Financial incentives for additional income in the new basic income support scheme
The financial organisation of the supplementary income option in the new basic income support scheme (the successor to the Citizen's Income)1 must take five guidelines into account:
- Additional earnings should be encouraged.
- Strongly pronounced thresholds, above which additional earnings become much less attractive (‘drop-out edges’), should be avoided.
- The reform should avoid additional state expenditure.
- The pay gap compared to those in gainful employment must be maintained.
- The benefits that can be achieved through gainful employment must be clearly visible to recipients of benefits.
According to the current regulation, additional earnings are possible when receiving the citizen's allowance (after the ‘new basic income support’ reform). There is an allowance of 100 euros without deductions. Higher earnings are largely deducted from the state support. From earnings of 101 euros up to earnings of 520 euros, there is a deduction (transfer deduction rate) of 80 per cent. Income above this up to an income of 1,000 euros is subject to a transfer deduction rate of 70 per cent. For a further 200 euros2 , the transfer deduction rate is 90 per cent, income above this amount is deducted in full from the citizen's allowance (Social Code II, § 11b, paragraph 3).
The rules on the deduction of transfers for additional earnings in addition to the receipt of benefits under Social Code II are to be reorganised. In order to offer financial incentives for additional earnings, to maintain the wage gap to people in employment and to avoid drop-outs, the deduction is to take effect from the first euro of additional earnings with a transfer deduction rate of 45 per cent. This rate will gradually increase to 65 per cent for additional earnings over 500 euros and to 70 per cent for additional earnings over 1,000 euros.
Working in the new basic security system
Basic state security for people in financial need is a cornerstone of the welfare state. However, unconditional access to this basic security must overburden the welfare state and the community of contributors. Therefore, the aim and expectation of welfare state regulations remains that each and every individual provides for their own livelihood.
Receiving state support should not exclude gainful employment, but rather encourage it. This makes sense for four main reasons:
- Own earnings, part of which may be kept in addition to state support, improve the living situation of those affected. It improves financial resources, recognition at work and social contacts.
- Gainful employment while receiving state support can be an entry into full-time employment that is sufficient to support oneself or enable a qualification.
- Working while receiving benefits under SGB II can improve the labour supply and make it possible to fill positions that would otherwise have to remain unfilled.
- Earning additional income while receiving benefits under SGB II is a contribution to social justice. It gives the recipients of benefits a financial advantage and at the same time helps to reduce the overall costs of transfer payments.
The existing regulation and the problem of the break-off edge
The existing regulation on additional earnings when receiving the citizen's allowance is a strong incentive for additional earnings of up to 100 euros. This additional income does not lead to deductions, but can be kept in full. Recipients of citizen's allowance are thus encouraged to take on a small amount of gainful employment. In fact, many recipients of support under SGB II make use of this additional income option.3
Under the current rules, a very high proportion (80 per cent) of earnings that exceed the amount of 100 euros is offset against the Citizen's Income. This is where the break-off point occurs. Above 100 euros, the incentive to earn additional income decreases considerably. On the one hand, from this threshold onwards, additional earnings are significantly less financially attractive for the individual. On the other hand, there is the signalling effect: the rule actually emphasises that additional earnings that are only slightly above 100 euros do not make sense.
The exact effects of this cancellation edge are unknown. However, several unfavourable effects are plausible: Firstly, it is reasonable to assume that people refrain from possible additional work due to the dropout edge. In view of the labour shortage in many areas, this costs companies and businesses profits and society prosperity.
The gradual expansion of gainful employment is also hindered by the dropout rate. A gradual transition between state support and increasing own employment can be helpful for recipients of state support, but also for employers. The opportunity to extend the work of proven employees can be an interesting option for employers.
