Germany’s demographic dilemma

Immigration alone will not be able to solve the problem of a rapidly ageing population
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Despite the arrival of nearly 1m refugees in Germany last year, the country’s biggest demographic challenge is not too many people but too few.

The population is set to decline from a 2002 peak of 82m to 74.5m by 2050, according to the United Nations. The percentage of Germans under 15 is forecast to fall to 13 per cent, among the world’s lowest. The share of those over 60 is expected to rise from 27 per cent to 39 per cent.

With the economy growing and unemployment at just 6 per cent, labour shortages abound. Government and business have responded to the challenge by hiring more women and more older men. After years of lagging behind Britain and France in terms of female participation in the labour force, Germany has almost caught up, with 54 per cent of working-age women in employment compared with 51 per cent in France and 56 per cent in the UK. For male workers aged 60-64, the result has been even more dramatic, with the employment ratio rising from 28 per cent in 2008 to over 50 per cent.

These reserves, however, are now being exhausted, just when the working-age population is set to fall. So more difficult problems lie ahead: encouraging people already approaching 65 to work longer, and pushing people of all ages to take a more flexible approach towards life-long training and retraining.

Employers hope a steady rise in the retirement age from 65 to 67 will extend working lives, especially with the spread of flexible-contract posts that appeal to older workers. The government this year tweaked rules to allow more pensioners to continue working part-time without suffering big pension cuts.

The longer people work, the more the costs to the pension system is reduced. Pensions and heath care costs are expected to grow more rapidly than the long-term economic growth rate, increasing the burden on a shrinking working population. In Germany the total cost of the elderly to the public purse is forecast by the European Commission to rise from 24 per cent of gross domestic product in 2013 to 28 per cent in 2040. In the UK the share is expected to grow from 22 per cent to 24 per cent and in France to stay flat at around 31 per cent.

Ludger Schuknecht, the finance ministry’s chief economist, says: “ A lot depends of people working longer and investing in life-long education. There is a good scenario, you can go for. There is also a bad scenario.”

Immigration can ease the pressures but only when immigrants are successfully integrated into the jobs market. That is harder to do with refugees from unstable countries, in the Middle East for example, than with migrant workers from developed countries in, say, southern Europe.

As the charts show, the typical education level of migrants into Germany is rising but the most recent cohort — the refugees arriving in 2015-16 — are an exception. While the intake includes Syrian engineers, Iranian software developers and Iraqi doctors, many others have little formal education. Experience shows that it takes five years before 50 per cent of working-age refugees are in jobs.

Even with successful integration, only huge migrant inflows over many years would change the demographic outlook. Some 500,000 people are forecast to retire annually over the next few years. By comparison the government has been planning for a net immigration of 200,000 per annum. Last year’s refugee surge took the net immigration figure — immigration minus emigration — to a record 1.1m. The ensuing outcry suggests that such inflows are almost certainly politically and socially unsustainable. Immigration can help manage the demographic change but it is unlikely to avert it.

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