Model calculations for the Fifth Sustainability Report of the Federal Ministry of Finance

Tasks

The long-term development of German social public finances and aggregated public budgets are simulated to identify potential threats to the fiscal sustainability of the German public finances. The project will rely on simulations until 2070 in the areas of demography, labor market, macroeconomic conditions and growth, and demography-driven public expenditure to assess the effects on aggregated public finances. It consid-ers population growth forecasts, employment and scenarios regarding the macroeco-nomic potential growth.

Methods

Different sustainability scenarios are calculated using the Social Insurance Model („SIM.xx“) combined with macroeconomic ifo-business cycle forecasts and a neoclas-sical growth accounting production function.

Data and other sources

14th Coordinated Population Forecasting
Official Microcensus

Results

The aim of the present study is to estimate the foreseeable effects of demographic change with the help of model simulations and to show the resulting risks for the sustainability of public finances in Germany. The model calculations relate to public expenditure positions that are strongly influenced by demographic change. In order to take the nu-merous sources of uncertainties into account, two diverging basic var-iants are developed for the benchmark model calculations, which are based on rather optimistic ("Variant T +") and rather pessimistic ("Var-iant T–") assumptions. Both variants mark the boundaries of a plausi-ble corridor. In addition, many alternative variants are considered to test the sensitivity of the benchmark results and to investigate possi-ble more extreme developments. Government primary expenditure (excluding interest payments) recently (2017) amounted to 42.9% of GDP. Demographic change will lead to a steady increase in the pri-mary expenditure ratio, which will accelerate between 2025 and 2040. By 2060, this rate will increase in the benchmark variants to 46.5% (variant T +) to 50.1% (variant T–) of GDP. The calculated sustainability indicators show that the sustainability of public finances has dete-riorated compared to the 4th sustainability report.

Short research study regarding this project

Aging and Productivity: Causal Evidence and Transmission Mechanisms

We examine how population aging influences factor productivity. Our theoretical framework suggests a novel instrumental variable for the old-age dependency ratio: the legal retirement age relative to the average age of the population. The results show that a one-standard deviation increase of the old-age dependency ratio decreases factor productivity by 5.5%. We investigate three transmission mechanisms: (i) innovations, (ii) firm entries and entrepreneurship, and (iii) the composition of public expenditure. Our results suggest that aging influences productivity by reducing innovation, entrepreneurship, and productive public expenditure. Using survey data, we provide a microeconomic foundation of the macro-level results.