MUNICH – Record levels of migration to Germany over the last two years have called into question the country’s demographic projections. But Germany’s rapid shift to a more favorable profile is not a reason to postpone politically painful policy decisions about retirement and pensions.
At the beginning of this century, forecasts that were considered reliable predicted that Germany would lose more than ten million inhabitants by 2050, owing to declining immigration and a low average birth rate. Today, population projections are significantly brighter. According to the government’s latest calculations, Germany’s population could remain above 80 million until 2060, and the reduction in the labor supply might not be as drastic as was previously feared.
Demographic forecasts needed to be corrected significantly, because the number of immigrants to Germany has fluctuated wildly and unpredictably, as opposed to emigration from Germany, which has remained relatively stable.
During high-immigration periods – such as in the early 1990s, after the collapse of the Soviet Union, or in the wake of the mid-1990s Balkan wars – population projections were fairly optimistic, because it was assumed that net migration would remain relatively high in the future as well.
Instead, immigration to Germany fell drastically after the turn of the century, because the country’s weak economic growth and rising unemployment until 2005 deterred would-be newcomers. To account for this reduction in net immigration, forecasters also lowered their estimates for the future, and thus underestimated the decade of population growth that began after 2005.
Alongside immigration, birth rates and average life expectancy also factor into population growth. In 2015, the fertility rate in Germany rose for the first time in 30 years, to 1.5 children per woman – probably owing to more focused family support and a strengthening economy, which reduced the financial risks of starting a family. The current fertility rate is expected to remain relatively stable into the future. But it is worth remembering that nobody foresaw the baby boom of the 1950s and 1960s or the dramatic fertility-rate decline in the 1970s.
Average life expectancy is similarly hard to pin down. In recent decades, it has consistently risen faster than demographers expected, which makes one wonder if longevity – and thus the size of the future retirement-age population – is being systematically underestimated.
As a rule, population forecasts start with static or period life tables that capture average life expectancy under the existing circumstances at any given time. But generation life tables, which are used to determine retrospectively how old a given age group has become, usually show a much higher average life expectancy than period life tables.
For example, German women born in 1910 would have had a life expectancy of 50.7 years at that time. But, looking back, they ended up living 58.8 years on average, even as they endured two world wars. By this logic, a woman born in 2009 should have already had an average life expectancy of more than 88 years; but current population estimates do not foresee that average life expectancy for newborns until 2060.
This shows that population estimates have relatively high margins of error. Contrary to what is assumed in many economic-growth models, demography is not a purely exogenous variable. Rather, it is susceptible to change as a result of economic development and other factors.
If Germany sustains its current level of economic growth in the coming decades, all three drivers of population growth – immigration, fertility, and average life expectancy – could rise, and the population would remain relatively constant. In this scenario, if Germany can integrate immigrants into the labor market and increase older workers’ labor-participation rate, it would be in a better position to finance existing social-welfare programs.
But we must not forget the one “constant” in all demographic forecasts: the aging of the population. Right now, baby boomers are still economically active, and will remain so for some time. But, by 2035, they will have retired, and Germany will have more than 21 million inhabitants over the age of 67; half of them will be over 80 by 2050. And if longevity rises faster than is currently expected, this age group will be even larger.
Germany cannot expect to see a sustained, moderate shrinking of its retirement-age population until after 2060. Thus, proposals to water down previously implemented pension reforms, in light of rising immigration and healthy economic growth, are more than negligent. Germany should be using the current aging pause to ensure its social systems’ long-term sustainability, create age-appropriate jobs, and adapt housing and infrastructure to the needs of an aging society.
In addition, Germany should have an active population policy to manage the three drivers of population growth, especially immigration. In the past two years, net migration was heavily influenced by the influx of asylum-seekers. The number of people who will need protection in the coming years or decades remains to be seen, and will depend on whether crises in the Middle East can be resolved, and on European and Germany’s own efforts to secure external borders and craft a comprehensive asylum policy.
Given these variables, the degree to which migration is affected by asylum-seekers will not be easy to predict or control. By contrast, economically motivated immigration from countries outside of the European Union can be managed at the national level. So, German policymakers should be giving more consideration to the role of domestic requirements in immigration law. Now more than ever, they need to recognize that population growth is a policy objective that they can help to shape. Michael Heise is Chief Economist of Allianz SE.
By Michael Heise