Demographic stress test Looking at the world through rose-tinted glasses and enjoying the present while we let the future do “its own thing” just won’t work anymore.
By MICHAEL DIEKMANN A few weeks ago the number of people on our planet reached the seven billion mark and, in spite of our unprecedented intellectual and financial resources, we are finding it hard to come up with a sustained response to the demographic challenge this poses. Continued population growth in Africa and Asia on the one hand and shrinking, ageing populations in the industrialized countries and also in China on the other hand can be a blessing or a curse, depending on your point of view. Regardless of whether people feel drawn toward the optimistic viewpoint or are beset with apocalyptic forebodings or consider themselves neutral and solely focused on the present – around the world there are growing doubts as to whether enough can be done to ensure food, healthcare, work and a reasonable income in old age in the coming decades if we continue to deal with problems and risks in the future as we have in the past.
These concerns are justified. They are also gnawing at the minds of individuals who don’t automatically feel they belong to a demographic “community of fear” (K. O.Hondrich). For many years postwar societies in Western Europe have held the firm belief that, come wind, come weather, the social security systems would somehow provide for them. However, that certainty was founded not least on the assumption of continuing growth. Now we are being rudely forced to face reality by inconvenient economic, demographic and social facts that preclude us from carrying on as we have to date. In all probability societal ageing will put fetters on economic growth in the future. It would therefore be irresponsible and quite the opposite of sustainable if, in our quest for ways out of the current crises, we failed to give due consideration to the interests of future generations. That includes not saddling them with astronomic debts so that they are free to make full use of whatever options are open to them.
SOCIETAL AGEING HAS FAR-REACHING CONSEQUENCES However, demographic change takes place at only a snail’s pace and at first goes practically unnoticed. Yet societal ageing can alter a country’s economy and social relationships so fundamentally and incontrovertibly that the consequences are far more disruptive than any financial crisis, no matter how dramatic it may be.
For the past forty years or so Germany has been registering more deaths than births. On average births per woman fell from 2.53 in 1964, when the baby boom was coming to an end, to 1.35 in 2009. The current fertility rate is around 35 percent below the replacement level needed to sustain a constant population in the long term. Thus, according to current forecasts, Germany’s population will shrink from 81.8 million today to 69.4 million in 2050 if the birthrate and immigration stay at current levels.
The fact that there will be ever more elderly people in Germany will make no difference. Thanks to medical advances and improved living conditions, average life expectancy at birth has increased by around 3 months for each year over the past 60 years. People are now living on average twice as long as over 100 years ago, and life expectancy is expected to continue rising. In 2050 slightly less than 40 percent of the total population is expected to be aged 60 and over. Of this category of just under 30 million, one in three, or more than 10 million people, will be aged 80 or older. The color of the future is silvery gray. That needn’t be a disadvantage. We will gain valuable years which, granted sound health and mental agility, we can actively organize. The changes in society will allow us to find new forms of work-life balance and generational coexistence. Demographic change will give us an opportunity not only to stay alive longer but to lead much more fulfilling lives.
FINANCING NOT CERTAIN Even so, financing will remain a problem. Frank Schirrmacher, a leading German essayist and journalist, paints a somber picture when he writes: “Those who are young now will find out what it means to lead a long life in a society that can only finance a short one. By 2030 the number of individuals of working age, that is to say the ones aged 15 to 66 who finance the welfare state, will fall by 10 percent. Without immigration the decrease will amount to as much as 14 percent. By 2050 Germany’s population of working age will contract from 53.8 million to 40.4 million individuals. As early as in the next 20 years there will be 7 million fewer people in the labor market.”
This means the demographic is putting a severe strain on our social security system and subjecting the entire economy to a gigantic stress test. The number of transfer payment recipients is growing, while that of contributors is falling. If we carry on as before, one of the consequences will be an increase in the national debt in order to pay for social benefits that the decreasing population of working age is no longer able to provide funding for. The Generational Contracts Research Center has calculated that, in spite of the reforms of the pension system, the sustainability gap in Germany stands at 294 percent of gross domestic product. This means that the equivalent of the (future) implicit and explicit national debt is already three times higher than GDP.
Both the populace and politicians must bear in mind that the exceptional monetary situation brought on by the unresolved banking crisis restricts the possibilities of defusing the demographic time bomb via the capital market. For the past three years we have been living with interest rates at record lows in almost the entire industrialized world. This is making it increasingly difficult to meet guarantee obligations that our customers rely on to secure their retirement provision.
