Our figure of the month 07/2021: The Dependency Ratio

The pension system in Germany is financed on a pay-as-you-go basis. In very simplified terms, this means that statutory pensions are paid from the gross wages of employees subject to social insurance contributions plus an employer's contribution. However, employees subject to social insurance contributions are also the population group that directly (e.g., raising their own children) or indirectly (e.g., child benefits) bears a large part of the expenses for families. Thus, not only pension payments but also family benefits are borne by employees. To get an idea of a "total burden" of this population group, it is helpful to look at the ratio of the young (0 to under 18 years old) and the old (67 and older) to the working population (18 to under 67 years old). A quotient of one of the "dependency ratio" formed in this way indicates that for every person of working age there is one person entitled to pension payments or triggering family benefits.

The basis for calculating the historical development of the dependency ratio up to 2020 is the updated population figures from the Federal Statistical Office. For the future development, the 14th Coordinated Population Projection is used. Within the framework of this, various variants are calculated, which differ with regard to the development of the birth rate, life expectancy and migration. The figure shows the effects of different developments in migration balances on the dependency ratio given moderate developments in fertility and life expectancy. The dependency ratio will rise sharply from the last measured value of 0.56 (2020) in all variants considered and will be at an intermediate peak between 0.72 and 0.74 in the mid-2030s. The influence of migration balances at the end of the projection period is most evident: in the trajectory with low annual net migration, the balance reaches levels of 147 thousand persons annually by 2030 and then remains constant. Under these conditions, the dependency ratio would reach a level of 0.8 in 2060. If net migration is high (311 thousand persons per year from 2030), it would be lower at a level of 0.74. For every 100 persons of working age, there would then be 74 persons claiming pension payments or triggering family benefits.

Increasing the retirement age, which is being debated in the political arena, is one possible way to lower the dependency ratio. There are limits to stabilizing the dependency ratio. For example, even with high net migration, the retirement age in 2060 would have to be around 72 years if the aim were to keep the dependency ratio at the 2020 level by this means alone. Supplementary approaches to stabilizing the pay-as-you-go system will therefore be required. In addition to additional private pension provision, for example, an increase in the propensity to work, the volume of work and average wages would support the system.

Other figures can be found here.