Welfare debt relief: Impact on employment, benefit receipt, and mental health

Benefit overpayments are a common byproduct of benefit programs and often lead to substantial debts among individuals. Although effective repayment and debt-relief policies are a key policy concern, empirical evidence on their impact is still scarce. In this study, we investigate the impact of welfare debt relief on labor market and mental health outcomes among financially vulnerable individuals. We exploit an eligibility cutoff applied by a Dutch welfare office to identify causal effects, using an instrumented difference-in-difference and fuzzy regression discontinuity design. Using linked administrative data, our findings suggest that debt relief reduces the use of mental health medication by about 1.1 percentage points (13.9%), consistent with lower financial stress. We find no significant effects on employment, earnings, and welfare receipt for the full sample. However, employment increases among debtors with ex-ante severe debt positions. This indicates the initial presence of debt overhang problems with larger debts.