The ifo Institute, on behalf of the Friedrich Naumann Foundation for Freedom, has recently published a study on incentives for working people to leave the “Arbeitslosengeld II” (Unemployment Benefit II) system, and the interactions between these incentives and the tax and social insurance system.

Let us briefly discuss the bakcground situation and the key findings.

Stuck in the Status Quo: Less Money Despite Having a Job

The regulations surrounding the so-called “supplementary income” (“Hinzuverdienst”) in the context of Unemployment Benefit II are unfair. Due to the multitude of different social security benefits with very different prerequisites, those affected often find themselves in a situation where, despite having taken a job, they have less available income at the end of the month. The income thresholds for self-earned money are unsystematic and not incentive compatible. Those who are currently receiving Unemployment Benefit II and wish to work their way beyond it have barely any incentive to do so.

It is true that the first 100 euros per month are generally subject to no deductions. However, households supported by minor jobs barely benefit financially from increasing their working hours and thereby raising their income.

Currently, if the income is raised by a further 100 euros, the worker may only retain a maximum of 20 euros. In extreme cases, more work may even lead to less income, for once particular income thresholds are crossed, other social security benefits may suddenly be withdrawn. Higher gross pay then leads to lower net pay.

Trapping Hartz IV recipients in minor jobs benefits neither the people affected nor the economy. This is when Hartz IV becomes a poverty trap.

The Objective: To Make Work Worthwhile, Irrespective of Income Bracket

A strong social network is the foundation of German social cohesion within the social market economy. In the face of the challenges presented by globalization, digitalization and demography, we cannot afford to leave people in our country lagging behind. Hartz IV can alleviate emergency situations, but the social and political objective must be for Hartz IV to be merely a transitional phenomenon.

The solution is an integrated tax and transfer system. The liberal basic income (“Liberales Bürgergeld”) is a concept in which achievements, effort, and working more are always rewarded. Our whole society benefits from this: the individual, because it increases their prospects of a good job and a higher income; businesses, because it supplies them with urgently needed workers; our society, because it means more citizens can participate in growth and prosperity.

Results of the Study

Long-term additional financial burden on the state budget should preferably be avoided for the suggestions to be implementable. The report identifies various ways in which the current disincentives can be overcome: structural deficits can be removed by combining the many different social security benefits into one standard benefit and by introducing reasonable supplementary income thresholds.

The study presents different models which take into account the consequences for the individual, the state budget, and the labor market. The suggested reform variants make it a significantly more attractive option for Hartz IV recipients to work more, by raising income retention by up to 40% (instead of max. 20%, the current rate).

The many different and competing social security benefits (Unemployment Benefit II, accommodation costs, housing benefit and children’s allowance) are combined into a single benefit so that working more always means more income.

All the reform scenarios lead to more jobs. Depending on the model, they create additional jobs for 90,000 to 290,000 people.

All the models are financially viable. The new jobs even ensure long-term scope for investment and tax relief. The incomes of the households increase in comparison to current incomes. Poverty and inequality are attenuated.

Read “Leaving Hartz IV” by the ifo Institute (both the study and the website in German)