Germany's demographic challenge

For those interested in demographics, Deustche Bank has published another big report. The demographic challenge: Simulations with an overlapping generations model (PDF) by Bernhard Gräf and Marc Schattenberg simulates the Germany population over the next 150 years, using their own OLG model. Their main conclusion is that "we will have to get used to substantially lower prosperity gains going forward." Here are some of the results of their simulations:

The growth potential of the German economy will shrink from about 1 ¼% p.a. at present to a mere ¼% p.a. by about 2060.

The annual increase in real income per capita will be dampened by up to 0.3 of a percentage point up to 2050, falling to just below 1% p.a. This comes to only one-third of the annual increases in prosperity from 1955 to 2005.

Under “Status quo” conditions, the return on capital will decline by around 100 basis points by 2060.

A change of pensions policy towards “More personal provision” would drive down returns by a further 35 basis points.

And the old-age dependency ratio is  set to nearly double by 2060. But longer term, there is some good news:

Our projections suggest that the population in our “model world” will decline by a further 15% from 2050 to 2080 and then remain stable from about 2150.

That's all right then.

Comments

[Blissex]

But this line of argument is ridiculous... There was this paper 10-15 years ago predicting a severe bust in the USA housing market, as demographic extrapolation showed incontrovertibly that the baby bust following the baby boom would cause a scarcity of house buyers.

As a review of that paper argued, what happened is that a lot of immigrants filled the gap, and older people anyhow ended up staying alone in 4-bedroom houses, and lobby for higher state subsidies for health care rather than sell them and trade down.

What is already happening is that in order to maximize the value of the real estate legacies that baby boomers expect from their parents, to raise tax takes, and to have a vast pool of cheap labour for services like home and health care, many western governments are opening the floodgates to immigration.

Immigrants are usually young, healthy, very cheap, work in the kind of service/servant jobs that are needed for an aging citizen population, don't have the vote, don't collect welfare (most of which goes to citizens over 60 years old), and many of them actually go back to their country of origin eventually, once they have saved some money.

The future in many western world countries is one of an older, asset rich, majority drawing dawn government benefits they have voted themselves, while there is a large minority of immigrants that are working hard to fund those benefits for low salaries in order to make them as cheap as possible, and who have to pay rent to property-owning citizens.

Too bad for the minority (70% of voters own real estate) citizens whose profile is similar to that of immigrants...

Expect changes compatible with this plan also in fiscal policy: higher sales and excise taxes (to hit illegal immigrants), higher taxes on lower incomes (to hit legal immigrants), lower taxes on capital, property and inheritance (to favour well off retired citizens).

This has already been happening, curiously enough...

In other words: "quo" extrapolation rarely works, because vested interests prevail and the politics of the situation change the economics too.

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