Germany's aging and declining population could increasingly burden public finances and drag on credit quality over the coming decades, according to S&P Global Ratings' latest study of global aging. We expect Germany's population will decline to below 75 million by 2050, down from over 80 million today. At the same time, the share of the working-age population in the total population is expected to drop by 11 percentage points to 55% by 2050. As a result, we expect total age-related public expenditures will increase by 22% by 2050 to over 24% of GDP (2015 versus 2050). This is significantly higher than the projected median share of age-related spending of GDP for Germany's peer groups of European countries and advanced economies in 2050, which stands at 20.1% for both groups. Overall, we forecast an increase in net debt to 149% of GDP in 2050, up from 66% in 2015 absent any counteracting reforms by the German government.
This increase is somewhat lower than in our previous study from 2013, as recent policy measures, such as better access to childcare facilities, have boosted fertility rates somewhat. Furthermore, a gradual rise in the legal retirement age to 67 is being currently being implemented. Lastly, Germany's underlying fiscal position has seen an improvement compared to our previous report.
- We expect Germany's old-age dependency ratio will rise to 57% in 2050 from 32% currently.
- This would push age-related spending to 24% of GDP by 2050 absent further government reforms to limit it, and lead to an increase in net debt to 149% of GDP.
- This, in turn, would drag on sovereign credit quality.
- The cost to Germany of demographic change is nevertheless lower than it was in our 2013 prediction, owing to recent pension reforms and an improved fiscal position.
S&P Global Ratings' analysis of the Federal Republic of Germany is part of a global study conducted to analyze the cost of aging. We presented our findings in "Global Aging 2016: 58 Shades Of Gray," published April 28, 2016. The study explores various scenarios--including a no-policy-change scenario--and the implications that we currently believe these different scenarios could have on sovereign ratings over the next several decades. We included an additional eight sovereigns in this year's report, which expanded the scope of the study's coverage to a total of 58 sovereigns, representing 70% of the world's population. For the 50 sovereigns that we included in the previous edition of our Global Aging series, our findings this year provide an update of our analyses--including information on long-term demographic, macroeconomic, and budgetary trends, all in the context of the countries' current fiscal positions.
Aging Dynamics Will Challenge Germany's Budgetary Position
The analysis suggests that in Germany, the old-age dependency ratio will rise to 57.4% in 2050 from 31.8% in 2015 (see table below; the old-age dependency ratio is the number of people 65 and older divided by the number of those 15 to 64). Overall, we expect the population will peak in the early 2020s at about 81 million, but it likely will decline to less than 75 million by 2050. The share of the working age population is projected to fall to 55.5% by 2050 from the current 66.1%.
In our view, an aging population likely will place substantial pressure on economic growth and public finances. Demand for publicly provided health care and long-term care services and state pensions could increase. Without further government reforms (not our base-case scenario), total age-related public expenditures in Germany are projected to rise to 24.5% of GDP in 2050 from 20.1% in 2015. This increase of 4.4% of GDP is greater than the projected 3.7-percentage-point increase for the median of our 58-sovereign sample. Germany's age-related expenditures in relation to GDP are thus projected to be significantly higher in 2050 than those of its peer groups of advanced economies and European nations, which stands at 20.1% of GDP for both groups of countries. We expect that the bulk of Germany's age-related spending will go toward pension outlays, followed by long-term care (see table). In our view, the increase in age-related spending in Germany will be somewhat moderate until the late 2020s, although spending will likely increase after this period as more people enter retirement age.
Such dynamics suggest a gradual deterioration in Germany's budgetary position in the long term. If unmanaged, the weight of general government spending--including social security--could rise significantly as age-related spending increases, coupled with a rising interest bill as deficits and debt mount. Our analysis suggests that without fiscal or structural policy reforms, net debt could rise to 148.9% of GDP by 2050 in Germany, higher than the sample median which stands at 134% of GDP.
A No-Policy-Change Scenario Would Drag On The Ratings
Such macroeconomic and fiscal dynamics would imply a change to the current 'AAA' long-term foreign currency sovereign rating on Germany. Based on the fiscal projections of our study, we derived hypothetical sovereign credit ratings for Germany (see table). In practice, S&P Global Ratings takes a large number of factors into consideration when determining sovereign credit ratings. In the very long term, however, prolonged fiscal imbalances and wealth (as measured by GDP per capita) tend to become the dominant factors. Using this approach, our 'AAA' rating on Germany would likely come under increasing pressure. By 2040, we expect that Germany's fiscal indicators will have weakened such that they would be more in line with sovereigns currently rated in the 'BBB' category, because, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration.
