Demographic Change and its Economic Consequences for USA compared to Germany

Seminar Paper, 2009

22 Pages, Grade: 1,0


Table of Contents

1 Introduction

2 Demographic Change in Germany
2.1 Demographic Development
2.1.1 Drivers for Population Development
2.1.2 Change in Age Structure
2.2 Impacts on the German Economy
2.2.1 Impacts on the Labor Market
2.2.2 Impacts on the Social Pension Fund
2.2.3 Impacts on the Statutory Health Insurance
2.2.4 Impacts on the Compulsory Long Term Care Insurance
2.3 Counteractive measures

3 Demographic change in USA
3.1 The Changing Age Profile
3.2 Drivers for Demographic Change
3.2.1 Fertility
3.2.2 Mortality
3.2.3 Immigration
3.3 Impact of Demographic Change on Health Care in the USA
3.4 Impact of Demographic Change on American Labor Force
3.5 Impact of Demographic Change on Social Security and Medicare
3.5.1 The Old-Age, Survivors and Disability Insurance
3.5.2 Medicare
3.6 Policies to Offset the Economic Consequences

4 Conclusion


Appendix 1: U.S. Population, by Age Group: 1950-2050
Appendix 2: U.S. Population Growth Rates, Birth Rates, Death Rates, and Net Immigration Rates: 1950 – 2050 (per 1,000 population)

1 Introduction

Many countries in the world have gone through demographic transitions which have serious consequences on their economies. Examples for these are the USA and Germany. Since 1950, USA’s population has been going through a demographic transition. Although its population has experienced growth over the years, it is aging rapidly and has become more racially and ethnically diverse. Germany on the other hand, has a diminishing population with a population structure of people 65 and over, rising at a rapid rate. These demographic changes have had significant consequences for these economies and have ultimately led to policy implementations to address the issue. There are also grave concerns for the future of the economies, and the question of policy considerations for these changes.

The purpose of this research paper is to examine demographic changes that have occurred over time in USA and Germany, the impact that these changes have on these economies in particular the labor market and the health system and future implications of these changes. Additionally, policy considerations that have been made to address these demographic changes will be addressed. This paper seeks to investigate what current and future impacts demographic changes have on USA and Germany and how the countries counteract these impacts.

2 Demographic Change in Germany

In 2005, Germany’s population constituted 82.5 million people. However, since that year, the population is estimated to decline slightly and result in a population size of 77.2 million people in 2030. This development is caused by several drivers which will be analyzed in the following paragraphs. Afterwards, the impacts on German labor market, pension schemes, statutory health insurance, and on the compulsory long term care insurance, as well as counteractive measures will be discussed.

2.1 Demographic Development

Since more than three decades, the total fertility rate (i.e., “the average number of children that would be born per woman if all women lived to the end of their childbearing years and bore children according to a given fertility rate at each age”) (Central Intelligence Agency 2009, Definitions and Notes: Total fertility rate) in Germany is declining. For 2009, the total fertility rate in Germany is estimated to be 1.41 children (Central Intelligence Agency 2009, Country Comparison: Total Fertility Rate). According to its definition that at least 2.1 children have to be born to keep the population growing in size, the born generation is not sufficiently large enough to substitute the previous generation. In other words, more humans die than children are born (Statistische Aemter des Bundes und der Laender 2007, page 7). According to the 11th coordinated population forecast conducted by the German Federal Statistical Office, the general population development in Germany is already shaped by the development in the previous decades. As a result of the forecast, in 2030 only 77 million inhabitants will live in Germany which corresponds to a decline of more than 5 million persons (6.4 percent) compared to the year 2005 (Statistische Aemter des Bundes und der Laender 2007, page 9). According to estimations of the German Institute for Economic Research, in the worst case, population could decline to 69.6 million by 2050 (Schulz 2007, page 1). In 2030, the population group of persons at an age of less than 20 years is affected the most by the population decline: almost 3.8 million (23 percent) fewer children and teenagers will live in Germany, compared to 2005. The number of people in working age, (between 20 and 65 years) will decline by 7.7 million people (15 percent), but number of people at the age of 65 and older will rise by 8 million (40 percent), resulting in the total amount of 22 million people at this particular age (Statistische Aemter des Bundes und der Laender, 2007, page 9).

2.1.1 Drivers for Population Development

The described population development is affected by several drivers: birth development, mortality, and migration. With respect to the birth development, it is known that since German unification in 1991 through 2005, the number of newborn declined by 17 percent. Estimations predict a further decline of 17 percent until 2030. This development is the result of a low birth level which exists for any length of time in Germany. If the birth rate (i.e., 1.34 in 2005) remains at this low level, every following generation will be smaller than the previous one (Statistische Aemter des Bundes und der Laender 2007, page 11).

With respect to mortality, it can be concluded that the number of deaths in Germany was declining through 2001 and is stagnating since that year. But the number is expected to rise again because of the changing age structure of the population: the increasing older population causes also an increasing number of deaths (Statistische Aemter des Bundes und der Laender 2007, pages 12-15). Since German unification through 2005 the number of newborn did not equalize the number of deaths. And the prospective decreasing number of newborn in conjunction with the increasing number of death will cause a further increase of the birth deficit in Germany (Statistische Aemter des Bundes und der Laender 2007, page 16).

