Births, Economic Growth and Population Aging

The gradually accelerating demographic change is one of the key factors shaping the future development of our society. In an aging population a shrinking working age population is accompanied by a rising number of pensioners. In the future this means that the financial burden of supporting ever more pensioners will fall on ever fewer shoulders and will exercise increasing pressure on social security systems and on the economy as a whole. To date discussion has focused primarily on the consequences of aging, and on the financing and design of the public pension system. However, it would also make sense to investigate the causes of the aging phenomenon, focusing in particular on the continuing decrease of the fertility rate. The obvious question to ask is whether the aging problem can be solved by raising the fertility rate?

Economic theory offers inconclusive guidance, even if the idea that if we have too many old people, we need more children to balance the effects out, appears plausible enough. The quantitative study discussed here also comes to more differentiated conclusions: A long-term boost in per capita gross national income will only result from a higher fertility rate if the additional children born are also better educated and trained. This means that the formation of human capital and not a higher fertility rate itself is decisive for long-term growth.

The three most important economic policy conclusions consequently relate to the formation of human capital, the role of tax financed family transfers ("Familienlastenausgleich") and the priority of further reforms of our social security systems:

(1) An aging Germany needs better trained and educated - and consequently highly productive - children. Following international comparative studies - such as studies of educational standards like the "TIMMS Study" or the "PISA Study" in which Germany scored conspicuously poorly - there is a need for farreaching reforms in Germany's vocational and continuing professional train- ing sector. In a period of demographic change the engine of future growth - training and education in the context of the family, school, university, and continuing professional training - merits special attention and support.

(2) As the number of newborn children has very little influence on per capita GNI, there are no particularly obvious reasons on economic grounds for encouraging higher fertility rates. If higher fertility rates are desirable, the corresponding rationale will have to be obtained from other scientific disciplines. The study considered here does, however, generalize on the basis of the problems of current tax financed family transfers. It would be beyond the scope of this paper to discuss whether such transfers are adequate. However, this paper does support the conclusion that all that economists can really call for is compensation for the burdens borne by families which simultaneously represent benefits for others. The mere existence of more children does not in itself present a longterm solution to the demographic-driven problems of the future.

(3) A higher fertility rate does not represent an alternative to a reform of the social security system aimed at solving the immediate aging problem which, if no reform is forthcoming, results in a crisis in the public pension and health systems in the period between 2020 and 2040. This also applies if the impact of human capital is taken into account. The transition period after which a higher fertility rate would result in a larger and better trained labor force able to pay contributions to the pension and other social insurance systems is far too long. Further reforms of our social security systems must have top priority. Specifically, further pension reforms are needed which go well beyond the steps taken by the "Riester reform" and which tackle the problems which will arise after 2015. Furthermore, a reform of the health system, which even faces more pressing problems, is needed.

Investments in human capital and reforms of social security systems are investments in the future which initially impose painful costs. However, it would be futile to hope for a painless cure to the problems associated with demographic change. The happy circumstance that we are living longer on average at the same time involves the need to finance this longevity. The financing burden must be mainly borne by the generation which will itself enjoy a longer life. The option of postponing urgent social reforms and shifting the burden to later (and possibly larger) generations will, as this paper has demonstrated, ultimately prove to be an economic nonstarter.

 

more information:

Berkel, Barbara; Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim (2004): Sind die Probleme der Bevölkerungsalterung durch eine höhere Geburtenrate lösbar?, Perspektiven der Wirtschaftspolitik, Band 5, Heft 1, 71-90

Sind die Probleme der Bevölkerungsalterung durch eine höhere Geburtenrate lösbar?
MEA Discussion Paper: 025-02 Barbara Berkel, Axel Börsch-Supan, Alexander Ludwig und Joachim Winter