Welfare states are highly dependent on the economic growth paradigm. Especially in social democratic welfare states, growth dependence has historically been accompanied by the notion of a virtuous circle, which ensures that social policy measures do not conflict with economic growth. However, this policy idea ignores the environmental impacts that are now challenging human wellbeing and welfare goals. In this conceptual research article, I reframe the virtuous circle of the welfare state by revealing its unintended consequences and internal contradictions before introducing a more sustainable policy idea. I argue that this new concept—a virtuous circle of sustainable welfare—could have transformative potential in designing a planned and socially sustainable degrowth transformation. Drawing on historical institutionalism, degrowth, social policy and sustainable welfare state research, I advocate for the virtuous circle as a heuristic tool to provide an appealing and convincing narrative for sustainable welfare state beyond growth. The policy idea of virtuous circle addresses interrelated institutional reforms and positive feedbacks between different institutions and policy goals. It also emphasizes that a holistic approach is necessary to avoid trade-offs and contradictions between social, environmental, and economic policies.