When social benefits make work unattractive

In the discussion about citizens’ money, the question is repeatedly asked whether work is worth it. Economists say: There are actually situations in which social benefits make overtime unattractive.

Since the replacement of Hartz IV, there has been a vehement discussion about what consequences the new citizens’ benefit will have on taking up work. The CDU, for example, has announced that if it wins the election, it will correct the citizen’s benefit system, in particular through tougher sanctions against those who refuse to accept reasonable work.

But there is a discussion that is more fundamental – and not just aimed at citizens’ money. The question is what consequences the combination of different social benefits has, which are reduced to varying degrees as the recipient’s income increases.

Rules are poorly coordinated

The answer to the question is provided by a report led by the Munich ifo Institute, on which the Berlin economist Ronnie Schöb also worked. The result: Those who work have more than those who don’t work. But: “More work is not necessarily worth it compared to less work,” says Schöb.

This can be seen, for example, with the so-called top-up people: people who are employed but still receive citizen’s benefit, housing benefit and – as parents – possibly also child allowance due to their level of income and personal living conditions.

The benefits are not only granted by different authorities, but also have rules that are poorly coordinated, says Schöb. The result: It can happen that higher earnings are completely eaten up by the loss of state support. In this case, economists speak of a “transfer withdrawal rate” of 100 percent.

The basic problem is the high deductions

The deductions are only so extreme in certain family situations and in places with very high rents, as the study shows, which was carried out on behalf of the SPD-led Federal Ministry of Labor. But the basic problem of high deductions exists everywhere. With fatal consequences, explains Schöb: “Why should someone work more if nothing or only little comes out of it?”

When it comes to wage increases, you can only recommend that people in some income ranges work less: “Then it could be that in the end you actually get more money out of it – in addition to the free time or the time you have for your family.”

There are a lack of working hours on the labor market

Employers report exactly this: Employees would react to a wage increase by reducing working hours. Although exactly the opposite would be important socially, as Pascal Kober, the labor market and social policy spokesman for the FDP parliamentary group, emphasizes.

As an example, Kober points to a single parent who currently earns 1,000 euros and is considering working 50 percent more. Because of the deductions from social benefits, only 84 euros would remain of the additional 500 euros earned. “If the single parent is in exactly the income range where it is not worthwhile for her to expand her work, these working hours are missing from the labor market.” This is fatal given the known shortage of workers and skilled workers.

Above all, however, it is a question of justice, emphasizes Kober – in agreement with the SPD social politician Annika Klose: “I can well understand that it also affects the sense of justice when people say: I work more hours here now – why should I no longer have anything in the account at the end?”

A reform should pay off

Against this background, economists suggest paying social benefits for longer, so that at least 30 cents remain for every additional euro earned – analogous to a rule that currently applies to additional income between 520 and 1,000 euros. At first glance, this would only lead to higher social spending, says Schöb from the Free University of Berlin.

The bottom line is that such a reform pays off for the state: “If we create incentives for people to work more again, that means that they pay higher social security contributions, they pay income tax and that welfare benefits as part of basic security also decrease. “

FDP is pushing for consequences

However, the SPD-led Federal Ministry of Labor is hesitant to evaluate the results of the report it commissioned. Upon request, the ministry said: “The results of the research project to reform transfer withdrawal rates and improve employment incentives are available to the federal government and are currently being further evaluated and discussed within the department.”

FDP politician Kober, however, is pushing for consequences: Maybe one or two people in the SPD still have to convince them. “But the credo that performance must be worth it should actually also find resonance in the SPD.”

In any case, Kober’s parliamentary colleague Annika Klose from the SPD wants to advocate for a reform of social benefits that takes into account the effects of citizen’s benefit, housing benefit and child allowance or the planned basic child support. You have to make sure that you don’t end up creating new inequalities in the system, says the social politician: “But working to make work worthwhile is definitely the path that I support.”