Thinking beyond 65

Germany and other aging nations risk losing 15% of their wealth – unless they unlock the potential of older workers

Richard Wolf

The backbone of Germany’s strengths is its labor force. With 42.6 million people in gainful economic activity in, Germany boasts the biggest workforce in its history. But the paeans of praise may soon be silenced.

With approximately five million people leaving the workforce by, Germany risks losing 15% of its GDP per capita to aging. Japan, the oldest country by most demographic measures, is on a similar wealth trajectory with output declining by 15% until, as International Pensions calculations show.

ON THE WAY TO ITALY

Our calculations forecast Germany’s labor force to shrink by a quarter to the, assuming current labor force participation remains constant. As the number of people of working age decreases faster than the total population, average living standards will likely decline if the output per worker remains constant. The result would be living standards comparable to those in Hong Kong and crisis-ridden Italy today. Generating wealth in younger countries like the US and UK is equally hampered unless aging societies reform themselves to embrace demographic change as a driver of growth. This is particularly true when it comes to the untapped resources of the elderly.

Yet demographic change does not have to equal economic decline. Thanks to the difference between absolute and relative numbers, fewer people of working age do not have to lead to a shrinking work force. Increasing labor force participation among mature (55 to 64 years), aged (65 to 69) and old (70 to 74) workers could even grow the labor force by 5% by.

While thinking beyond 65 often leads to heated debates unpopular with many politicians and retirement entry at age 70 or even 80 can cause a public outcry as it did at a recent panel discussion, extending working life is not about toiling “‘til you drop.” If anything, it is about not dropping (out) with the finish line in sight.

Current wealth levels in Germany and many other nations could be sustained if more workers continued to work until the official retirement entry age at 65. As of, only 61.6% of those between 55 and 64 are working, according to Eurostat. More than a third of this age group leaves the labor force – despite being of working age.

MATURE TODAY, PRIME AGE TOMORROW

Younger age groups (15-25 years) have a labor force participation rate below 50% as most of them are still enjoying an education (see figure 1). In the prime age group (25-54), the share of employed persons skyrockets to 83.3% only to decrease sharply for mature and aged workers.

Demographic change does not have to equal economic declineOne way to counter this is to incentivize today’s mature workers to be tomorrow’s prime age. Completing the phasing in of Rente mit 67 (retirement at 67) in Germany by might help create the shift displayed in figure 1. It could also lead to future aged workers adopting the working pattern of today’s mature. Share of post-retirement workers may then rise to 11% with the help of more flexible working time arrangements. This would increase the number of workers at a time when they are needed most to soften the sudden shock of large flocks of baby boomers leaving the workforce.

Like so often in economics, these calculations are based on assumptions and the question is: Is it realistic that with one of the highest overall labor force participation rates in Europe, Germany can further increase participation?

As early retirement incentives were phased out in the early, labor force participation rate for mature and aged workers is already on the rise. The share of women working also seems to be growing, as a forthcoming article in this series will examine in greater detail.

And it’s not like it can’t be done. Labor force participation of those of prime age was close to our assumptions as recently as the, when it reached 90% for men between 55 and 59.

Demographic change is a fact. Yet by enabling mature workers to better participate in the labor force, we might succeed in adding six million people to the labor force by the. Demographic change may then even become a driver for growth.

Thinking beyond 65

Germany and other aging nations risk losing 15% of their wealth – unless they unlock the potential of older workers

Richard Wolf

Thinking beyond 65

Germany and other aging nations risk losing 15% of their wealth – unless they unlock the potential of older workers

Richard Wolf

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