ZEW President Franz on the Topic of "Making Claims" in the Context of Unemployment Pay II (ALG II)

This article appeared in the November 2005 edition of the ZEWnews

Making Claims

Only gradually does the outrage that flared up in relevant circles during the introduction of the unemployment pay II (ALG II) seem to now calm itself down over the fact that the state dared to inquire about the neediness of ALG II claims. But still the fact is ignored that the ALG II is not an insurance benefit, but rather a societal solidarity contribution. Now, however, the Hartz IV/ALG II reforms are threatened via a new adversity in the form of extraordinarily high additional financial burdens. Hartz IV is developing into a fiscal policy fiasco, even a bottomless pit, according to many commentators.

A respectable estimate of ALG II’s financial burdens would have to compare its expenditures with those which would have resulted in 2005 if the old regulations concerning unemployment relief and social welfare assistance had continued to exist. The actual labour market development of this year would be taken as a basis, as adjusted by effects due exclusively to ALG II. Observing such a "counter factual" situation is logically impossible and can be approximately simulated only with complex methods. Thus, a simple expenditure comparison will have to suffice.

The expenditures for unemployment assistance, financed from the federal budget, amounted to approximately 19 billion Euro in 2004. The expenditures of the municipalities for the claims regarding former social welfare assistance, claims which are now processed through ALG II, can be estimated for the past year to be as large as or even somewhat more than 10 billion Euro. Thus, expenditures as high as approximately 30 billion Euro are the result, compared with the expenditures for the ALG II claims in 2005. According to previous official estimates on the part of the federal government, there should have been a total fiscal relief of slightly more than 3 billion Euros in 2005. But now it turns out that these estimates were far too optimistic. At the end of this year, the number of employable people in need of assistance alone, at just under 5 million, will probably be around 2 million higher than currently estimated. For the federal government, the additional expenditure volume will then amount to at least 8 billion Euros. Even taking into account a certain redistribution of financial burdens from the municipalities to the federal government (because more employable recipients of the previous social assistance have now changed to ALG II), this amount definitely gives cause for concern.

Though the reasons for this undesirable development still need to be carefully evaluated, some assumptions are indeed admissible. The earning capacity is very generously defined in the ALG II; in principle, three hours of a light work are enough. As a result, the municipalities assigned a high number of welfare recipients to the federal government as ALG II claimants. Furthermore, the standard rates and surcharges for ALG II were not exactly on the lower end of things. The scientific community, including the German Council of Economic Experts, proposed for some time to reduce rates further and grant higher additional income opportunities in return. With the legal title of “beneficiary and his spouse and children” (Bedarfsgemeinschaften), you can sign up for ALG II. In other words, the actual or faked departure of the young person of age from the parents' house or the unmarried partner from the common dwelling is sufficient for these persons to make an ALG II claim and, if necessary, a housing subsidy claim, instead of parents and/or partners first using their own wealth in taking up financial duties. In any case, a certain change in the mentality of those affected cannot be dismissed. In the past, people were ashamed to go to the social welfare office—but apparently now unashamed to go to the employment agency.

The new federal government is thus faced with the task of not simply giving money away to those “making claims” but rather of practising and consistently enforcing a rule of helping claimants get back on their feet financially, which could be done, for example, by strongly encouraging family solidarity and applying sanctions in cases of unwillingness to work.