Germany’s Demographic Bridge

Make working beyond 67 genuinely attractive, but don’t force everyone to do it.

Someone capable of working until 70 or 72 should receive a powerful financial incentive to do so: lower taxation on earnings after the statutory retirement age, continued pension accrual, and flexible combinations of work and partial pension. Germany already has unusually high employment among 60–64-year-olds — 66.7% in 2024 — demonstrating that this isn’t an unrealistic behavioural assumption. Yet only 14.3% of people aged 50–69 continue working when they first begin receiving a pension, considerably below the comparable European OECD average. There is therefore room to change incentives.

Crucially, I’d distinguish occupations. A 69-year-old software architect might comfortably continue working. Someone who has spent 45 years roofing houses should have an entirely different route. Disability, occupational wear and long contribution histories need protection.

Temporarily broaden the tax contribution supporting pensions.

Germany already does this: pensions are not financed solely from pension contributions. Federal funding accounted for about €120 billion of the roughly €420 billion system revenues in 2025. So using general taxation isn’t some radical departure; it already represents around 30% of financing.

During the demographic bulge, I would deliberately increase the portion financed from broad taxation rather than attempting to extract the entire adjustment from younger workers’ payroll contributions. That spreads the cost across income sources and generations.

Create a substantial funded pension component alongside pay-as-you-go.

This is important because a purely pay-as-you-go system remains exposed to demographics indefinitely. Germany’s 2026 pension commission has actually moved in this direction, recommending a separate capital-funded component funded initially through additional contributions, eventually complementing the statutory pension.

I would make this a permanent second engine of the system: one portion financed by future workers and another backed by accumulated productive assets. It won’t rescue the 2030s by itself because capital takes decades to compound, but it materially improves the position of people retiring in the 2040s, 2050s and beyond.

Attack the fertility problem by attacking the cost of having children.

Germany had only 654,241 births in 2025, its lowest number since 1946, with fertility at 1.32. More concerning, Destatis notes that Germany now has a relatively small generation of potential mothers as a consequence of earlier low fertility. That’s the demographic-momentum effect we were discussing.

The policy objective should not be telling people to reproduce. It should be removing reasons people who want two or three children stop at zero or one: childcare availability, housing costs, career penalties, parental leave design and financial insecurity. I’d concentrate support particularly on the second child, because that’s where approaching replacement fertility really starts to matter.

Make multigenerational households economically advantageous rather than treating them as failure-to-launch.

This connects directly to the point you raised earlier. Adult children staying with parents longer isn’t inherently an economic problem. Three adults sharing one house can consume considerably fewer fixed resources than three adults maintaining three separate households.

Tax and housing policies could encourage adaptable homes, granny flats, intergenerational renovations and family caregiving while still protecting personal independence. That can simultaneously reduce housing pressure, reduce childcare costs, help older parents and allow younger adults to accumulate capital before creating their own households.

It doesn’t directly manufacture pension contributors, but it reduces the income required to maintain the same standard of living, which makes somewhat higher taxation much less destructive than a simple single-household-income calculation suggests.

Raise labour-force participation before importing the entire solution.

Immigration remains important, but Germany shouldn’t calculate its demographic deficit and simply assume the same number of immigrants must fill it.

There are still several domestic labour reservoirs: older workers, women who would work more hours if childcare permitted it, people involuntarily working part-time, people who leave employment before statutory retirement, and people whose skills no longer match available work. The OECD specifically identifies lifelong learning, flexible retirement and healthier workplaces as major opportunities for Germany.

Then use immigration strategically to fill the remaining gap — particularly younger skilled workers and their families who are likely to remain contributors over decades.

Make productivity, automation and AI part of pension policy.

This may ultimately be the most important step.

A pay-as-you-go system doesn’t actually require a particular number of human beings. It requires enough economic value to be produced and taxed.

If 30 million future workers equipped with automation, robotics and AI can produce as much real output as 40 million workers produce today, then demographic decline does not translate one-for-one into economic decline.

That means productivity investment — industrial automation, energy infrastructure, digital government, AI, education and capital formation — belongs in the pension discussion.

And eventually Germany may need to shift some taxation away from taxing human labour so heavily and toward the broader economic income generated by capital and highly automated production.

Stop measuring retirement as a binary state.

The twentieth-century model says:

That makes less sense as people live longer and work becomes less physically demanding for many occupations.

I would build:

into the pension system.

A 67-year-old could draw perhaps part of their pension while working three days. At 70 they could work two days. At 72 they could stop.

That retains expertise, reduces the psychological and economic cliff of retirement, allows continued taxation and production, and places much less physical burden on older workers.

And this isn’t starting from zero: Germany has already changed employment law to make continuing employment beyond normal pension age easier.

Abandon perpetual population growth as the underlying assumption.

This is the most fundamental reform.

Don’t define success as getting Germany back onto an endlessly expanding population pyramid.

Instead design an economy capable of functioning with something closer to a column-shaped or eventually gently contracting population structure.

That means every five years Germany should publish something analogous to a demographic balance sheet showing:

Then automatically adjust contributions, tax transfers, incentives for later retirement and funded-pension contributions within predetermined limits.

That turns demographics from a political crisis every election cycle into something closer to actuarial management.