Starting January 1, 2025, low-income citizens in Germany will see an increase in housing benefit (Wohngeld) by an average of 30 euros. However, the planned Wohngeld reform has sparked criticism, as economists warn it might reduce work incentives similarly to the Bürgergeld (Citizens’ allowance) system.
Berlin – From January 1, 2025, low-income citizens in Germany can expect an increase in their housing benefits (Wohngeld) by an average of 30 euros. However, this increase has sparked considerable debate, as critics draw parallels between the proposed Wohngeld reform and the Bürgergeld (Citizens’ allowance) system, raising concerns about its potential negative effects on work incentives. Andreas Peichl, head of the Center for Macroeconomics and Surveys at the Munich-based Ifo Institute, recently expressed his concerns to the Frankfurter Allgemeine Zeitung (F.A.Z.), stating, “The increase in Wohngeld does not improve work incentives; on the contrary.”
The Wohngeld reform is being compared to Bürgergeld because it may similarly discourage some individuals from working. A key issue is the high transfer withdrawal rates, which refer to the reduction in benefits as people earn more income. In some cases, higher gross income might not be worth it for individuals in certain income brackets, as the accompanying reduction in social benefits could outweigh the gains from increased earnings.
The degree of benefit reduction varies across different types of transfer payments and depends on specific circumstances, such as rent levels or the number of children in a household. Peichl argues that the high transfer withdrawal rates, present in both the Bürgergeld and Wohngeld systems, are counterproductive and prevent people from escaping what is known as the low-income trap.
Understanding Transfer Withdrawal Rates. Transfer withdrawal rates represent the percentage of additional earned income that does not lead to an increase in overall disposable income due to reduced social benefits. State transfer payments, such as Bürgergeld, Wohngeld, and child allowances, are income-dependent.
Economists propose drastic changes to Wohngeld
In light of these concerns, economists have proposed significant reforms. One suggestion, outlined in an Ifo research report by experts including Peichl, advocates for fully integrating Wohngeld into the accommodation costs (KdU) covered by Bürgergeld. Additionally, they recommend making Bürgergeld more generous by reducing the rate at which earned income affects benefit levels to 65 percent.
This proposal would result in approximately 1.6 million more households receiving Bürgergeld, while 1.8 million households would no longer qualify for Wohngeld. The economists believe that this could strengthen work incentives by making employment more financially rewarding. “Integrating Wohngeld into Bürgergeld and simultaneously reforming the earnings disregards could enhance work incentives and make the system more efficient,” Peichl wrote in the Ifo report published on August 8. Ifo researcher Maximilian Blömer added, “Additionally, the budget would experience a slight relief, and there would be a minor increase in the number of households receiving benefits.”
Can Wohngeld and Bürgergeld be received simultaneously? Wohngeld is available to individuals who are employed or self-employed but whose income is insufficient to cover their living expenses. This includes retirees and students who do not qualify for BAföG. However, it is not possible to receive Wohngeld and Bürgergeld simultaneously.
Details on the Wohngeld increase starting January 2025
The Wohngeld reform comes in response to rising costs for rent, energy, and daily necessities, explains Federal Minister for Housing Klara Geywitz (SPD). She emphasized that people are spending significantly more on these essential needs. To maintain the relief effect in the long term, the government plans to increase the monthly Wohngeld by an average of 15 percent, or 30 euros, starting January 1, 2025.
The last Wohngeld reform occurred in 2023, which also significantly expanded the pool of eligible recipients. The goal of Wohngeld is to provide financial relief to low-income workers and retirees so that they do not have to apply for Bürgergeld or basic security benefits due to high rents. The amount of Wohngeld depends on the number of household members, income, and rent. According to previous estimates, around 1.9 million households nationwide could receive Wohngeld next year.