With respect to migration, only external migration (i.e., moving of people from other countries to Germany) is important to analyze. This migration depends strongly on political measures and on economical and social changes inland and abroad. Although migration declined since 1992, still more people move to Germany than people move away. This implicates also a juvenescent effect on German population because the people who move to Germany are generally younger than the people who move away from the country. Estimations predict a yearly net migration of 100,000 people to Germany (i.e., the difference between 500,000 people who move in and 400,000 people who move away from the country) for the next decades (Statistische Aemter des Bundes und der Laender 2007, pages 17-19).

2.1.2 Change in Age Structure

Due to the previously mentioned impacts on Germany, the population is estimated to decline to 80.1 million people in 2020 and further to 77.2 million in 2030 and net migration will not be able to equalize the birth deficit (Statistische Aemter des Bundes und der Laender 2007, page 20). The age structure of the German population, on the one hand, is determined by the demographic changes which occurred during the last hundred years. On the other hand, the age structure will affect the population development of the future.

As displayed on the following figure, population with the age of 65 and older was 15.9 million (19 percent) in 2005 and is estimated to grow to 22.1 million (29 percent) until 2030. The next age class that includes population aged 20 to 64 represents the group of people that belong to the baby boomer generation. This group will be responsible for the aging of the population in the future. The third population group, aged under 20 is highly affected by the decline in the birth rate of the last decade. In 2030 this group will even be smaller. Only the first group will increase sustainably (Statistische Aemter des Bundes und der Laender 2007, pages 22-24).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Population pyramid development for Germany.

Source: 000000rErRZRW89A0WEDoxfTNmvg--&cmspath=struktur,vollanzeige.csp&ID=1021430, page 24.

Due to the changes mentioned above, the ratio between the people in retirement age and the people in employment age, the old-age dependency ratio, will alter. For each 100 people in employment age in 1991 only 24 people in retirement age (i.e., 65 years and older) lived in Germany. In 2005, this ratio was already increased to 32 persons aged 65 and older. Due to the estimations, the ratio will increase to 39 in 2020 and 52 in 2030 (i.e., for two people in employment age, one person in retirement age will exist) (Statistische Aemter des Bundes und der Laender 2007, page 25).

2.2 Impacts on the German Economy

The population development described in the previous chapter will have severe impacts on the German economy. Aim of the following paragraphs is to explain the different impacts on the most affected fragments of the German economy: the changing age structure will have a direct impact on the labor market, the social pension fund, the statutory health insurance, as well as on the compulsory long term care insurance in Germany.

2.2.1 Impacts on the Labor Market

The number of newborn affects the future demand for teachers, schools, podiatrists, et cetera. On the basis of the birth rate, it can be estimated how the number of people in employable age will develop in the future (Statistische Aemter des Bundes und der Laender 2007, page 11). According to estimations of the German Institute for Economic Research, at the latest after the year 2025, labor supply will considerably decline due to the population decline; the number of people who are in employable age will also decline, as well as their average age (Schulz 2008, page 3). The ratio of older workforce in Germany will grow and the number of younger people who will enter the labor market will decline in the next years. The retirement age adjustment to 67 years in 2007 will have an additional effect. These facts will force the economy for several adjustments: enterprises will have to prepare for older workforce and supply health promotion as well as transition to flexible working hours (Schulz 2008, page 2). Additionally, continuing education and adjustment of knowledge and qualifications will be necessary in order to enable older people to keep up with changing labor conditions and technological changes (Schulz 2008, page 7; Deutscher Bundestag 2002, page 73). The senescent population could also have a damping effect on economic growth. However, a long-run prediction is not possible because of the unpredictable technical progress (Deutscher Bundestag 2002, page 76). Furthermore, the declining number of young people who could enter the labor market implicates the fear of a drop in innovation potential in Germany (Bundeszentrale fuer politische Bildung 2001, page 3).

2.2.2 Impacts on the Social Pension Fund

The German pension scheme system aims to assure income for people in retirement age in order to enable them to meet their living expenses. The German social pension fund is financed by all persons who are liable to compulsory insurance deductions by the pay-as-you-go system (Sozialgesetzbuch: Sechstes Buch – Gesetzliche Rentenversicherung 2009, §153). Thus, according to the inter-generational contract, everybody who participates in this system, directly pays the pensions for a huge part (90 percent) (Bundeszentrale fuer politische Bildung 2004, Bevoelkerungsentwicklung: Rentenversicherung) of the retired population and also acquires the title to receive pensions after achieving the retiring age (Bundesfinanzministerium 2009, Generationenvertrag). Thus, the changing age structure will have a direct impact on the social pension fund in Germany: if, due to the increasing old-age dependency ratio (see 2.1.2), the number of retired persons, compared to the number of employed people who pay the pensions by the pay-as-you-go system doubles, either the social security contribution has to be increased, the average pension has to be decreased, the retirement age has to be increased, or the pension has to be financed partly by tax money (Bundeszentrale fuer politische Bildung 2004, Bevoelkerungsentwicklung: Rentenversicherung). However, these measures cannot be adjusted arbitrarily. Thus, the resulting gap has to be closed by a privately financed funded pension insurance system.


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Demographic Change and its Economic Consequences for USA compared to Germany
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M.A., MBA Lukas Scisly (Author), 2009, Demographic Change and its Economic Consequences for USA compared to Germany, Munich, GRIN Verlag,


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