What Impacts Will the Aging Population of Germany Have on Its Economy

The objective of this research paper is to explore, analyze and survey the implications of Germany’s demographics on the country’s economy. The motivation behind this study is to add to the understanding of social-economic issues in one of the Eurozone’s heavyweights and its impact for years to come. This paper looks into Germany’s demographic trends, consumption trends, savings trends, Germany's pension policy and labor market effects.This paper draws on estimates and analyses from relevant literature, including scholarly journals and government publications to illustrate and quantify its points. Conclusions drawn from this study shows that the definitive impact of population aging on economic growth is reflected in consumption, savings, labor pool and dependency burdens. Practical implications can be surmised from this paper; policy makers, native citizens, immigrants and other stakeholders might wish to refer to this paper for an understanding and persp ective of the social phenomenon and derive solutions to problems in its sphere.However there are limitations to this research as it is done through literature review and the demographic-economic variables are not constant. Further research will be required to gather concise and quantifiable data to support its claims. Introduction Germany's aging problem is serious because during the past 30 years, German women have produced children at an average rate of less than 1. 4 babies per lifetime (Tim Colebatch, 2004). In 2009 The Federal Statistic's Office (Germany) forecast Germany's rapidly aging population was likely to decline by 20 percent to around 65 million by 2060.The drop will be accompanied by a dramatic shift in the amount of elderly people in Germany. Of the country's current 81 million inhabitants, some 20. 6 percent are now aged 65 (2011). But in 2060, assuming that fertility rate remain constant and life expectancy increase at a steady rate, that percentage will increase t o 33 percent. Following a rapid recovery from the 2008-2009 recessions, economic growth has slowed in the second half of 2011 for Germany (OECD,2012).Policy makers are faced with domestic issues interfering with mid-term growth potential, one of them namely rapid population aging. Deutsche Bundesbank published a report in April 2012 announcing that if the dampening effects of demographics can be mitigated by appropriate reform measures, it will largely be possible to maintain the current rate of potential growth of roughly 11/4% per y ear until 2020. With Europe struggling to cope with the Debt Crisis, an economic powerhouse such as Germany is under the pressure to come up with solutions and lead the union.However with its workforce fading into bottomless vacuum of tax dependents, it does not reflect well onto Germany’s financial health and strength as a sovereign nation. This paper intends to examine the situation in Germany and reach a conclusion that population aging incre ases the dependent population burden in views of both taxpayers and the nation’s budget; aggregate consumption expenditure decreases; the savings rate declines and shrinks the pool of available capital; working-age population reduces, while the labor productivity in Germany is not impacted heavily.Moreover, this paper will outline a perspective stakeholders should adopt to illustrate that as long as effective reform or measures can be implemented, the negative impact of the aging population on economic growth is likely to be minimized. Main arguments Dependency burdens Population aging increases the dependent population burden. Germany's pension system is known as the most generous pension system and public welfare. Costs of public retirement insurance are almost 12% of GDP, more than 2. times as much as the U. S. Social Security System (Axel Borsch-Supan, et al. ,2003), and it accounts for a high proportion of retirees' income. The weight of this tremendous systems is taxing on Germany's finances as well as the need for tax-payers' support. To ease the pressure of an aging population on the government budget, Germany has carried out a series of reforms. In what was called â€Å"the greatest social reform after war â€Å"by former Labor Minister Franz Liszt initiated in the spring of 2001.The main contents include reducing benefits, settling the level of premium expenditure, a pay-as-you-go pension system and developing a new type of private pension to fill the loss of welfare income. This reform, especially with measures to expand private pension types, will probably promote economic development. The Fund pension system is conducive for German government to supply a large number of retirees without increasing the load of employees and taxpayers. From a macroeconomic perspective, this series of system can help reduce the government budget pressure from an aging population.From micro-economic perspective, it can also bring higher personal income. Unfor tunately, there is a big difference between the actual implementation of Liszt reform and the government's promise. The new fund pension system in Germany is being undertaken