The Citizen’s Allowance is intended to ensure the livelihood of long-term unemployed people. At the same time, however, politicians also want to motivate recipients to look for new jobs.
The Munich-based ifo Institute for Economic Research has now presented how the two goals can be better reconciled in a new report commissioned by the Federal Ministry of Economics. The main proposal is that recipients of the citizen’s allowance should be allowed to keep more of the money they have earned themselves.
The report comes at a time when there is once again a heated debate about the citizen’s allowance. The CDU/CSU and FDP consider it to be too generous, while the SPD and the Greens defend it. Federal Finance Minister Christian Lindner (FDP) in particular is addressing possible cuts during negotiations on the 2025 federal budget. Because billions of euros are missing from the budget and many companies are urgently looking for workers, Lindner said, the unemployed should not be prevented from working by paying too high social benefits.
Ifo Institute makes concrete proposals
The proposals presented by Ifo economist Andreas Peichl and his colleagues also concern the economic consequences triggered by the citizen’s allowance payments. They include the following: If a long-term unemployed person takes up a new job, for example with a low salary or part-time, he or she will receive fewer social benefits. This is because the state reduces its aid because the person is partly working for their own living again. This also applies to state payments of housing benefit and child allowance.
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However, the offsetting sometimes has paradoxical effects. “This, together with the burden of taxes and social security, leads in many cases to effective marginal burdens of 100 percent,” writes Peichl. The bottom line is that the person then has less money at their disposal, even though they work more. This can lead to the welfare state deterring citizens from taking on additional employment.
Up to 144,000 more people would work
The economists have analyzed that this could be changed by integrating housing benefit into the citizen’s allowance. Secondly, politicians should coordinate the two benefits better. And thirdly, recipients should always be allowed to keep, for example, 35 percent of their additional income from work. Because higher earnings would then be worthwhile, many recipients of the citizen’s allowance would look for better jobs.
The researchers’ calculation models have shown that up to 144,000 more people would take up employment – about three percent of the approximately four million people of working age who receive citizen’s allowance. A positive side effect for the state: depending on the reform variant, it would save several hundred million or even a billion euros per year.
The governing coalition of the SPD, the Greens and the FDP could see these findings as a mandate. In the context of the upcoming negotiations on the budget and the growth program, the report may offer starting points for reform.
