55 billion euros in costs: Why the German welfare state is reaching its fiscal limits

Hidden costs: How recipients of citizen's income drive up health insurance contributions

Helmut Schmidt's belated warning: The uncomfortable truth about migration and the welfare state

The German social welfare system is at a historic turning point. Official figures from the Federal Employment Agency for 2025 unequivocally demonstrate that almost half of all recipients of basic income support do not hold German citizenship. While direct benefits and administrative costs have ballooned to a staggering 55 billion euros, the architecture of the welfare state is increasingly faltering. This development is not only pushing the system to its fiscal limits but also severely testing social cohesion. From exploding health insurance contributions and fatal poverty traps in the low-wage sector to the eventual abolition of basic income support in 2026 – the situation demands an honest debate. How can the unresolved tension between open borders and a functioning welfare state, against which Nobel laureate Milton Friedman and former Chancellor Helmut Schmidt have already issued urgent warnings, be managed? This is an in-depth analysis of the current figures, systemic flaws, and the future of basic income support in Germany.

When the mathematics of the welfare state reaches its limits

The extent of the problem: Almost every second recipient of citizen's income is not German

In 2025, a total of 5.186 million people in Germany received citizen's income under the German Social Code II. Of these, 2.425 million – exactly 46.8 percent – ​​did not hold German citizenship. Total government expenditure on citizen's income amounted to €46.6 billion. Of this sum, €21.7 billion went to foreign nationals and €24.9 billion to German citizens. These figures are not estimates but are taken from the official statistics of the Federal Employment Agency. They mark a structural shift in the German social system, the socio-political implications of which can hardly be overestimated.

The proportion of foreigners among recipients of basic income support was not always so high. Just a decade ago, it was significantly below 30 percent. The sharp increase is largely attributable to two major migration movements: the refugee migration from 2015 onwards – primarily from Syria, Afghanistan, and Iraq – and the mass immigration of Ukrainian war refugees from 2022 onwards. Since the Russian invasion of Germany, Ukrainians have been directly eligible for benefits under the German Social Code, Book II (SGB II), as they were granted subsidiary protection status without having to first go through the asylum process. This distinguishes Germany's benefit structure considerably from that of other European countries.

The largest individual groups among foreign recipients of citizen's income support are nationals from Syria, Ukraine, Afghanistan, and Iraq. Ukrainian nationals alone constitute a substantial portion, as the number of Ukrainian war refugees registered in Germany at times exceeded one million. At the same time, the employment rate varies considerably depending on the country of origin: While refugees from some countries are increasingly integrated into the labor market over time, a significant proportion remain dependent on benefits long-term.

Fiscal pressure: administrative costs, overall burden, and the tipping point of the system

However, the direct transfer payments are only one part of the financial picture. Added to this are the administrative costs of the job centers, which rose to almost eight billion euros in 2025. Thus, the total fiscal burden of the citizen's income system amounts to around 54 to 55 billion euros per year when administration and direct payments are combined. For comparison: The entire federal budget for 2025 comprised around 480 billion euros – the social welfare budget, including citizen's income, housing allowance, and other transfer payments, consumed more than a third of that.

This financial figure is not only economically relevant, but also politically significant. The citizen's income, introduced in 2023 as the successor to the Hartz IV system, has been highly controversial since its implementation. Critics argued that the system provided insufficient incentives to work, while proponents emphasized its more humane design compared to its predecessor. The debate culminated in the Bundestag's formal abolition of the citizen's income in March 2026, replacing it with the new basic income support, which came into effect on July 1, 2026.

The new basic income support comes with significantly stricter sanctions. Anyone who refuses reasonable work or training measures faces a 30 percent reduction in their standard benefits – in cases of repeated offenses, benefits can be reduced even further or completely withdrawn. At the same time, the obligation to provide job placement services has been expanded, and the obligations of benefit recipients to cooperate have been tightened. The fundamental political consensus on this issue has clearly shifted: even the successors of the previous coalition government recognized that the basic income in its original form was politically untenable.

