Giving Recipients of Germany’s Basic Income More Net from Gross Increases Employment
Making smaller cuts to social benefits for recipients of Germany’s basic income (Bürgergeld) who work more would increase their participation in the labor market. This is the finding of a reform proposal by the ifo Institute and ZEW elaborated on behalf of the German Federal Ministry of Labour and Social Affairs (BMAS). “This reform would in fact bring more money into the public purse,” says Andreas Peichl from the ifo Institute, who led the study. “Enacting this reform within the system, as set out by the Ministry, would increase employment by 136,000 people or 145,000 full-time positions. That would enable the reform to finance itself. This is because public budgets would end up with around EUR 1.1 billion more in taxes and social security contributions,” says Holger Stichnoth from the Leibniz Centre for European Economic Research (ZEW).
The proposal is aimed at single parents and single people without children as well as couples with three or more children, because this is where the employment effects arise. As things stand, social benefits such as housing benefit are reduced by between 80 and 100 percent for incomes over EUR 520 per month up to EUR 1,000. To make taking on additional work worthwhile by ensuring more net income is left over from the supplemental earnings, the reform provides for social benefits to be reduced by only 70 percent in the future up to an earnings limit of EUR 2,000. For incomes over EUR 2,000 per month, social benefits would be reduced by only 65 percent instead of the previous 100 percent.
“We show that this reform leaves no community of need worse off and – taking into account behavioral adjustments – is also self-financing. The results of a representative survey indicate that such a reform would meet with broad acceptance among the general public. In this respect, the hurdles to implementation should be relatively easy to overcome,” says Maximilian Blömer from the ifo Institute.
Stichnoth adds that the employment effects could be increased even further if the crediting rate for the additional amount of the basic child allowance was reduced from 45 percent to 25 percent. This would put households with children in a better position and would lead to an overall increase in employment of 157,000 people and 165,000 full-time positions. This combined reform would relieve public budgets only by around EUR 500 million.
Peichl adds: “In fact, the current two-tier system comprising basic income and housing benefit should also be converted into a single basic social security. This would make the system much simpler and thus reduce the administrative burden. And it would have even greater employment effects.”
Expert opinion (in German): “Reforming Transfer Payments Reduction Rates and Improving Incentives to Work,” by Andreas Peichl, Holger Bonin, Holger Stichnoth, and others; study number 629 of the German Federal Ministry of Labor and Social Affairs
Publication: https://bmas.de