Furthermore, additional work beyond the demolition edge may take place as undeclared labour.4
There are many calls for and discussions about the reorganisation of additional income options in the receipt of citizen's income. The Ampel government set up a commission to reform the supplementary income system.5 The commission's proposal reduces the withdrawal of transfers, significantly increases the number of people entitled to benefits and continues to provide for considerable jumps in the transfer withdrawal rates, i.e. cut-off points for gainful employment. The proposal also changes the transfer withdrawal rates depending on the composition of the community of need. This makes the regulations more complicated and extends entitlements without solving the core problem.
The gradual increase in the transfer withdrawal rate with small changes avoids a break-off point. Expanding gainful employment is financially attractive in every earnings bracket. At the same time, there is a withdrawal of state support for each area of additional earnings. The associated signal makes it clear that the new basic income support is always a support benefit.
Costs of a reform
The actual effects of the proposed measure on public budget costs are difficult to assess. The design of the transfer withdrawal rate has repercussions on entitlements to child benefit and housing benefit in the case of higher earnings. Another influential factor is how employment behaviour will change as a result of the new regulation.
For earnings of up to 100 euros, the proposal leads to decreasing costs for public budgets, as this additional income is currently exempt from deduction, whereas the proposal also assumes a low transfer withdrawal rate in this area. For additional earnings of 260 euros, the amount of the transfer deduction is identical for both models. For higher additional earnings, the proposed transfer deduction rate is lower than under the existing regulations. This initially results in more state expenditure.
The lower transfer withdrawal rates mean that the transfer withdrawal only reaches the level of transfers if earnings are higher than before. This means that entitlement to the new basic income support will only cease if earnings are slightly higher. This slightly increases the number of beneficiaries, which in turn causes additional costs.6 An increase in the number of beneficiaries could be avoided if the transfer withdrawal rate is set 13 percentage points higher in all proposed stages.
However, the higher costs for public budgets are offset by savings if more people in the new basic income support scheme earn additional income. Such an increase in employment above the threshold of 100 euros is likely because the drop-out edge is avoided. As the proposal dispenses with deduction-free additional earnings and there is a transfer deduction for all additional earnings, any gainful employment of recipients of the new basic income support leads to state savings.7
It is difficult to estimate how these effects relate to each other and whether the improved labour supply is associated with positive macroeconomic effects.
Complex impact chains, worthwhile change
A seemingly simple change in the transfer withdrawal rates in the new basic income support has complicated consequences. The state costs for support under SGB II change, the number of beneficiaries changes, the change in transfer withdrawal rates has different consequences depending on the housing costs and the children in the community of need, because there are consequences for housing benefit and child benefit.
The change proposed here is intended to achieve several objectives at the same time: The wage gap between new basic income support recipients and those in employment without state support must be maintained, the state costs must remain within reasonable limits, the regulation should provide an incentive for gainful employment and the living situation of people who are dependent on state support should be appropriate.
It is difficult to achieve all of these goals precisely. Previous federal parliaments have shied away from new regulations. However, the weaknesses of the current regulation are obvious and a change is necessary.
The proposal made here focuses on the incentive to earn a living and avoids any break-off points. The aim is to enable a gradual transition to a self-generated livelihood and to encourage it, not to prevent it. Improving the regulation on additional earnings in the new basic income support scheme is worth the effort.
1 In the following, the term ‘citizen's income’ is used when the text refers to the regulation in force at the end of the traffic light government in February 2025. When referring to the new regulation, the term ‘new basic income support’ is used. Both are benefits under the German Social Code II (SGB II).
2 For people with a minor child in the community of need, the threshold is a further 500 euros instead of a further 200 euros.