on a relatively small scale, while the current non-accumulation fund insurance system is still in the highest flight. The final result is that, the German retirees are almost entirely likely to depend on the government. Overall, the public welfare accounted for 61% of net income after tax for families of 60 years old or above.The substantial increase in social welfare spending for the elderly in the GNP will continue to enlarge, as it is bound to limit the expanding of production, and influence the capital investment and economic efficiency, and add the burden on the national economy. Thus, with the development of population aging and extension of the average life expectancy of the aging of the population, it might be appropriate to extend the retirement age limit, in order to reduce dependent population and re latively increase the accumulation funds to expand production.Germany plans to raise the retirement age to 67 years of age, because of such considerations. But at the same time, the heavy new employment pressure requires Germany to strike a balance between extending retirement age and easing the employment pressure. Consumption The next section puts forward the argument that with the on-set of population aging, an increasing share of the elderly in the German market caused changes in its consumption structure.Overall, the consumption expenditure shows a gradual widening tendency during the aging process; however, Germany has already entered the aging society, so consumption expenditure showed a decreasing trend. This table shows the percentage of elderly family with an excess of the annuity income over expenditures. Annuity income is more than consumer spending and it increases with age. The decline in consumer spending is so significant that for about a quarter of the elderly aged 75 and above, the annuity income is more than 50% higher than consumer spending.In fact, almost all of this decline can be attributed to a decrease of food, travel and traffic expenses, the marginal utility of consumption reduction will probably decrease in the elderly, due to deteriorating health or being lonely. It is worth noticing that in Germany, food, travel and traffic expenses can hardly be offset by more health spending, because almost all health fees are covered by compulsory health insurance. (Wise, 2004) To some extent, the influence of population aging on consumption inhibited economic development.In this case, to speed up the development of older industries, government should focus on the development of travel, real estate and pension services for older people in order to promote consumption growth and the prosperity of the silver hair market. Savings The world's population is aging, accordingly, bank balances might probably stop growing. People tend to reduce their sa vings after retirement, while the younger generation are not as canny as older generations. As a result, savings rate will drop significantly (Diana Farrell, et al. , electric shavers, 2005).Because aggregate saving equals to investment (Lachlan McGregor, 2008), so if left unchecked, the slowdown of the global savings rate will reduce the amount of money available for investment and then hinder economic growth. It is not easy to find a solution. Stimulating economic growth in itself is not a solution, nor is the future productivity revolution or technological breakthroughs. To add to future global savings and financial wealth, the German government and the family need to increase their savings rate, and earn a higher return on assets. These changes involve tough choices, but it can provide a brighter future.As the elderly make up the larger proportion of the population, the total amount for investment and wealth accumulation will be reduced. The expected decline of growth rate for G ermany's financial wealth will fall to 2. 4% from 3. 8%. One thing is certain: the decline in the household savings rate can shrink the pool of available capital. Because of continuing budget deficit, government may push up interest rates and crowd out private investment. In the next few years, the rise in the cost of economic dependence will force government to implete better fiscal discipline.The only meaningful way to offset the population pressure to the upcoming global financial wealth is increasing savings rate of government and households, and a more efficient allocation of capital for the economy, thereby increasing the return. In Germany, to achieve the required rate of return, the policy makers must improve competitiveness, encourage innovation in financial sector and the economy as a whole, and raise the legal protection of investors and creditors. As for increasing the savings rate, the key to is to overcome inertia.When the enterprises automatically register their emplo yees on a voluntary savings plan rather than requiring people to become active, participation rate might increase significantly. Of course, the government can also increase the savings rate of Germany directly. Labor Pool With an increase in the proportion of the elderly population, the proportion of working-age population will accordingly decrease, which goes against German economic development (David E. Bloom, et al. , 2001). Labor force can be an effective motivation of rapid economic growth.However, a demographic draft report of the German federal government indicated that the working age population may reduce from 50 million to 26. 