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Explained: Why are Hartz IV benefits so controversial in Germany?

Germany’s highest court reached a groundbreaking decision this week when it ruled that it was “partially illegal” to penalize Hartz IV welfare recipients. We look at why critics have called to change the system since its beginnings.

Explained: Why are Hartz IV benefits so controversial in Germany?
A Hartz IV recipient in Wiesbaden. Photo: DPA

The ruling was a blow against the notorious system, a type of long-term welfare assistance, which requires recipients to fulfill a specific set of conditions in order to receive a monthly payment and housing assistance. 

READ ALSO: German court slaps down harshest sanctions against job seekers

In the past, the system had relied largely on slapping penalties for job seekers who did not meet all of the criteria, including when they turned down a job they did not want, or did not show up once for a job centre meeting. 

The slogan of Hartz IV has long been “‘Fördern und Fordern” – or support welfare recipients, but only through making demands on them. 

Judges at Germany's highest court in Karlsruhe on Tuesday. Photo: DPA

How did Hartz IV come about?

The Hartz concept was named after Peter Hartz, a former high-ranking Volkswagen manager who was instructed by then-Chancellor Gerhard Schröder of the centre-left Social Democrats (SPD) to find a solution to trim down the German social welfare state. 

In 2004, Germany had some four million unemployed people, and it was becoming increasingly difficult to fund all of them under the Sozialstaat, which relied on payments proportional to their previous income.

So in 2005, then-Chancellor Gerhard Schröder  introduced a series of reforms, known as Hartz I-IV. 

The most well known, Hartz IV, was designed to give long-term unemployed people an “existence minimum” every month – assuming that they fulfill conditions such as filling out job applications. 

While Hartz IV is reported to have trimmed the unemployment rate by 50 percent in Germany, and boosted the Bundesrepublik’s economy, it has also become a notorious name for Germany’s non-working poor. 

What do politicians think?

Over the years, many politicians have called to repeal Hartz IV with a so-called bedingungsloses Grundeinkommen (Universal Basic Income),

in which everyone would receive the same amount per month regardless of whether or not they are an active part of the German labour market.

Many people who reliably cast their votes for the SPD before 2005 became disgruntled by what they saw as the party turning their backs on working class interests. In partial response to the complaints, far-left Die Linke (the Left) formed in 2007, attracting many one-time SPD voters who sought a more humane and better-paid welfare system.

In the wake of this week's ruling, Dietmar Bartsch, a leading lawmaker from Die Linke, called for a complete overhaul of the system.

“Hartz IV plunges people and their families into the abyss,” he tweeted. “We need a new system of unemployment benefits that provides security and removes the fear of social decline.”

But Labour Minister Hubertus Heil, a Social Democrat, earlier this year defended the Hartz IV sanctions.

“The welfare state needs to have the means to demand the reasonable and binding cooperation” of benefits recipients, he said in January.

Green Party co-leader Robert Habeck has meanwhile pushed to scrap Hartz IV and replace it with ‘system of guarantees', which would be based on incentives instead of punishment for welfare recipients.

READ ALSO: How the Greens co-leader wants to ditch Germany's controversial benefits system Hartz IV

What are the conditions of Hartz IV?

Prior to the new reforms, a person could receive an unemployment benefit (Arbeitslosgeld) between 12 and 36 months after they had lost their job, depending on their age and the amount of time they had been out of work. 

But as of 2008, as part of the reform, the so-called full benefit was reduced – in most cases – to 12 months, after which the person qualified for Hartz IV. However this is extended of upwards of 15 months for those 50 and older. 

At the current rate, single jobseeker with no children currently receives €424 a month, while couples receive €764.

Recipients who fail to meet monthly conditions are penalized at least 10 percent of what they are receiving.

For a second offence within one year – including not showing up to a job centre meeting – recipients can have had their benefits cut up to 60 percent. And the third time even 100 percent.

In addition, at this stage the money for housing and heating and the health insurance allowance are no longer paid. With cuts of more than 30 percent, jobseekers have still been allowed to apply for food stamps (Lebensmittelmarken).

