A shortage of babies and a glut of old folk threatens Germany's generous pension system, putting Chancellor Gerhard Schroeder under pressure to make people work longer.

With women having on average 1.4 children, well below the 2.1 needed to keep the population steady, an increased ratio of retired people to workers will strain the system.

Growth in Europe's biggest economy is flagging, while unemployment is near post-war highs and Mr Schroeder has said pensioners will have to bear their share of the pain in his Agenda 2010 reform plans.

Demographers say without reforms to a system under which pensioners receive two-thirds of final salary, a massive rise in government spending for pensions and health care will over-burden budgets.

"The population pyramid will turn into the population mushroom - a large chunk of older people resting on a thin stalk of youngsters, with scary consequences," a recent editorial in the Sueddeutsche Zeitung daily said.

A government commission led by economist Bert Ruerup has proposed raising the retirement age progressively to 67 from 65 to try and cut rising costs which have made German workers among the world's most expensive.

Germany can ill afford to price itself out of the market, especially now as the European Union prepares to admit new members such as Hungary and Poland where wage costs are more than 80 per cent lower.

"The financial crisis shows how quickly negative trends in the labour market or higher state spending can knock pension financing out of whack. Reform of the state pension systems has to continue," says Deutsche Bank's Dieter Brauninger.

"The message for the working generation is to ensure their living standards in their old age. They will need to make more efforts to provide for themselves during their working lives," he said.

But plans to raise the retirement age have sparked outrage in a country where 50-year-olds struggle to find work and after mass demonstrations in France this week against pension reforms, analysts wonder whether Schroeder will stick to his plans despite the political cost.

Germany's population was 82.6 million in 2002 - barely changed from 82.1 million in 1997 - and is expected to fall to 81.5 million in the next five years.

But for immigration, estimated at 200,000 per year, Germany's population would have shrunk in the past five years.

Currently there are 4.4 workers for every person over 65, but that is forecast to fall to 1.8 by 2050.

"Left on autopilot, today's retirement system will either crush future workers or betray future retirees," public policy analyst Richard Jackson wrote in a report for the Centre for Strategic and International Studies think tank.

"Reform must proceed on two tracks - decreasing the cost of pay-as-you-go promises while expanding alternative means of support," he said.

When Iron Chancellor Otto von Bismarck established the world's first state pension in 1889, life expectancy for males at birth was 37 years and only people over 70 benefited.

Now the average German male who reaches 65 can expect to live another 15 years and the state "pay as you go" pension system - where today's workers pay for retirees' pensions out of payroll taxes - is straining at the seams.

Germany's actual average retirement age is 60 - a legacy of policies in the 1990s to encourage early retirement and make room for younger unemployed workers.

Mr Ruerup's reform plans include tweaking the formula used to adjust state pensions each year to make them rise more slowly, mainly by excluding civil servants' earnings from the sums.

The proposals are aimed at keeping state pension contributions below 22 per cent of gross wages until 2020 - a goal the government said it achieved two years ago with reforms which encouraged more private pension provision.

When these were adopted, the state pension contribution rate was 19.1 per cent of wages, paid equally by employers and workers.

However rising unemployment last year cut the numbers paying into the system and the government had to hike the contribution rate this year to 19.5 per cent. It is forecast to rise to nearly 20 per cent next year, pushing up the cost of German labour and reducing take home pay.

The centre-left government has yet to respond formally to the Ruerup proposals.

Mr Schroeder tried to improve the demographic picture by changing immigration laws to let more foreigners work in Germany, but in 2002 the Constitutional Court ruled the law invalid.

He has also tried to encourage more children by raising child benefits and funding for nurseries and care centres.