Mastering the challenge of demographic change

Sustaining growth and prosperity while maintaining government's ability to act

2006

Public debate on the subject of demographic change centers primarily around the need to stabilize social security systems. Government has responded by initiating significant changes in this area. Yet this focus is too narrow. Our aging society confronts both the political and business communities with the challenge of sustaining growth and prosperity while ensuring that the government – and other organizations – can continue to take effective action in future. If the political and business arenas act resolutely, protracted periods of negative growth, mushrooming public debt and declining prosperity (especially among today's active population) can still be avoided. Instead, Germany can be placed firmly on a path toward sustainable growth. In response to this challenge, our study examines four areas that, taken together, can do much to help us master the challenge of demographic change.

• Public budgets on all levels must be restructured and consolidated between now and 2010. Zero-debt budgets from 2011 through 2025 can create breathing space to finance the burdens that will arise when the current demographic trend comes to a head after 2026.
• The transfer of income between the active population and benefit recipients (in particular pensioners) must be frozen at today's level for the years ahead. This step will allow all social groups to enjoy adequate growth in their relative prosperity.
• Labor market participation in Germany must be increased in stages. Employment among women must be raised to Swedish levels and among older citizens to US levels. This can only be done if the corporate sector, the unions and the government put in place conditions that will give older people better access to the labor market, and if it is made easier for women to combine family and career life.
• Productivity in Germany must be improved by ramping up investment in research and education. Annual productivity growth of 1.3% (the study's base case) is the bare minimum that must be achieved. Productivity in the USA is currently improving at a rate of more than 2% p.a.

Isolated steps have already been taken in all four areas. If the political and business communities now pull together and rigorously take all the actions outlined above, stable economic growth of at least 1.1% p.a. can realistically be achieved. This would ensure that prosperity continues to grow in the long term. It would also give government the leeway it needs to continue to act in the best interests of the whole of society. The actions outlined in the study constitute the minimum that must be done. Bolder, more incisive steps could lead to substantially higher rates of growth.