In 2018, a total of 441,000 jobseekers were financially penalized at least once, with sanctions the highest for those under 25-years-old. These recipients have lost all payments for housing, heating and health insurance on the second violation.

How did the Constitutional Court justify its decision to end penalties of more than 30 percent? 

Human dignity, as enshrined in Germany’s Basic Law (Grundgesetz), was the main reason that the judges gave for their decision.

The judges consider it unfair for the payment to be reduced by more than 30 percent, because this means too heavy a burden for those affected.

However, they said that light penalties are still permissible in order to encourage the job seeker to reintegrate into the the labour market. 

How many sanctions are currently being imposed?

The number has been falling for years, as has the total number of Hartz IV recipients. According to Federal Employment Agency statistics, around 904,000 sanctions were imposed in 2018, 49,000 fewer than in the previous year.

Over the course of 2017, at least one sanction was imposed on 8.5 percent of those entitled to benefits who were also able to work. Approximately 3.2 percent of recipients were subject to one sanction per month.

The job centres cut benefits most frequently because Hartz IV recipients did not appear on a specific date. Seventy-five percent of sanctions in 2018 were due to missed appointments.

What does this mean for taxpayers?

Hartz IV currently costs taxpayers about €40 billion per year. Fewer sanctions mean higher benefits, but also that taxpayers will have to fork out millions more per year to make up for the difference.

What happens now? 

The Constitutional Court did not impose a deadline on to change the sanction practice. 

Instead, it has set new rules during the transition period. With immediate effect, the job centres will no longer be allowed to impose harsher penalties than the 30 percent reduction. Labour Minister Hubertus Heil (SPD) has announced that rapid reform talks will follow in the coming weeks.

What other types of reforms are being considered?

Even before the 2017 Bundestag elections, the employment and social affairs ministers across Germany had planned to abolish the special regulations for people under 25, and no longer sanction rent and heating costs in order to avoid housing losses. 

In the previous Grand Coalition, Labour Minister Andrea Nahles (SPD) took up the proposals, but the CDU/CSU did not follow. Yet following the ruling, the discussions have been relaunched – including less stringent penalties for those under 25-years-old.

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WORKING IN GERMANY

7 tips for how to survive as a freelancer in Germany

Taking the decision to go it alone and freelance in Germany can be a daunting prospect. But, if you do it right, it can be an exciting and liberating path. Here are some of our top tips on how to survive.

7 tips for how to survive as a freelancer in Germany

1. Get a tax advisor

The German tax system is complicated, even for Germans. All the associated paperwork uses the Amtsprache (authority language) which is more like legalese than ‘normal’ German, and mistakes when filling out tax forms can cause you, at best, a massive headache and, at worst, a costly fine. So it’s best that you employ someone who knows what they’re doing to help you out.

That person is called a Steuerberater (tax advisor) in Germany. They will help you register with the tax office, correspond with them and submit your tax declarations.

Be aware that, in Germany, different deadlines apply for tax returns depending on whether you employ an official tax advisor or not. If you are doing the tax return on your own, the deadline for submitting your annual tax return is earlier than if you use a tax advisor’s services. 

READ ALSO: What NOT to do when you’re freelancing in Germany

When looking for a tax advisor, a top tip is to use your network to get recommendations. Ideally, you want someone who will do more than just fill in the forms for you, but who will actually advise you on how best to manage your business finances so that you can make tax savings.

2. Keep your accounting in order

The better you keep your own accounts in order, the easier it will be for your tax advisor to compile your tax declarations and therefore the cheaper their services will be.

As a freelancer, there are a lot of costs you can deduct from your taxes – from train tickets, working materials, to meals out – so it’s best to keep hold of all your receipts and to keep them in good order.

2 euros and 50 cents lie on a receipt in a beer garden. Photo: picture alliance/dpa | Peter Kneffel

In Germany, you’re obliged to keep hold of receipts for two years, in case of a tax inspection, so it’s a good idea to photocopy the type of machine-printed receipts you get from restaurants so that they stay legible for a long time.

There are also a few things to be aware of when writing your own invoices. Firstly, make sure that you include your tax number. This isn’t the 11-digit Steueridentifikationsnummer that everyone gets when registering in Germany, but the 10-digit Steuernummer you get from the Finanzamt after registering yourself as a freelancer. 