When comparing our results for Germany with what we found in 2013, it seems that future budgetary challenges now appear to be somewhat less important than they were a few years ago. This is a result of several factors. Two of the main reasons are the significant improvement in the sovereign's budgetary position since 2013 and a lower increase in the projected age-related spending, compared to the 2013 report. Despite this lower projected increase compared to the previous study, we consider the two most important changes regarding the pension system since our last study negative for pension-related spending. First, Germans who have contributed to the pension system for at least 45 years are now eligible for early retirement at age 63. Second, for mothers whose children were born before 1992, an additional year of parenting time will be accounted for, increasing their pensions slightly. Both measures will increase pension-related outlays and potentially lower the effective retirement age. In the long run, they risk offsetting the significant budgetary improvements Germany has achieved in recent years.
Alternative Scenarios Could Result In Drastically Different Economic And Fiscal Prospects
In addition to our no-policy-change scenario, we have considered several other long-term scenarios (see table). Two of these scenarios are: i) Germany undertaking radical structural reforms in its social security system, freezing all age-related spending at the current level (as a percentage of GDP); or ii) balancing the budget by 2019. Based on this analysis, fiscal indicators in Germany appear to hold up better if the government were to undertake structural reforms to prevent age-related spending from rising or move to consolidate its budget for a sustained period.
The Effects Of Age-Related Spending On Sovereigns' Future Creditworthiness
Our base-case scenario is not a prediction. Rather, it is a simulation that highlights the importance of age-related spending trends as a factor in the evolution of sovereign creditworthiness. In our view, it is unlikely that governments would, as a general matter, allow debt and deficit burdens to spiral out of control or that creditors would be willing to subscribe to such high levels of debt. In fact, as we have observed in many sovereigns in our 2016 Global Aging report, governments are able to confront the prospects of unsustainably rising debt burdens by implementing budgetary consolidation or reforms of their social security systems.
|Aging Population Data And Scenario Results: Germany|
|Demographic and economic assumptions|
|Working-age population (% of total)||66.1||64.0||61.9||59.0||56.7||56.2||56.0||55.5|
|Elderly population (aged over 65; % of total)||21.0||23.2||25.2||28.1||30.6||31.2||31.5||31.8|
|Old-age dependency ratio (%)||31.8||36.2||40.7||47.6||53.9||55.6||56.2||57.4|
|Real GDP (% change)||1.7||1.2||1.0||0.7||0.8||1.0||1.0||0.9|
|Age-related government expenditure (% of GDP)|
|Scenario 1: No policy change (% of GDP)|
|Net general government debt||66.6||58.8||60.6||69.2||83.1||100.8||122.5||148.9|
|General government balance||0.7||(0.8)||(2.7)||(4.0)||(5.3)||(6.7)||(8.2)||(9.8)|
|General government expenditure||42.1||45.3||47.2||48.5||49.8||51.2||52.7||54.3|
|Hypothetical long-term sovereign rating||AAA||aa||aa||a||a||bbb||bbb||bbb|
|Scenario 2: Balanced budget in 2019 (% of GDP)|
|Net general government debt||66.6||57.1||56.1||61.3||71.4||85.0||101.8||122.8|
|General government balance||0.7||(0.3)||(2.0)||(3.1)||(4.3)||(5.4)||(6.6)||(7.9)|
|Hypothetical long-term sovereign rating||AAA||aa||aa||aa||a||a||bbb||bbb|
|Scenario 3: No additional age-related spending (% of GDP)|
|Net general government debt||66.6||57.2||52.7||49.5||46.0||41.8||36.8||31.6|
|General government balance||0.7||(0.2)||(0.9)||(0.7)||(0.5)||(0.3)||(0.1)||0.2|
|Hypothetical long-term sovereign rating||AAA||aa||aaa||aaa||aaa||aaa||aaa||aaa|
|Scenario 4: Lower interest rate (% of GDP)|
|Net general government debt||66.6||60.1||60.6||66.1||76.1||88.9||104.3||122.8|
|General government balance||0.7||(1.3)||(2.2)||(3.2)||(4.3)||(5.3)||(6.3)||(7.3)|
|Hypothetical long-term sovereign rating||AAA||aa||aaa||aaa||aaa||aaa||aa||aa|
|Scenario 5: Higher growth (% GDP)|
|Net general government debt||66.6||56.8||55.2||59.8||68.9||80.6||95.0||112.3|
|General government balance||0.7||(0.7)||(2.4)||(3.5)||(4.6)||(5.6)||(6.7)||(7.8)|
|Hypothetical long-term sovereign rating||AAA||aaa||aaa||aaa||aaa||aaa||aa||aa|