankings from least to most vulnerable 1. Australia 2. UK 3. USA 4. Canada 5. Sweden 6. Japan 7. Germany 8. Netherlands 9. Belgium 10. France 11. Italy 12. Spain

Source: Center for Strategic and International Studies, 2003.

For each of the 12 countries, the index is compiled from separate indicators in four basic categories.

  • 'public burden' indicators, which track the growth in public spending caused by an ageing society;
  • 'fiscal-room' indicators, which track a country’s ability to accommodate aging costs through higher taxes, cuts in other spending, or borrowing;
  • 'benefit-dependence' indicators, which track how dependent the elderly are on public benefits and, thus, how politically difficult it will be to reduce their 'generosity'; and
  • 'elder affluence' indicators, which track the relative affluence of the old vis-à-vis the young.

According to the author, Richard Jackson, a member of CSIS and an adjunct fellow on the GAI, Germany’s combined bill for pensions, healthcare and other benefit programmes for older people is, if current trends continue, likely to rise to roughly 26% of Gross Domestic Product by 2040 from 15.1% in 2002. Aging will, the report says, also lead to fundamental workforce challenges as the labour force will shrink, and the average age of the labour force will increase. For instance, an older workforce will possibly reduce the innovation, risk-taking, and mobility essential for growth for today’s as well as tomorrow’s economy, it is claimed. As to what can be done, the CSIS report asserts that an aging Germany will need to make much fuller use of its 'human capital' by:

  • integrating more women into the labour market, as female employment rates in Germany still lag behind those of the developed-world leaders, in particular Denmark, Finland, Norway, and Sweden, by a wide margin;
  • increasing the chances of older workers either to hold or to obtain a job. If 'the average age of retirement in Germany could be raised from 60 to 65 over the next half century, it would offset half of the projected decline in the support ratio of working-age adults to elders';
  • avoiding 'failed' experiments such as the creation of jobs for younger workers by 'bribing' older workers to retire; and
  • increasing immigration – by raising the numbers of skilled immigrants and by integrating immigrants into the labour market better. However, this strategy alone clearly has limits as 'the required numbers are simply too large'.

The report sums up its policy recommendations for overcoming the looming aging crisis in the German labour market as follows: 'Boosting work effort and job growth will require action on many fronts – not just flexible labour regulations, but everything from better day care for working moms to lifelong learning for working seniors. Above all, it will require reform of Germany’s social insurance system, and especially its public pensions, whose large and growing cost is a key reason Germany’s labour supply isn’t greater to begin with.'

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment