Growing Older: Germany Needs Reforms

IMF Blog, June 29, 2016

Source details

Germany faces a demographic shift: with baby boomers hitting retirement age and low fertility rates, fewer workers must sustain a growing proportion of retirees.
Despite a steady inflow of migrants, the number of workers is expected to decline at an accelerating pace after 2020.
With fewer people working, potential output growth is expected to fall, putting the long-term sustainability of the social security system and public finances at risk.

Affordable and full-time child care
- Finding: A large portion of women is in the labor force (73 percent in 2014), but many do not work full-time (the average is 30.5 hours a week, which is 9 hours less than men).
- Constraint: Germany’s tax system discourages full-time employment by the household’s second earner (usually a woman). Scarcity of affordable, full-time child care options and after-school programs also limits full-time work.
- Policy recommendation: Increase spending on child care services and expand full-time child care and after-school programs.
- Quantified impact: If Germany spent a quarter of a percentage point more of its GDP on child care services (lifting the total spending to 0.75 percent of GDP, the OECD average), real GDP would be 2.5 percent higher in the long run, with positive effects on short-term growth as well.

Retire later
- Finding: Germans stop working at the age of 62.7 on average, which is low in international comparison.
- Policy recommendation: Increase the statutory retirement age and remove disincentives to continue working after that age to extend working lives.
- Quantified impact: Adding one extra work year on average would result in 1.75 percent higher real GDP in the long run.
- Fiscal implication: Corresponding savings for the social security system could be used to lower contribution rates and/or avoid cuts in benefits.

Upgrade immigrants’ skills
- Finding: Germany has been attracting a growing number of immigrants, and past experience shows immigrants integrate slowly into the job market with higher unemployment and lower wages than German workers.
- Quantified pattern: On average, wage gaps between natives and immigrants have been estimated at 30 percent upon entry, narrowing but not fully disappearing over a span of 25 years.
- Policy recommendation: Step up investment in training and adapt training to the needs of immigrants to lift long-term employment and GDP.

Reiterate prior IMF suggestions: government investment in transport and other public infrastructure, improving crumbling roads and ailing school buildings.
Finding: In 2015, net public investment in these areas was negative, meaning the country failed to keep up with the depreciation of public capital.
Note on plans: A recently released plan showing sizable increases in transport infrastructure investment is promising, but budget allocations are only to be decided year-by-year and so are highly uncertain.
Other areas for reform: Expand fast internet broadband connections and boost competition in some regulated professions and in the postal and railway sectors.

Source: Growing Older: Germany Needs Reforms, Enrica Detragiache, Jean-Marc Natal, Joana Pereira, June 29, 2016.

Bevölkerungsalterung: Deutschland braucht Reformen
- Bevölkerungsalterung: Deutschland braucht Reformen (Markdown version)
- Bevölkerungsalterung: Deutschland braucht Reformen (PDF)