A leading economist is calling for a comprehensive overhaul of Germany’s social welfare system, citing inefficiencies and unintended consequences impacting workforce incentives. Andreas Peichl, Director of the Ifo Center for Macroeconomics and Surveys and Professor of Economics at Ludwig Maximilian University of Munich, argues that the current patchwork of social benefits – including unemployment assistance (Bürgergeld), social insurance programs and income tax structures – lacks coordination.
Peichl, who has previously conducted analyses for the Federal Ministry of Labour, told the Süddeutsche Zeitung that the system’s current structure can paradoxically disincentivize work. He explained that individuals may find themselves earning more but experiencing little or no net income increase, or even a decrease, due to deductions across various programs.
Having modeled over 60 potential reforms and their projected impacts, Peichl’s assessment comes as Chancellor Friedrich Merz has signaled an intention to significantly reduce expenditures on Bürgergeld within the federal budget, a goal Peichl suggests may be challenging. He cautions against considering Bürgergeld reform in isolation from the broader social welfare system.
While acknowledging the potential for initial costs associated with widening the transfer sector, Peichl believes reforms could be designed to be self-financing through increased employment, which in turn would generate more revenue for social security programs. Merz announced his plan to implement Bürgergeld reforms as early as autumn, setting the stage for a potentially complex and impactful policy shift.