HEALTHCARE COSTS AND SENILE DEMENTIA What the ageing process in our society means for the health system and the long-term care market is illustrated by the following figures: 40 percent of all healthcare costs are generated by individuals aged between 70 and 79; a further 30 percent are reserved to pay for the healthcare expenses of the 80-plus generation. The upshot is that the cost of long-term care will double by 2050 (according to the OECD). In the future senile dementia will spiral into a mass problem. Today some 1.2 million individuals in Germany suffer from dementia. That is 1.5 percent of the total population. By 2050, as a result of societal ageing, this figure is set to rise to 2.6 million, or 3.7 percent of the population, since the likelihood of developing senile dementia grows with advancing age. Thus, it is just under 5 percent for an individual aged between 70 and 74, around 12 percent for an 80 year-old and more than 30 percent for people 90 or over.
WE CAN NO LONGER PROCRASTINATE We have therefore reached a point at which social-security and economic policy-makers must examine what scope of action they still have at their disposal. Western economies have to subject themselves to a demographic stress test. Time is running out. Waiting to see what happens, looking at the world through rose-tinted glasses, enjoying the present while we let the future do “its own thing” just won’t work anymore. Yet procrastination has so far been characteristic of the discursive and practical approach adopted by politicians to address the consequences of dramatic societal ageing. Unpopular societal and economic adjustments to demographic trends are postponed until some indefinite point in the future, although we know that this will only make things worse. The longer we put off tackling the consequences of the demographic upheaval and delude ourselves into believing that somehow or other we’ll be able to cope with the developments that lie before us, the more unrelentingly the unappetizing aspects of those developments will come to the fore and make our lives miserable. We have to change course now, for in a few years’ time the biggest category of old individuals in the Federal Republic, the baby-boomers born between 1950 and 1965 will exclusively be recipients of transfer payments.
Governments must fundamentally rethink the concepts of working life and retirement as well as pension and health policy and re-align them to address the new situation. When fewer babies are born and the population declines and grows progressively older, and growth momentum tends to level off and the national debt rises, there can be no way around finding ways of boosting capital formation in order to ensure that the goods and services for coming generations can be paid for – especially considering that there is no quick fix for the ageing process because the women who could have substantially increased the fertility rate have simply never been born.
LONGER WORKING LIFE What options are open to us? First, we can make use of the newly gained longevity to redress the imbalance between the active and inactive years of our life. If we use the improvement in health and greater quality of life to significantly extend working life, that would represent an initial effective step toward mobilizing additional labor. This would not only alleviate the decline in the labor pool but would also relieve the social security system. It would require a gradual increase of the pensionable age to 69.
The years of an exaggerated youth cult are drawing irreversibly to a close. There is an increasing awareness that a decline in flexibility and speed among older employees is offset by their experience and expertise. However, in order to make better use of the strengths of older employees, the corporate sector will have to undergo a real sea change – a process that we have unfortunately only just embarked on. This also holds true for greater flexibility in the working environment, allowing more compatibility of work and family life in order to establish women far more firmly than before in the labor market.
FUNDED RETIREMENT PLANS DESPITE LOW INTEREST RATES Moreover, social security systems themselves must be rendered resilient to demographic change, with funded retirement plans replacing pay-as-you-go systems. It is therefore increasingly important that people assume responsibility for their own retirement by making private provision. This applies also and in particular to low-income recipients. However, these individuals frequently feel hard pressed to set aside additional funds for their old age. So far old-age poverty isn’t a serious problem. But it could become one with explosive social consequences when this group of individuals reaches pensionable age.
LIMITS OF IMMIGRATION POLICY There are some who hope we can relieve the social security system and the labor market by encouraging immigration. But this can only help alleviate the situation to a limited degree. In order to keep the population headcount in Germany constant until 2050, we would have to attract 340,000 immigrants every year. In order to prevent the share of the population of working age from shrinking, we would need as many as 490,000 immigrants per year. And if the objective were to preserve the present balance between the working population (aged 15 to 64) and retirees (aged 65 and over), no fewer than 3.6 million would have to come to Germany every year. Neither our attractiveness for young and competent employees nor the sociopolitical determinants make it seem likely that such waves of immigration can be brought about in the foreseeable future without serious upheavals.
THE BIRTH RATE MUST INCREASE Even if an immigration miracle of this magnitude were possible, it would only offer short-term relief. In the longer term, rapidly ageing societies must start thinking about how they intend to increase their birth rates. As of early 2012 we, the Allianz Group together with federal government departments and political and scientific circles, plan to set up a Berlin Demography Forum as a platform to seek solutions together. It is, after all, our wish that coming generations should also be able to benefit from the changes in the population structure of such far-reaching, perhaps even historical dimensions.
MICHAEL DIEKMANN is CEO of Allianz SE.