3 For the end of 2008, Dingeldey, Sopp and Wagner (2012: 34) report a proportion of one third of ALG II recipients who had a mini-job with a wage up to the amount of the tax-free allowance (i.e. up to 100 euros or up to 120 euros for people with children). Dingeldey, Irene/Sopp, Peter/Wagner, Alexandra, 2012: Governance des Einkommensmixes: Geringfügige Beschäftigung im ALG-II-Bezug. WSI-Mitteilungen 1/2012. Blömer, Fuest and Peichl, with reference to Bruckmeier and Becker, report an accumulation of marginal employment with a monthly income of up to 100 euros among people receiving benefits under SGB II (Blömer/Fuest/Peichl 2019, page 34, see endnote 1, with reference to Bruckmeier, Kerstin/Becker, Sebastian, 2018: Auswirkungen des gesetzlichen Mindestlohns auf die Armutsgefährdung und die Lage von erwerbs-tätigen Arbeitslosengeld-II-Bezieherinnen und -Beziehen. https://www.mindestlohn-kommission.de/DE/Forschung/Projekte/pdf/Bericht-Mindestlohn-Armut-ALGII.pdf (last access 05.02.2025).
4 Blömer, Fuest and Peichl (2019, see endnote 1) report a widespread assumption by practitioners in job centres that additional money is earned over and above the stated 100 euros.
5 As before, the Commission proposal leaves the first 100 euros of additional income untouched and then sets high, but comparatively somewhat lower, transfer withdrawal rates, whereby single parents are to be treated differently from single people or families. Peichl, Andreas and others, 2023: On reforming transfer withdrawal rates and improving work incentives. Research report. Munich and Mannheim: ifo Institute and ZEW.
On the discussion about additional earnings in the Citizen's Income, see, for example, German Council of Economic Experts, 2023: Overcoming Weak Growth - Investing in the Future. Annual report 2023/24. Wiesbaden: Federal Statistical Office. https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/gutachten/jg202324/JG202324_Gesamtausgabe.pdf (last access 17.02.2025), p. 255 ff.; Blömer, Maximilian/Fuest, Clemens/Peichl, Andreas, 2019: Raus aus der Niedrigeinkommensfalle(!) Der ifo-Vorschlag zur Reform des Grundsicherungssystems. Ifo Schnelldienst 4/2019, 72nd year; Maximilian/Fischer, Lilly/Peichl, Andreas, 2023: An updated reform proposal for more employment and tax relief. Ifo Schnelldienst 9/2023, pp. 25-36; Heilmann, Dirk/Rürup, Bert, 2012: Labour market reforms. What remains to be done. Wirtschaftsdienst Jg. 92(5), pp. 339-344; Bruckmeier, Kerstin/Wiemers, Jürgen, 2022: New regulation of supplementary income opportunities for transfer recipients: no easy task. Zeitgespräch vol. 102(2), pp. 90-94.
6 The average level of benefits in the Citizen's Income is currently reached at an income of around 1,200 euros. Under the proposed model, this threshold rises to €1,409. The extent to which a shift in the threshold of those entitled to benefits will lead to more recipients of the new basic income support also depends on whether the benefits are applied for. Particularly in the case of very small additional amounts, it can be assumed that not every eligible person will apply. See also Bruckmeier, Kerstin/Mühlhan, Jannek/Wiemers, Jürgen, 2018: Stärkung Erwerbstätige im unteren Einkommensbereich. Approaches to reforming unemployment benefit II, housing benefit and child supplement, IAB Research Report, 09/2018.
7 Blömer, Hansen and Peichl have estimated the different effects in a model calculation for another reform proposal with changed transfer withdrawal rates. However, in the model they propose, there are still large jumps in the transfer withdrawal rates, i.e. employment dropouts. Blömer, Maximilian/Hansen, Emanuel/Peichl, Andreas, 2024: The design of transfer withdrawal in interdependence with the Citizen's Income, the Basic Child Benefit and the Housing Benefit. Munich: ifo Institute. See also the model calculations for a model with modified transfer withdrawal rates, which also contains discontinuation edges and significantly expands eligibility, in Peichl et al. 2023, see endnote 1. A comparison of various model calculations is reported by Bruckmeier, Kerstin/Wiemers, Jürgen, 2022: Neuregelung der Hinzuverdienstmöglichkeiten für Transferbeziehende: keine leichte Aufgabe. Zeitgespräch vol. 102(2), pp. 90-94.
