As Europe’s population “ages”, giving the continent a major demographic issue, the question of how to accommodate a large group of people no longer in employment looms large.  This month, German Chancellor Angela Merkel has taken steps to address this.

Merkel’s Christian Democrat party is seeking extra sources of funding to pay for soaring pensions and bills for social care, and they have drafted proposals requiring all those over the age of 25 to pay a proportion of their income towards this.

The proposals haven’t yet set a cost on the “age tax” but discussions have mentioned a possible figure of one per cent of income.

A slump in Germany’s population means that as more and more ageing Germans retire there are less and less young workers to replace them as taxpayers to fund generous welfare and pension arrangements.  Estimates from Germany’s federal employment agency, predict that the workforce will be reduced by seven million people by 2025.  Leading figures are already looking to a time after 2030 when this number will be significantly higher.  Unlike the UK, German’s working population hasn’t been significantly boosted by immigration over the past decade.

The proposals promise to be a hot topic in next year’s national elections.  We look forward to seeing where the debate will lead and welcome the views of our clients on this complex subject.

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3 responses to “Europe’s demographic time-bomb: Germany attempts defusal”

  1. You raise a very interesting issue.

    In Germany, the average life expectancy is 79 years or thereabouts. In 1980 life expectancy was 73 and retirement 60 – 62yrs. The 67 yr retirement target they recently set will help a little, but considering the rate at which the Baby Boomers are exiting the workplace and the relatively low birthrate, it won’t solve the problem.

    The age tax is necessary. Whether it will be enough, I don’t know. The German government may need to do more:

    Companies like BMW allow employees to work until age 70. From what I saw on a recent programme on telly, a number of employees are exercising that option. The German government could consider offering a slightly elevated pension to late retirees as it may encourage people to work longer. Think about it: an additional 3 years of working means an extra three years’ taxes in the government coffers and a 3-yr delay before paying pensions. It could be a win-win situation.

    Just my tuppence worth 🙂

  2. David Jones says:

    Hi Debbie

    Thanks for your comment. I agree that something more needs to be done to defuse this demographic time bomb, not only in Germany but in many other countries including the UK. Personally I was pleased to see this put on the table and like you I think it should be a starting point. The problem already seems to be that it’s becoming a party political tug of war in Germany, as it inevitably would in the UK. I think the main reason these issue don’t get properly addressed in Europe is that our leaders don’t believe proposing a tough solution to a 2030 problem will get them elected in 2013. All credit to Angela Merkel for trying to take a responsible long term view for her country.

    I was also interested in this particular piece of news as a pointer to just how old “Old Europe” is getting. Our demographics for the next 30 years don’t make pretty reading. I’d like to ask you how you see Africa developing demographically. Also, your pensions solution looks eminently sensible to me. Is there anything of that nature operating in any other economy that you know of?

    • Hi David,

      Demographic development in Africa is not easy to predict, but I will give it a go :).
      1. The birth rate in Africa is high, but so is infant mortality. (93 deaths / 1000 births on average)
      2. From puberty on, HIV / AIDS presents a massive risk. (At least 5% of the African population between the ages of 15 and 49 are infected. This is a ‘guesstimate’ at best. Also consider that less than 30% of sufferers are treated with anti-retrovirals.)
      3. Life expectancy is low compared to the UK and Germany. On average, 56yrs with the lowest on the continent 39 (Mozambique) and the highest 74 (Lybia).

      In many African countries pensions are not paid – even if the governments claim that they are.

      Fortunately in South Africa we don’t share their fate: the government pays a small pension to retired / unemployed people aged 60 and over. This pension is +/- GBP90. Government can’t afford to pay more than that because we have a tiny tax base – 6 million taxpayers bear the burdens (health, education, infrastructure etc) of 44 million non taxpayers. Employed South Africans invest in retirement plans to subsidise their retirements. (Perhaps that is an option in Europe?)

      In spite of infant mortality and HIV related deaths, South Africa has a massive young population. I can’t reliably quote the number but we have many more young people than older people. If we can sustain or grow our economy, and retain / grow our taxpayer base, we shouldn’t have the same issues with pensions as you do in Europe for the next 2 generations at least.

      Our problem really, is the youngsters: We can’t adequately cater for them (education, health, employment, socially) and I believe that this will worsen in the next generation. Right now there are no answers.

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