A Plan for Independence
The pathway to a fulfilling and purposeful life
Benefit cliffs are an unfortunate feature of the American safety-net system. They occur when a family’s breadwinner, or an individual, discovers that his or her family will become worse off economically by earning more money. It sounds paradoxical, but it happens whenever the loss in welfare benefits exceeds the additional take-home pay.
These negative incentives lead many to remain in perpetual poverty without any potential to save for the future or seek better financial outcomes if the tradeoff is a substantial loss in benefits. In a NBER working paper, a team of economists concluded: “One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent.”
Welfare cliffs also include outdated asset limits that prevent recipients from saving enough to encounter an emergency (like a car repair or emergency room visit). For instance, federal law currently does not allow TANF beneficiaries to own more than $1,000 in liquid assets.
This chart shows an example of safety-net benefits cliffs for a single mom in Louisiana in 2021, demonstrating the disincentive hazards related to earnings. The recommendations on actionable plans have already been addressed in other sections. This section will discuss resolving work disincentives and marriage penalties.
Solving the Problems
State leaders should implement policies that help recipients by providing actionable plans to advance their situation while reducing disincentives to work and marriage in assistance programs.
Removing disincentives requires revamping and streamlining eligibility systems. Recipients will sign agreements with the agencies which cover the terms of the assistance, providing periodic information for eligibility evaluations, and developing plans that include goals for successfully exiting the programs. Part of that agreement will allow the state agencies to collect information about recipients after they exit to evaluate the success of self-sufficiency goals. These steps lay the groundwork for what comes next.
State agencies need to adopt a unified eligibility engine that links requirements together. This can help remove conflicting rules and disincentives to work, employment-based advancement, and marriage. The revisions will require changes to how benefits are calculated to avoid cliffs and penalties. Some of these changes, such as subsidized childcare services, can be done by revising state block grant plans. Other changes will require administrative waivers under statutory provisions allowing states to undertake demonstration projects. Others may require temporary workarounds until federal legislation can be passed which either gives states greater flexibility or directly solves the problems. Some workarounds may include making adjustments to programs where states have flexibility to offset programs where they don’t; to coach recipients on how to overcome cliffs; or to provide temporary funds to bridge recipients over cliffs, such as from the TANF program.
Many people, from employers to the recipients of programs, know about safety-net benefits cliffs anecdotally. We also have research that verifies they exist. The Georgia Center for Opportunity has a leading computational model (link https://benefitscliffs.org) using the actual rules of eligibility that maps out data graphically and shows where the cliffs are. It references and provides a model that demonstrates how welfare programs, alone or in combination with other programs, create multiple benefits cliffs for recipients that punish work.
As an example of how the welfare cliff works, consider a mom of two small children in Georgia who is receiving benefits from five different means-tested welfare programs and is working to advance in her career. She will face at least two significant cliffs as her pay increases. When she is earning approximately $12.50 per hour, she will be receiving just over $45,000 annually as a combination of both earnings and welfare benefits.
Should she receive a raise and earn just 25 cents more per hour (to $12.75), she will face a net loss in income (because of reduced welfare benefits) of nearly $1,500 annually. Should this same mom receive an additional raise of just one dollar more per hour (to $13.75), her net loss in annual income would be nearly $14,000. Combined, this single mom could expect to lose more than $15,000 in income annually by accepting a raise of just $1.25 per hour.
And, to make matters worse, for her to make up for the loss in benefits that she would face, her salary would not have to go up a few more dollars. Instead, her salary would have to jump from $12.50 per hour to $30.50 per hour – a salary increase of nearly 250 percent!
In summary, the states should use the full extent of their flexibility with block grant programs and waivers in federal law to mitigate any embedded disincentives with the goal of eventually eliminating them. Beyond their current limitations, states can build a case for greater flexibility to help people graduate from government assistance.
How to implement
- Require agencies administering safety-net programs to map out safety-net benefit cliffs and marriage penalties, and to develop guidelines for all safety-net programs under the control of the state to address those cliffs and penalties.
- Require individual action plans to help beneficiaries improve their financial circumstances. The plans can be developed by state-employed caseworkers or can be referred to qualified nonprofit groups. The plans must include strategies to overcome cliffs and penalties. The legislation may require states to develop plans to use TANF funds or community resources to supplement the benefits for a year to provide a ramp into independence.
- Executive action by the states, which may be guided by legislation, to redesign state childcare plans to eliminate cliffs. The redesign of childcare regulation should encourage less costly settings while incentivizing less costly choices.
- State leaders should use opportunities in federal law, such as waivers pursuant to Section 1115 of the Social Security Act and Section 1332 of the Affordable Care Act, to ease benefit cliffs and marriage penalties.
- Initiate executive action to apply for a Section 2026 SNAP demonstration waiver to eliminate SNAP cliffs as part of welfare reform.
- Consistent with TANF rules, state agencies need to make single or custodial parents receiving any safety-net benefits for themselves or for their children, including childcare assistance, seek child support through existing enforcement systems established within each state, unless the situation meets a specific list of exceptions.
ABLE 529 Accounts. The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged 529 savings programs for people with disabilities. These ABLE accounts allow people on programs with asset limitations to save for qualified disability expenses, and the distributions are tax-free if used for that purpose.1“ABLE Accounts – Tax Benefit for People with Disabilities,” Internal Revenue Service, last updated July 15, 2021, https://www.irs.gov/government-entities/federal-state-local-governments/able-accounts-tax-benefit-for-people-with-disabilities.
Georgia’s Pathways to Coverage and Reinsurance Program.
Consistent with flexibility given to states by federal law, Georgia applied for and received approval from the Secretary of Health and Human Services under the Trump administration for a Section 1115 waiver to provide adults without health insurance with a pathway to private coverage. This initiative links to Georgia’s approved Reinsurance Program using a Section 1332 waiver to ease the expense of plans available on federally controlled health insurance exchanges under the Affordable Care Act. Although the Biden administration is threatening to suspend these waivers, it is important for states to continue to innovate. When the goal of helping individuals transition to and flourish with non-government solutions is achieved, the legal hassles will be well worth the effort. In order to achieve that goal, it will be necessary to solve safety-net benefit cliffs and marriage penalties.
A well-designed welfare system should provide temporary assistance until individuals can be self-sufficient. Selective time limits provide an extra incentive for recipients to improve their lives, get off government assistance, and seek gainful employment. Time limits are particularly important to help non-disabled adults seek and find employment.
There are exceptions, of course. Due to their condition, some recipients will never be able to reach self-sufficiency. There will also be emergency situations—often personally catastrophic events like severe illness—when a person or family needs more assistance than is usually allowed. The system should continue to aid in those circumstances.
But in many cases, assistance should be time-limited to encourage the natural inclination to earn more money and the long-term goal of self-sufficiency. In other words, if a recipient understands that the assistance is a one-time event, he or she will be encouraged to pursue a strategy to escape dependency on governmental assistance permanently.
How to implement
- Guide the use of TANF funds to allow temporary assistance to overcome safety-net cliffs and marriage penalties and enforce the TANF 60-month time limit.
- Require public housing authorities, which are creatures of state law, to utilize housing time limits. The legislation shall include exceptions.
Temporary Assistance to Needy Families – National.
TANF limits enrollees to 60 months of benefits.
Supplemental Nutrition Assistance Program – National.
SNAP also imposes time limits on able-bodied adults without dependents. They are limited to three months of food stamps within a three-year period when they do not fulfill employment requirements.