The Friedman Dilemma: Why open borders and the welfare state are structurally contradictory

The American economist and Nobel laureate Milton Friedman formulated the central tension between an open border system and the welfare state with analytical precision: a welfare state and free immigration cannot coexist. Those who want freedom of immigration must restrict the welfare state – and vice versa. Friedman made it clear that he personally considered a global system of open borders desirable, but only in a world without a welfare state. As long as state transfer systems exist, they act as an incentive mechanism that deliberately directs migration from low-income regions to high-wage countries – not only because of job opportunities, but also because of the social safety net.

This theoretical framework is of direct relevance to the German situation. The German basic income system is particularly attractive compared to other European countries: the standard benefit, combined with housing costs, health insurance contributions, and other supplementary benefits, results in total support for a family of four that exceeds the net income of many Eastern European or North African workers. This fiscal attractiveness is structurally built in and cannot be eliminated by mere political will.

Friedman also explicitly differentiated between the free movement of goods and the free movement of people: while free trade and the welfare state are compatible, this is not the case for free migration and the welfare state. Goods and services cannot receive social benefits – people can. This basic economic logic is not political polemic, but a sober analysis of incentive systems. It explains why almost all welfare states have introduced or maintained immigration controls over time – even those that ideologically profess openness.

Nearly all established welfare states have introduced or maintained immigration controls, including:

Scandinavia / Northern Europe

• Denmark – a pioneer of so-called “welfare chauvinism”: gradual restriction of social welfare access for immigrants and refugees, explicitly with the aim of reducing the incentive to immigrate
• Sweden – despite an open stance, residence and benefit rules have been gradually tightened since 2015
• Norway, Finland – qualification-based control systems

Anglo-American welfare states

• USA – Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) 1996: legal immigrants are not entitled to federal social benefits for the first five years
• United Kingdom – “No Recourse to Public Funds” (NRPF) rule: Immigrants without permanent residency are excluded from social assistance, child benefits, housing benefits and disability benefits
• Canada – points system with strict qualification requirements; new immigrants do not have full access to social assistance during a waiting period
• Australia – also a points system, two-year waiting period before eligibility for social benefits
• New Zealand – comparable control model

Continental Europe

• Switzerland – strict quotas, bilateral agreements with a steering component
• The Netherlands, Austria, France – increasingly restrictive rules for access to benefits for new immigrants

Japan

• Despite a minimal welfare state in the classical sense, the immigration policy is extremely restrictive and has only recently been cautiously opened up.

The Oxford Review article aptly summarizes it: Concerns about welfare-motivated immigration have contributed to increasingly restricting unconditional access to social benefits in almost all high-income countries.

The referenced article from the Oxford Review of Economic Policy (published in June 2025 by authors such as Isabel Ruiz) is a comprehensive literature review that examines empirical data on the interaction between immigration and the welfare state.

The article addresses three key economic policy issues:

1. The “Welfare Magnet Hypothesis”

This article examines the extent to which generous social welfare systems actually attract a disproportionate number of migrants. The evidence supports the assumption that the presence of a strong welfare state influences migration decisions, particularly among immigrants with lower qualifications.

2. The net fiscal effect

The study examines whether immigrants provide more financial benefit (taxes/contributions) or cost more to the state (social benefits/infrastructure). Research reveals a highly nuanced picture: the net impact depends heavily on residency status, length of stay, and, above all, formal qualifications. While labor migration often has positive fiscal effects, humanitarian migration, particularly in the first few years, is associated with significant negative fiscal effects (costs).

3. Public opinion and political reaction

Another focus is how anxieties about the financial viability of the social welfare system affect the political attitudes of the population. The article argues that concerns about the exploitation of the welfare state (“welfare chauvinism”) are one of the main drivers behind the drastic restrictions on unconditional access to social benefits for new immigrants in recent decades.

In summary, the Oxford article academically confirms Milton Friedman's argument: In practice, an expansive welfare state and open borders create an irresolvable political-economic tension, which is why democracies almost inevitably resort to immigration controls or benefit exclusions.

