A German child born in 2020 may spend 57 per cent of their lifetime wages paying for pensions, healthcare, aged care and unemployment benefits. 

At least, that is the warning recently delivered by Germany’s most famous group of economic advisers, the German Council of Economic Experts (Die Wirtschaftsweisen).

The economists estimate that a German born in 1940 paid about 34 per cent of their wages towards financing the social safety net. A German worker born in 1990 will pay about 47 per cent.

Today’s primary school children could eventually face a burden of 57 per cent if the system remains unchanged.

Think about that for a moment. More than half of every worker’s labour could eventually be absorbed by social contributions. 

The debate unfolding in Germany offers a glimpse into Australia’s future. 

Germany’s baby boomer generation looms much larger than Australia’s because it combined a stronger postwar baby boom with decades of very low fertility and far less population growth from migration. This has left younger generations too small to balance the demographic scales.

The result can be seen in the chart below. Germany is visibly older than Australia.

As the giant German baby boomer cohort retires over the next decade, the country is not only losing experienced workers, it is also facing decades of increasing demand for healthcare and aged-care services. 

How should Germany pay for it? That question sits at the centre of German politics. 

The economic advisers argue that without reforms, social security contributions will continue rising as fewer workers support more retirees.

Their proposed solutions include slower growth in pension benefits, tighter eligibility for aged-care support, reforms to healthcare funding and a greater expectation that older Germans contribute more of their own savings towards care costs. 

Predictably, these ideas have triggered fierce opposition. Nobody enjoys hearing that benefits may need to be reduced. 

Yet demographics are stubborn. 

Most welfare systems were designed when large, working-age populations supported relatively small retiree populations.

When that balance shifts, governments have only a limited number of options. They can raise taxes, cut benefits, borrow more money, or redesign the system itself. 

None of those choices are politically easy. 

The challenge is particularly acute in ageing societies because older voters make up an increasingly large share of the electorate. Politicians quickly discover that pension reform may be economically necessary but electorally dangerous. 

Meanwhile, many younger Germans feel they are being asked to contribute ever more to a system that may not deliver equivalent benefits when they eventually retire.

When younger generations believe they are carrying an unfair burden, trust in institutions inevitably suffers. Institutions include systems we take for granted – democracy and capitalism for example. 

These are not uniquely German questions. 

How much should younger workers contribute to support older generations? How much responsibility should individuals take for funding their own retirement and care? And what obligations do governments have when demographics change dramatically? 

Australia will increasingly confront the same debates. 

Fortunately, Australia entered this demographic transition with one major advantage – superannuation. 

Compulsory superannuation, introduced in the early 1990s, remains one of the most significant economic reforms in modern Australian history.

What many Australians initially viewed as another deduction from their pay packet has grown into a retirement savings system worth trillions of dollars. 

The genius of superannuation is that it spreads the cost of ageing across an individual’s entire working life. 

Rather than relying almost entirely on future taxpayers to fund retirement incomes, Australians accumulate assets while they work. Those savings then help fund retirement decades later. 

The system is far from perfect. Some Australians still retire with inadequate balances. Career interruptions, low wages and housing insecurity can all undermine retirement outcomes.

Yet compared with many countries that rely heavily on pay-as-you-go pension systems, Australia remains in a relatively strong position. 

That does not mean we can relax. 

While superannuation reduces pressure on the age pension, it does not eliminate the broader costs of an ageing society. 

Healthcare spending will continue to rise as Australians live longer. Demand for aged-care services will increase substantially. Workforce shortages in healthcare, disability support and aged care are already emerging and are likely to intensify in coming decades. 

In many ways, Australia’s biggest ageing challenge is no longer retirement income, it is the cost of keeping people healthy, cared for and connected in later life. 

Germany offers lessons here as well. 

One striking finding from the recent German report is that healthcare costs are being driven less by administration and more by the underlying structure of the system itself.

Hospitals, pharmaceuticals and medical services account for most of the spending growth. Similar pressures are visible in Australia. 

As populations age, health systems shift from treating short-term illnesses to managing chronic conditions. Medical advances help people live longer lives, but they often come with higher costs. 

The German debate also highlights another uncomfortable reality. Ageing societies often become accustomed to promising more benefits while avoiding discussions about who will ultimately pay for them. Demographics eventually forces that conversation. 

Australia has already benefited from policymakers who were willing to think beyond the next election cycle. Compulsory superannuation was politically controversial when it was introduced, today it stands as one of Australia’s greatest economic strengths. 

Australia is ageing, but decades of sustained skilled migration have slowed the process compared with many European countries. 

Even so, the number of Australians aged over 85 will double by 2040. The ratio of workers to retirees will decline. Healthcare demand will rise.

Governments at all levels will face increasing pressure to fund services while maintaining living standards for younger generations. 

Germany is simply arriving at these challenges first. 

That is why Australians should pay attention to the debate unfolding on the other side of the world. It offers a glimpse into our own future. 

The good news is that we are not starting from scratch. Australia’s superannuation system means we are better prepared than many countries for the retirement income challenge. 

The bad news is that no retirement savings system can completely outrun demographics. 

Ageing is not a crisis. In many ways, it is a remarkable success story. People are living longer and healthier lives than previous generations could have imagined, but every success creates new responsibilities. 

Germany is not a warning because it has failed. It is a warning because it is ageing faster than Australia. The questions German policymakers are wrestling with today are the same questions Australia will face tomorrow. 

The advantage Australia still possesses is time. The mistake would be to waste it. 

Simon Kuestenmacher is a co-founder of The Demographics Group. His columns, media commentary and public speaking focus on current socio-demographic trends and how these impact Australia. His podcast, Demographics Decoded, explores the world through the demographic lens. Follow Simon on Twitter (X), Facebook, or LinkedIn.