German Newspaper article on welfare

How the German welfare state punishes performance

Transfer payments such as citizen's allowance and housing benefit as well as the tax system are poorly coordinated. More gross often leads to less net. Berlin. If the citizen's allowance increases by twelve percent at the turn of the year, there will be a lot of envy: most employees can only dream of a wage increase of this magnitude.

Despite the higher citizen's allowance, someone who works always has more money at their disposal than someone who does not work, says Andreas Peichl of the Munich Ifo Institute . "But the question is how big the incentive to work is," stresses the economist.

Poorly coordinated state benefits such as the citizen's allowance, housing benefit or child allowance often mean that additional work is not worthwhile or, in extreme cases, even leads to lower net income. The Ifo Institute has calculated this for various household types for the Handelsblatt newspaper - and shown how anti-performance the system sometimes is.

The economists took into account the higher citizen's allowance rates and the increase in the maximum amount of the child allowance to 292 euros, as well as tax changes announced by the coalition for the coming year, some of which have not yet been enshrined in law It is planned to increase the basic allowance to 11,784 euros and the child allowance – including the allowance for care and education or training needs – to 9,540 euros.

Calculation example single

An unemployed, single citizen's allowance recipient, for whom the state reimburses rent costs of 650 euros and heating costs of 80 euros, would only have the standard rate of 563 euros available per month.

If the single person were to work full-time for the minimum wage and have the same housing costs , he would earn around 2,000 euros gross. According to Ifo calculations, he would have 911 euros left over net if he claimed the transfer payments to which he was entitled, such as housing benefit. This would mean he would have 348 euros more at his disposal than his unemployed counterpart.

However, if the citizen's allowance recipient takes on a mini-job that pays 500 euros, the wage gap to that of a full-time employee is only 168 euros. For a midi-job with 18.5 hours per week at the minimum wage, the wage gap shrinks to just 20 euros. So for half the work, you get almost as much money as in a full-time job.

Calculation example for single parents

An unemployed single parent with two children aged five and nine and housing and heating costs of 1,055 euros would have 1,553 euros at her disposal with the citizen's allowance. With a full-time job at the minimum wage and a gross income of 2,000 euros, she would have a net income of 2,349 euros - 796 euros more. However, this only applies if she actually claims the transfer payments to which she is entitled, such as housing benefit, child benefit or maintenance advance. Many people who are entitled to benefits do not do so out of shame or ignorance. Without all the transfer payments, the single parent with her full-time job at the minimum wage would only have a net income of 1,015 euros instead of 2,349 euros - 538 euros less than a corresponding recipient of citizen's allowance.

Calculation example for a couple with two incomes

A dual-income couple with two children aged five and nine, who work full-time and each earn 2000 euros gross per month, have a net income of 2686 euros with rent and heating costs of 1235 euros.

The couple therefore only has 887 euros more at their disposal per month than the household receiving citizen's allowance. The absurd thing is that if the model working couple increases their joint income to 5,000 euros, the household's net income falls by 43 euros to 2,643. Criticism from the opposition and coalition

The problem is that rising wages are in many cases eaten up again by the parallel reduction in state transfers and an increasing tax and social security burden. "Work is therefore often no longer profitable," criticizes the labor market policy spokesman for the Union faction , Stephan Stracke ( CSU ). "But performance and hard work must be worthwhile."

Despite falling inflation rates, the federal government has raised the citizen's allowance rates by an average of almost a quarter within two years. The standard rate for single people will rise by 61 euros to 563 euros per month in 2024.

The SPD , Greens and FDP had also already reformed the additional income limits so that benefit recipients of earned income between the mini-job limit of 520 euros and 1,000 euros could keep more than before. But the coalition is thus continuing to privilege part-time employment, criticizes Stracke. The goal must always be full-time employment that meets demand without permanent subsidies. "Anything else is just tinkering with symptoms." The traffic light coalition has not yet implemented its reform promise from the coalition agreement to better coordinate state services in order to create real incentives to work.

And so there are warning voices not only in the opposition, but also in the governing coalition that the welfare state must not destroy work incentives: "Work and performance must be noticeably more and more worthwhile," says Jens Teutrine, the spokesman for the FDP parliamentary group responsible for the citizen's allowance.

It is "absurd" that, in the interaction of the various social benefits, there are currently income ranges where, despite higher income, people have less money in their pockets and working more is hardly financially worthwhile.

Coalition promised reform

A reform of the system "is urgently needed and is long overdue," warns Ifo researcher Lilly Fischer, who carried out the calculations together with Peichl. This includes reducing the transfer withdrawal rates and increasing the tax allowances for employed people. In addition, the two competing social systems of citizen's allowance on the one hand and housing benefit plus child allowance on the other hand would have to be integrated. According to the coalition agreement, the SPD, Greens and FDP want to coordinate tax-financed social benefits in such a way that it really is worthwhile for recipients of citizen's allowance to take up employment subject to social insurance contributions.

As a basis for such a reform, Labor Minister Hubertus Heil (SPD) commissioned a report from the economic research institutes Ifo and ZEW as well as other scientists - as agreed in the coalition agreement. The report, which Handelsblatt had already reported on in advance, was published shortly before Christmas. The research team led by project leader Peichl proposes several reform paths, including the following model: If citizens' allowance recipients earn more than 520 and no more than 2,000 euros per month, only 70 percent of this should be counted towards the citizens' allowance.

Under current law, only incomes between 520 and 1,000 euros are exempt to this extent. According to the Commission's proposal, benefit recipients should be allowed to keep 35 cents instead of zero for every euro earned above 2,000 euros.

This would mean that even with higher earned income, there would be significantly more net income left over from gross income. However, a change in the income limits would also increase the number of people entitled to benefits.

Depending on how the additional income limits are designed, the Commission assumes that over a million more households could receive basic social security benefits, says CSU politician Stracke. This would expand transfer payments and consolidate them for low earners He suggests that social benefits should be reduced at a lower rate for a limited period of time as incomes rise. "This could be a way to pave the way to full-time employment without the disadvantage of permanent subsidies," emphasises Stracke.

Housing benefit reform is still pending

Reducing social transfers as income increases, not too quickly and not too slowly, is always a balancing act, says economist Martin Werding, who also worked on the report. "However, basic security currently still contains real gaps that make it difficult to completely stop relying on transfers."

The next major reform would require housing benefit to be better linked to citizen's allowance, says the Bochum economist. The two benefits are currently poorly coordinated. However, solutions to this problem were not part of the reviewers' task. The coalition will now examine the experts' suggestions as a basis for a reform, even if his group does not adopt all of them one-to-one, says FDP politician Teutrine. "Our goal is to strengthen employment subject to social insurance contributions and to build a stable bridge to the labor market for a wide variety of family constellations."

Until that happens, the welfare state will continue to produce many absurdities.

By Frank specht and Martin Grieve