The legacy of guest worker policy: Helmut Schmidt's late criticism and its historical context

The debate about migration and social cohesion is not new in Germany. Even former Chancellor Helmut Schmidt, a Social Democrat and one of the most influential figures of the Bonn Republic, expressed criticism of German migration policy in his later years. In interviews with Bild and Focus in 2004 and 2005, he described the early recruitment of guest workers from culturally distant societies as a political mistake. He saw the lack of integration prospects and the lack of cultural compatibility as a long-term source of social tension.

Schmidt explicitly distinguished between immigration from culturally related European societies, which he considered fundamentally unproblematic, and immigration from cultural spheres with fundamentally different value systems, which he deemed more difficult to integrate. This distinction sparked fierce controversy at the time. Political allies and opponents alike accused Schmidt of promoting exclusionary rhetoric with this stance. Schmidt himself, however, emphasized that guest workers should not be the victims of a failed policy for which they themselves bore no responsibility.

At this point, historical caution is warranted: The Federal Chancellor Helmut Schmidt Foundation has pointed out that some quotes circulating on social media, attributed to Schmidt, are not definitively substantiated in their specific wording. Nevertheless, the general tenor of his later statements on immigration policy is documented by numerous original interviews. Schmidt was not xenophobic, but neither was he an uncritical advocate of a borderless multicultural society. He thought in terms of state policy categories such as social cohesion, national capacity for action, and long-term societal stability.

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The systemic question: Can the welfare state survive demographically and fiscally?

The combination of rising social spending, a declining working-age population, and increasing burdens from non-insurance-related benefits presents the German social security system with structural challenges that extend far beyond the basic income guarantee. The development in statutory health insurance (GKV) is particularly striking. The average supplementary contribution rose to 2.9 percent in 2026, which, combined with the general contribution rate of 14.6 percent, leads to total contribution rates of up to 19.45 percent for some health insurance funds. Scenarios in which the total contribution rate exceeds 20 percent are increasingly considered realistic by health insurance associations and economists.

A key problem in this context is the so-called non-insurance-related benefits – that is, expenditures of the statutory health insurance system that are not covered by contribution income and should actually be financed through taxes. Recipients of citizen's allowance are required to have statutory health insurance, but their contributions are covered by the federal government at a flat rate that is significantly lower than the actual insurance costs. It is estimated that the federal government pays around 100 to 150 euros per month into the statutory health insurance system for each citizen's allowance recipient, while the actual benefit expenditures per capita are higher. This shortfall is ultimately cross-subsidized by those paying contributions.

The Institute for Health Economics and institutions such as the Hans Böckler Foundation have pointed out the growing structural imbalance in this context: Up to one-fifth of statutory health insurance expenditures are allocated to non-insurance-related benefits, which are politically desired but problematic from a contribution system perspective. This cross-subsidization is essentially a hidden tax on employment – ​​and burdens employees subject to social security contributions without this being made transparent to them.

Integration as a long-term task: Between successes and structural limitations

It would be analytically incomplete and politically dishonest to focus solely on the cost aspects of migration without considering the actual integration processes. The Institute for Employment Research (IAB), in its long-term study on the labor market integration of refugees, documents both progress and persistent difficulties. Ten years after the large influx of refugees in 2015/2016, the results show that some of those who arrived at that time have successfully integrated into the German labor market and are now contributing to the social security system. Others remain dependent on benefits despite participating in training programs.

The overall employment rate of refugees is slightly below the German average. While this initially sounds encouraging, a more nuanced picture is needed: The group of employable refugees receiving benefits under the German Social Code, Book II (SGB II), is demographically young and generally healthy – factors that would normally favor a high employment rate. The fact that the rate is nevertheless below average points to structural barriers to integration: insufficient language skills, lack of professional recognition, cultural distance to the German labor market, and in some cases, a lack of motivation to work.

An analysis by the Süddeutsche Zeitung of a comprehensive study from 2025 paints a more nuanced picture: Immigration can be fiscally beneficial in the long term if it is managed according to qualifications. Humanitarian immigration, on the other hand, is regularly associated with considerable net costs in the initial years, which may only be recouped over a long period of ten to twenty years – if at all. This distinction between managed labor migration and unmanaged humanitarian migration is economically fundamental, but is frequently conflated in political debate.

