A new proposal from the Ifo Institute suggests reforming the Bürgergeld system to increase financial incentives for recipients to work. The reform aims to integrate housing benefits and adjust income deductions to encourage employment.
Proposed Bürgergeld reform aims to boost employment
Working while receiving Bürgergeld (citizen’s allowance) in Germany often results in a modest increase in disposable income due to the integration of earnings with various social benefits like housing allowance. Critics argue that this setup discourages people from working, as the financial gains from employment are not always proportional to the income earned. To address this issue, the Munich-based Ifo Institute has proposed a Bürgergeld reform designed to make work more financially rewarding for recipients.
According to an analysis commissioned by the Federal Ministry of Economics, the proposed reform could increase the labor supply by approximately 144,000 full-time equivalents. This metric allows for the comparison of employment levels despite varying weekly working hours by relating an individual’s work hours to the average full-time workweek.
Key elements of the proposed reform
Professor Andreas Peichl from the Ifo Institute emphasized that integrating housing allowance into the Bürgergeld and simultaneously reforming the income disregard rules for working recipients could create stronger work incentives and streamline the system. Economist Maximilian Blömer added that this reform would slightly ease the budget and lead to a minor increase in households receiving transfer payments.
Under the proposed changes, housing benefits would be fully absorbed into the Bürgergeld’s accommodation costs. Additionally, the Bürgergeld itself would be made more generous, and the income deduction rate for earnings would be reduced to 65%. The Ifo analysis predicts that these changes would result in around 1.6 million households receiving more Bürgergeld, while 1.8 million households would no longer qualify for housing allowance.
Supporting households with children
To further support families with children, the Ifo economists suggest reducing the deduction of parental income from the child supplement. This adjustment could increase the labor supply by an additional 25,000 full-time equivalents, with only a minimal impact on the federal budget. Another option under consideration is revising the formula used to calculate housing allowance eligibility.
The debate over how to quickly reintegrate Bürgergeld recipients into the workforce continues in German politics. The current coalition government has opted for stricter sanctions within the Bürgergeld system, which studies suggest are effective in encouraging employment.
