Earlier this week, a full-page advertisement appeared in two of Germany’s largest newspapers. It showed what appeared to be an unborn child in the womb. But this was not the work of local anti-abortion activists. The advertisement was paid for by a German organization, the New Social Market Economy Initiative, a lobby group with close ties to employers’ organizations.
The headline above the baby reads: “Your pension plans are my worst nightmare.” The point of the advertising was to ask any new coalition government not to raise the level of social welfare contributions in a country where they are already fairly high.
At the moment Germany is looking ahead at a demographic time bomb. Labor shortages, a falling birth rate and an aging population mean that it will become increasingly difficult to fulfill the pension expectations of German retirees.
Migration can ease the demographic problem, but not solve it completely. Martin Werding,, professor of public finance and social policy at the Ruhr University Bochum
At the coalition talks that are currently going on between the center-left Social Democrats and Angela Merkel’s Christian Democratic Union, two topics have dominated the protracted negotiations: immigration and social welfare. The Social Democrats, or SPD, want to maintain social welfare payments, including pensions, and to defend the rights of migrants. The Christian Democrats, or CDU, are taking a harder line.
Although they are often discussed in isolation, the two issues are in fact inseparable. Only controlled migration can solve the demographic problems. But this begs further questions: How much migration should there be? And what kind of migration?
“Huge waves of refugees won’t help us much,” says Martin Werding, professor of public finance and social policy at the Ruhr University in Bochum. He explains that steady migration is best, but with the focus on migrants whose skills and language abilities allow them to integrate into the labor market quickly.
Recent years have actually seen a sharp increase in this kind of migration, alongside the more publicized arrival of around a million refugees from 2015 onwards.
“Since 2010, we have seen a lot more foreigners paying into the German pension system,” Gundula Rossbach, president of the German Pension Insurance Union, told Handelsblatt. The vast majority of these workers have arrived from other countries of the European Union, drawn by Germany’s booming labor market. This has driven up Germany’s population, which has grown from 80.3 million to 82.8 million in the last six years.
However, migration is not a magic bullet to solve Germany’s demographic problems. One of the reasons for this is that foreign workers not only pay into the pension system, but also earn a right to access their homeland’s own pension plan. To guarantee a positive effect, these foreign workers need to stay in the country and have children, who would offset low birthrates among the German-born population and eventually pay into the German pension system themselves.
However the brutal truth is that no model of immigration can patch up the holes in the German pension system entirely. And this is going to be increasingly apparent from 2025 onwards as the last of the baby boomers start to retire. In a relatively short time this will add a further 5 million pensioners while at the same time there are around that many workers missing from the German labor force.
Statistical models prepared by Mr. Werding’s team suggest that even an annual immigration of 300,000 people will not be enough to maintain current levels of pension payments. That influx will mean that the bill for pension contributions, as subtracted from pay packets of those still working, will only rise to 22 percent, rather than 24 percent. That’s still a big jump from current rates of 18.6 percent.
Additionally the amount of pension a retired employee will get, which was slated to fall from 48 percent to 41.5 percent of their previous pay, will still decrease but, with steady migration, only to 44.5 percent.
“Migration can ease the demographic problem, but not solve it completely,” Mr. Werding says. A solution is basically unthinkable without substantial immigration, he emphasizes.
But that could also see a vicious circle arising when it comes to attracting skilled workers from overseas, the expert warns. The fall in Germany’s working-age population may force the government to raise taxes and social security contributions, but at the same time, this could deter many of the kinds of foreign workers who might otherwise be drawn to the country.
For this reason, Ms. Rossbach, president of Germany’s pension organization, is calling for new pension costs not to fall too heavily on those currently paying into the system, with general taxation being used instead.
Mr. Werding agrees, pointing out that the current wave of skilled migrants entering the country largely did so because of economic slowdowns elsewhere in Europe. Previously, European migrants preferred to go elsewhere, and those days could easily return if Germany is not careful to keep taxes and contributions low, he says.
Peter Thelen covers social security systems, the job market and labor topics for Handelsblatt. To contact the author: [email protected]