The structural trap: When incentives and realities diverge

A central problem of the German social welfare system is the creation of poverty traps and negative work incentives resulting from the interaction of various benefit systems. Those receiving basic income support who take on part-time work lose a significant portion of their income due to offsetting rules. The effective marginal tax rate when taking up employment in the low-wage sector can reach 80 to 90 percent – ​​every additional euro earned leads to a benefit reduction of almost the same magnitude. This is not a malfunction of the system, but a structural consequence of the interplay between benefit offsetting, social security contributions, and taxes.

This poverty trap affects Germans and foreigners alike, but it is exacerbated for groups with low formal qualifications – a group that is disproportionately represented among recipients of basic income support with a migration background. In a world of globalized labor markets, those who lack internationally recognized qualifications find work in Germany's low-wage sector that is hardly worthwhile in relation to the state support they receive. The new basic income support program, starting in July 2026, attempts to correct this lack of incentive through stricter sanctions – an approach that makes fiscal sense, but does not address the fundamental problem of the qualification structure.

Added to this is the question of residency requirements and regional distribution. Recipients of citizen's income are disproportionately concentrated in large cities with high rents. Since housing costs are fully covered by the state, benefit recipients have no incentive to move to more affordable regions. This increases the fiscal burden and exacerbates spatial segregation – a problem that remains unresolved in social policy.

The socio-political divide: Social acceptance of the transfer system under pressure

Social welfare systems function effectively only as long as they are perceived as fair and legitimate by the majority of contributors. The acceptance of a welfare state is based on the principle of reciprocity: those who contribute have the right to expect that the system will also benefit them. This foundation of trust erodes when the perceived proportion of transfer recipients who have contributed little or nothing to the system exceeds a critical threshold.

The political consequences of this erosion have been visible in Germany for years. The rise of the AfD, the shift in discourse within the SPD and CDU/CSU towards stricter migration rules, and the public debate about deportations and benefit cuts are symptoms of growing skepticism towards the existing migration framework. Politically, this skepticism is widespread across all social strata, not just in supposedly socially disadvantaged communities. Opinion polls consistently show that a majority of the German population favors a stricter migration policy – ​​regardless of their own party affiliation.

The public debate is frequently distorted by two errors: On the one hand, there is a tendency toward dramatization, which portrays all recipients of basic income support with a migration background as system abusers, without considering the multitude of legitimate reasons for receiving it – disability, caregiving responsibilities, periods of education or training. On the other hand, there is a tendency toward trivialization, which downplays structural fiscal problems by pointing to isolated successes. An objective analysis of state policy must avoid both extremes and instead soberly identify the underlying systemic mechanisms.

The political consequence: Between humanitarian duty and fiscal reality

Germany, as a welfare state, faces a fundamental dilemma that will only intensify in the coming years. Demographic trends—declining birth rates, an aging population, and a shrinking working-age population—structurally increase the pressure on all social security systems. At the same time, Germany's geographical location, economic strength, and comparatively generous social welfare system make it an attractive destination for migration from around the world. These two trends are inextricably linked: the more attractive the social welfare system, the greater the migration pressure; the greater the migration pressure on the social welfare system, the greater the fiscal burden.

The answer to this dilemma cannot be purely fiscal. Cutting transfer payments will not solve the fundamental problem if there is simultaneously no adequate skills development infrastructure to integrate migrants into the labor market. Likewise, an open-borders policy without a regulatory component cannot be maintained if the fiscal capacity of the social security system is stretched to its limits. What is needed is an honest triangulation of three principles: first, a needs-based and skills-driven immigration policy; second, more consistent labor market integration with genuine incentives instead of mere threats of sanctions; and third, transparent tax-based financing of non-insurance-related benefits, instead of continuing to conceal them through contribution rates.

Helmut Schmidt and Milton Friedman, from different intellectual traditions and with different political convictions, identified the same structural conflict: A society cannot promise unlimited universal welfare and simultaneously open the boundaries of that welfare indefinitely. This is not a conservative or left-wing statement—it is a political reality that every responsible government must confront sooner or later. With the introduction of the new basic income support system in July 2026, Germany has taken a first step in this direction. Whether it will be sufficient will be shown by the economic and social developments of the coming years.