The news comes after almost three weeks of deadlock following the collapse of coalition talks between Merkel's alliance, the pro-business Free Democratic Party (FDP) and the Green Party after federal elections in September.
After a bruising election in September, Schulz said his party should go into opposition.
The motion that delegates voted for stipulates several demands to be put to the Conservatives Union, which is comprised with Merkel's Christian Democratic Union (CDU) and the Bavarian sister party Christian Social Union (CSU), including stricter climate targets, an abolition of private health insurance and a reform to combat poverty among pensioners.
In an election later, Schulz was re-elected as SPD's party leader with a total of 81.9 percent of the vote, down from the 100 percent he received in March when he was elected as SPD Chairman. "But we must not want to reign at any cost", he said in his speech.
"It's not about the question of Grand Coalition or no Grand Coalition, minority government or no minority government", he said on Thursday.
Schulz said the party would recover only if it could offer a clear vision of a Germany and a Europe that worked for their citizens, calling for deeper European integration and a "United States of Europe" by 2025.
The Social Democrats are Merkel's best hope for building a government in her fourth term in office, after discussions with the Greens and the liberal Free Democrats failed.
The delay in forming a new coalition - the biggest crisis of Mrs Merkel's career - has anxious some European Union allies who see Germany as a pillar of stability in the bloc.
Mrs Merkel could form a minority government with the Greens, with SPD support.
In a bid to avoid the possibility of fresh elections, Germany's President Frank-Walter Steinmeier stepped in to break the deadlock, issuing what Schulz described as a "dramatic appeal" for his party to consider coalition talks.