Falling numbers of workers spell yet another challenge for Europe's struggling top economy, already battling onerous red tape, high energy costs and fierce competition in its traditional industries, AFP reported.
"Germany is not on the brink of demographic change -- it is already in the middle of it," said Holger Schaefer from the IW economic institute in Cologne, which published the report.
"In just a few years, the economy will lack the workers needed to generate prosperity and sustain the welfare state in its current form."
The study said that the labor market is set to be hit especially hard by the retirement of "baby boomers", usually defined as those born in the two decades after the end of World War II.
With not enough people entering the labor market to replace them, the working-age population will drop by 4.3 million by 2036, to 51 million, a fall of some seven percent, it said.
The rate of decline is worse than previously anticipated, because the population has started shrinking earlier than expected.
In 2025 Germany's population fell for the first time in many years, by about 100,000 people, and now stands at some 83.5 million. By 2040, it will drop to below 82 million, the IW institute forecast.
As well as a declining birth rate, the fall is being driven by a sharp decrease in the number of people moving to Germany, it said.
Migration to the EU's most populous country was set to remain subdued due "to the clouded economic outlook and the federal government's shift in migration policy," the report said.
Conservative Chancellor Friedrich Merz's coalition has made tougher immigration policies a priority as he seeks to diminish the appeal of the far-right Alternative for Germany (AfD) party.
The IW institute said the government could arrest the decline in the working age population by encouraging people to work more, and making it easier to attract skilled workers from abroad.