Germany: Demographic Challenges Require Reforms Amid Political Fragmentation

These structural weaknesses are expected to become increasingly relevant over the coming years as the risk of political gridlock compounds other pressures on maintaining Germany’s economic competitiveness.

Germany is already among the worst-placed large economies measured by the number of hours worked per worker and yearly shrinkage in the labour force (Figure 1).

Figure 1: Shorter working hours intensify Germany’s demographic challenge

Credit Outlook Stable but Demographic Pressure Set to Intensify

Germany’s robust public finances and diversified economy continue to support its AAA sovereign rating, which Scope Ratings reaffirmed on 27 September.

However, the productivity gains that have long offset the relatively lower hours worked in Germany may no longer be sustainable in the face of a shrinking workforce. Demographic pressures could strain productivity particularly in manufacturing, threatening Germany’s global competitiveness and pushing companies to accelerate automation or outsourcing.

Addressing this challenge requires labour-market reforms, increased immigration with the aim to attract and retain highly skilled workers, new policies encouraging higher labour-force participation rates, and increased automation to maintain productivity and economic growth.

Germany’s working-age population is set to decline by more than 8% by 2030 compared with 2023. Shortages of skilled labour will worsen due to the country’s comparatively short working hours, which are among the lowest in the EU. Employees worked 34 hours a week on average in 2023, less than in Italy, Spain and France where this averaged around 36 hours.

In contrast, economies of most other AAA-rated sovereigns expect the number of people of working age to remain broadly stable, such as the Netherlands and Denmark (both +0.3%) or increase slightly as in Norway and Sweden (+3%). Several other countries will also benefit from increases in the working-age population, partly through immigration, including Ireland (+7.0%), the UK (+2.8%) and the US (+1.6%).

Rising Pension Liabilities Strain Future Budgets

With fewer workers to support an ageing population and, with the number of hours worked per worker declining in recent years, the pressure on Germany’s social-security system is set to increase.

Government efforts to reduce the future pension burden, including the introduction of a EUR 200bn share-based pension fund by 2036, are welcome. Still, further reform is essential as these efforts will likely reduce the expected rise in pension contributions – to around 22.3% of gross salaries by 2045 from 18.6% today — by only 0.4pps of gross salaries.

The government has earmarked EUR 132bn or 27.2% of the total 2025 draft budget for pension spending. Previous studies have indicated that this share could double by 2050 with the old age dependency ratio rising to more than 50%.

This rising financial burden could limit fiscal space for discretionary spending and Germany’s ability to respond to economic shocks or invest in long-term growth without increasing public debt or implementing difficult fiscal reforms. The IMF estimates the net present value of pension spending between 2023-50 to be 24.5% of GDP, which is significantly higher than for the UK (9.6%) or France (-0.1%).

Political Fragmentation Complicates Immigration, Labour-market Policy

The growing influence of smaller and fringe political parties, reflected in recent regional election results, complicates consensus-building on critical reforms such as increasing net migration and encouraging higher labour-force participation, both crucial for addressing the country’s demographic challenges.

This political gridlock delays much needed policy reforms, exacerbating the economic risks posed by a shrinking workforce and increasing pension liabilities, even if Germany continues to attract skilled workers.

The challenges are significant given the scale of the demographic deficit the economy is facing. Germany needs average annual net immigration of 480,000 people of working age, well above recent rates. Average annual total net migration since 2000 — excluding the crisis years of 2015 and 2022 – amounted to 253,000 people.

With excessive bureaucracy and comparatively lower cultural inclusiveness partly helping to explain why Germany has become less appealing as a destination for skilled workers compared with English-speaking countries, increased efforts to encourage labour-force participation and boost productivity will be needed.

Such reforms combined with substantial investments in the country’s capital stock would help to stabilise Germany’s diminishing growth potential, which Scope still estimates at around 0.8% a year.

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Eiko Sievert is a Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, and primary analyst on Germany’s sovereign credit rating. Elena Klare, an associate analyst at Scope, contributed to writing this comment.