Germany’s economy has struggled lately, with weak demand and high energy costs blunting growth. But its greatest long-term challenge is likely from a demographic crisis that began decades ago.
Like most developed societies, Germany’s population is getting older, which means relatively more retired people and fewer workers—a combination that threatens economic growth and public finances.
The impact is mild for now, but as the International Monetary Fund warned in a report Tuesday, population aging could cause significant pain a few years down the line.
What’s new?
Nothing. Policymakers have known for decades that Germany’s demographics would increase its dependency ratio: the number of non-workers per worker. It’s just that now it’s starting to have an effect.
Though innocuous-sounding, the dependency ratio is a vitally important economic measure. All other things being equal, the fewer workers there are relative to the rest of the population, the higher the tax burden on each person who does work, and the lower the per capita output.
The IMF predicts that Germany’s annual working-age population growth rate will fall by 0.7% over the medium term—it didn’t define that, but it typically means single-figure years in economics—more than any other G7 country, as baby boomers start retiring and the inflow of immigrants eases.
“An aging population will… adversely affect public finances as tax revenue growth slows and spending on pensions and healthcare rises,” the organization said in its report.
Germany’s pension system, which dates back to 1889, relies on contributions made by currently employed workers to support retired ones. However, the ratio of working to retired people has plummeted from 6:1 to just 2:1 since the 1960s.
Aging within the labor force is also a concern. While the effect varies by region and industry, there does seem to be a negative link between workers’ average age and…