Most companies won’t pay you if you don’t have this on your invoices so make sure you include it.

You should also make sure that you number your invoices properly – ideally in ascending order so that you can easily keep track of them. You are not allowed to issue two invoices with the same number and if you do so and the finance office notices, you could face an inspection of your whole accounting system.

There are numerous great accounting software programmes you can use to help you, such as Lexoffice and Sevdesk and, even if you have to pay for them, the costs will be tax deductible!

3. Find out if you’re eligible for financial support

In Germany, there are several opportunities for freelancers to gain financial support and to cut their outgoings, and its worth finding out if you’re eligible for them.

If you’re claiming unemployment benefits under ALG 1 and are thinking about becoming a freelancer, the employment office offers a special type of financial support to help you to get your freelance business off the ground.

Called the Grundungszuschuss (“foundation grant”) the payment is a six-month grant equalling your monthly entitlement under ALG 1 plus €300 towards your insurance costs can be applied for those in receipt of this unemployment benefit.

READ ALSO: Will freelancers benefit from Germany’s €300 energy allowance?

If you are engaged in some form of artistic profession in Germany – which can include journalism to pottery – you may be entitled to membership to the Kunstlersozialkasse (artists’ social insurance).

Being a member of the KSK means you only have to pay half of your health insurance and pension contributions, and the KSK will pay the rest.

4. Work out how much you think you will earn

As with starting any business, you need to have some idea of your expected earnings from the outset.

If you’re just starting out as a freelancer, or have some freelance gigs on the side of an employment position, then it might be worth considering registering yourself as a Kleinunternehmer (“small business”).

As a Kleinunternehmer, you can currently earn up to €22.000 per year without having to charge VAT and having to submit only yearly tax declarations. 

An income tax declaration form lies on a table. Photo: picture alliance/dpa/dpa-Zentralbild | Hans-Jürgen Wiedl

Be aware that if you are registered as this kind of freelancer, you must include the following sentence in your invoices: ‘Gemäß § 19 UStG wird keine Umsatzsteuer berechnet’ which means ‘In accordance with Paragrah19 of the German VAT law, no VAT has been added to this invoice.’

READ ALSO: Everything you need to know about your German tax return in 2022

If you think you will earn more than €22.000 per year, you will need to pay Umsatzsteuer (VAT) and will have to submit tax declarations in advance and more often. Depending on how much you earn, this could be every month or every quarter. 

5. Get your insurance in order

In Germany, it’s a legal requirement to have health insurance.

If you’ve just made the move from employment to being a freelancer and want to keep the same health insurer, you should get in contact with your health insurance provider straight away to tell them about your change of circumstances. They will ask you to re-register and to tell them your projected freelance earnings for the year, so they can amend your monthly fees.

If you don’t keep your health insurer provider updated, you could continue to be charged the higher rate that you had from your previous salary.

The insurance cards of the health insurance companies DAK, AOK, Barmer and Techniker-Krankenkasse TK lie with euro notes under a stethoscope. Photo: picture alliance / dpa | Daniel Karmann

It’s not just health insurance you need to think about as a freelancer. It’s also wise to think about protecting yourself from any sort of claims that could arise as a result of any working mishaps. 

If, for example, you lose your laptop which contains confidential client information, you need to be protected against claims.

That’s why it’s good to have both Betriebshaftversicherung (business liability insurance) and Rechtschutzversicherung (legal protection insurance).

6. Plan your time wisely

All of these bureaucratic obligations take time. So it’s really important that you take account of that when planning your time. For example, planning half a day a week to deal with your invoices, filing, emails to clients, and conversations with authorities can be really beneficial when scheduling your working time. 

7. Grow your network

As a freelancer, networking is absolutely crucial to success. 

Keep an up-to-date profile on websites like LinkedIn and German equivalent XING and keep in contact with anyone you’ve ever worked with, no matter how brief the contact was. 

Having a network is not only about getting more clients, but also about building a support network in your field to exchange advice, tips and generally for your own enrichment. 

Participating in workshops related to your field, going to seminars, and meet-ups, can be great ways of broadening your network. 

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