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How Germany is reforming its unemployment insurance

The German government is preparing to overhaul its unemployment insurance system in depth. Special Adviser to the President of the Jean-Jaurès Foundation for Europe, Ernst Stetter analyzes the challenges of a reform designed to turn its back on the liberal reforms of the Schröder era.

The German government has announced that it wants to reform the operation of unemployment benefits from 1eh January 2023. While what Germans call the Hartz IV system was originally introduced by Chancellor Gerhard Schröder in 2005, its abolition was a campaign promise of the Social Democrats. By replacing it with a new citizen’s subsidy, the Social Democrats hope to free themselves from the stigma that has weighed on them since they established a system accused of causing significant rifts in German society.

After heated discussions in the governing coalition, Labor Minister Hubertus Heil (SPD) presented the key points of the reform on 14 September 2022: “Our welfare state must ensure that people who do not have financial reserves can make ends meet,” he said.

From next year, the citizen’s income must give everyone simple, efficient, fair and equal access to the welfare society. SPD chair Saskia Esken adds that the end of the Hartz IV system symbolizes a contemporary response to Germany’s social problems.

Less bureaucracy, more trust

The key words in the reform are simple: Less bureaucracy and more trust in the unemployed. The aim is to offer new opportunities on the labor market thanks to a program adapted to the jobseekers’ professional qualifications. This is an important point: experience has shown that two out of three long-term unemployed do not have sufficient vocational training. The citizen’s income removes the so-called placement priority, and must thus give the unemployed real opportunities to find a job.

Anyone who lacks professional qualifications must be given the opportunity to acquire them without simultaneously having to take on temporary and often insecure jobs during this period. The government plan envisages a “trust period”: six months during which compensation payments could not be reduced or suspended, even in case of breach of customary obligations or rejection of a job offer.

Correspondingly, the government wants that during the first two years of unemployment, only the jobseeker’s economic wealth from 60,000 euros can be taken into account, with a ceiling raised by 30,000 euros for each additional person in the hearth. The idea is that people receiving unemployment benefits don’t have to worry about having to dip into their small savings or part with their assets. Finally, the Scholz government intends to take into account the real housing costs of beneficiaries when calculating their benefits, even when the housing is larger and the rent more expensive than what would normally be considered a “reasonable” level. The goal here is to relieve unemployed workers who are already busy finding a new job from the added pressure of having to move quickly to more affordable housing. Despite the promises made during the election campaign of a substantial increase in the monthly benefit, the standard rate of this new citizen’s income should remain around 500 euros per month. month and per person.

Hartz IV, a trauma for the SPD

Since its introduction in 2005, Hartz IV has been a trauma for SPD. Nothing has damaged its image and identity as a party of workers and disadvantaged Germans more than these laws, which were considered too liberal and disrespectful to the unemployed. The party was so divided on this issue that the Hartz IV laws were one of the main reasons for the split of the German left and the creation of the Die Linke party.

For critics of the Hartz IV system, the main criticism against it was that it had thrown many workers into a terrible sense of insecurity in the face of the possibility of experiencing a brutal and irreversible social decline. A legitimate fear: as things stand, even those who have worked for decades, pay taxes and pay social contributions, are likely to find themselves at the very bottom of the social ladder in a very short time. They only receive their daily allowance for one year, with an amount that depends on their previous income. If they have not found a job during this period, then they are forced to live off the assets they have accumulated over the years. When these reserves are exhausted, the unemployed are condemned to live both below the poverty line and under the strict control of the government: the latter can exercise a right to control their income, their assets and impose the threat of forced relocation if he deems his apartment too large or his rent for animals.

This legacy, too heavy to bear, led the then SPD chair Andrea Nahles to solemnly promise in 2019 to abandon Hartz IV and profoundly change the unemployment benefit system. To regain its credibility with its activists and win back the votes of its constituents, the party had to implement a truly disruptive reform that could make Hartz IV’s name forgotten.

Citizen’s income, a slightly modified Hartz IV?

Despite the government’s announcements, the first comments are not without criticism. The basic problem is that the method of calculating the standard rate for the new citizen’s income is the same as that applicable to Hartz IV.

The basis for these rates is the so-called income and consumption test (EVS). This means that approximately 60,000 households’ incomes and expenses are audited every five years. However, it is the poorest 20% who are not dependent on social benefits that should really be defined as the reference group, considering that what they spend should also be available to recipients of citizen income, i.e. around 680 euros per month . But in fact, no one gets this amount and the income remains fixed at 502 euros per month. Instead of making its calculations from the poorest 20% of citizens, the federal government has taken into account only the poorest 15% since 2011. Then it decided to deduct transport allowances, leisure expenses, amounts spent on culture from the amount obtained. , etc. The compensation of 502 euros is therefore only an arbitrary calculation, well below the subsistence level.

The chairman of the German Association for Social Assistance for Equality, Ulrich Schneider, stated that if the reform only leads to an increase of only 53 euros, then the income of the citizens will not do anything against the poverty of the unemployed and we will not be able to talk about a turning point . For its part, Die Linke reacted with derision to the government’s proposal, calling for an allowance of 690 euros per month to be established.

Although the increase to 502 euros represents an increase of 11%, Marcel Fratzscher of the German Institute for Economic Research also does not consider it sufficient to enable the poorest to cope with high inflation from now on.

For his part, the chairman of the trade, Hans Peter Wollseifer, maintains that the gap between people on low incomes and people on a basic income must remain large enough not to discourage a return to work. The employers’ chairman, Rainer Dulger, unsurprisingly regards this as a fatal step in labor market policy. For him, the reform does not make it possible to build a bridge to professional life, but rather to a system of social transfers and assistant positions.

Unemployment support in light of current economic challenges

Citizens’ income must very quickly prove that it meets the requirements for a real reform. All this represents a huge challenge, especially with soaring energy prices and rapidly rising food prices. Hartz IV was seen as a system that forced the unemployed, even after years of hard work, to accept almost any job, even if it meant pushing them below the poverty line.

The reform will only succeed if the government shows that the citizen’s income will from now on be quickly adjusted to the current inflationary trend in order to ensure a dignified level of existence. Otherwise, the debate on the reform of unemployment benefits will not disappear from the political debate.

The success of reform will also depend on the bureaucracy’s ability to adapt to a system that requires less scrutiny and threats of punishment. Until now, the agencies of the German employment center have more or less brutally pushed many of their “clients” into temporary jobs, although many of them already found themselves unemployed again a few months later. For the administration’s agents, helping the unemployed find suitable and lasting work was less of a priority than getting them out of their statistics quickly.

In addition to the sanctions imposed in case of breach of obligations, the purpose here is to change those obligations. However, the reform does not go as far in this area as the Greens and part of the SPD had hoped, in favor of the abolition of sanctions against the unemployed who cannot find a job. After fighting with its partners, the FDP thus achieved that the unemployed who do not take steps to find a job can be punished from six months.

Everything is therefore not perfect, but the government coalition at least shows a desire to give the unemployed the opportunity to catch up on their educational delays and thus increase their chances of finding both a suitable and sustainable job. As Germany suffers from a shortage of skilled workers, this shift is more important than ever.

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