5 million in 2050, which is a decrease of nearly a half. According to the draft, the employment reduction would bring disastrous consequences to the economy of Germany. Moreover, it is much more difficult for older workers to adapt to the fast-paced production activities, especially in the labor-intensive production, so population aging is not conduc ive to the improvement of labor. In this case, a targeted immigration plan is very useful to enable Germany' to maintain its competitiveness.It is estimated that in order to make the employment potential of Germany remain at the level in 2004, at least 300 thousand to 500 thousand immigrants are needed annually. The appeal of that idea stems from two considerations: immigrants are relatively young, and hence their arrival reduces the average age of both the population and the labor force; and they can be expected to add more to the national product than they use up as consumers in terms of health-care, and thus to provide net support for the rising numbers of elderly dependents in the population.On closer inspection, however, there is a problem: immigrants get older, like everyone else, and a sustained policy of higher immigration has little long-term impact on either the median age or the age composition of the population. As Espenshade (1994, p. 766) noted, â€Å"immigration is a clumsy and unrealistic policy alternative to offset a shortage of domestic labor or to correct a perceived imbalance in the pensioner to worker ratio. †The effect of population aging to enhance labor productivity is negative which can be reflected on that the speed of aging workforce to accept new knowledge, science and technology is slower than that of the young. Relatively the elderly population shows a weak ability to adapt to new industries. Thus, to some extent, new product development and technological innovation are largely influenced by the aging problem. In the case of rapid scientific and technological development, and faster advancement of knowledge and increasingly keen competition, population aging has greater negative influence on labor productivity and economic growth.As for Germany, it gives priority to technology-intensive industries and to improve labor productivity mainly relies on science and technology, so the demand for mental exertion is much higher tha n physical. As a result, the negative influence of population aging on increase labor productivity is likely to be limited, on the other side, the experience of skilled older workers will have a positive effect to improve labor productivity in Germany. Conclusion Overall, it is argued in this essay that population aging in terms of the acroeconomics is not conducive to economic development, and its negative impact is mainly manifested in the above-mentioned four areas, while the elderly population do not entirely represent an economic burden as they can be profitable consumers, among them there are still some people engaged in economic activities with relatively abundant accumulation of experience and knowledge which can make up for the physical insufficiency. Thus, to some extent, these people contribute to the economic development.In fact, an effective way to mitigate the adverse effects of an aging population and labor force, is by accelerating the development of a knowledge-base d economy in high-tech industries. (i. e. to improve the level of automation in production and reduce the demand for workers' physical strength. ) We should also see that the development of the knowledge-based economy led to changes in the industrial structure and occupational structure and the increasingly high demand for workers intelligence.With the expectancy of population average life, the health status of the elderly is gradually improving, older workers will make a greater contribution than ever for economic development. Therefore, the rational development and utilization of elderly human resources, will become an important issue to mitigate the adverse impact of population aging on economic development. AppendixPercentage of Elderly in Age Group with a Ratio of Annuity Income to Consumption Expenditures in Germany [pic] Bibliography Asghar Zaidi and Malgorzata Rejniak (2010). Fiscal Policy and Sustainability in View of Crisis and Population Aging in Central and Eastern Europ ean Countries. Axel Borsch-Supan et al. (2005). aging, pension reform, and capital flows:a multi-country simulation model. Cambridge. National Bureau of Economic Research.David A. Wise (2004). Studies in the Economics of Aging. National Bureau of Economic Research. David E. Bloomet al. (2001). Economic Growth and the Demographic Transition. Cambridge: National Bureau of Economic Research. David N. Weil (2006). Population Aging. Cambridge. National Bureau of Economic Research. Michael D. Hurd (2006). The Economics Of Individual Aging. University of New York at Stony Brook.