THE NC BENEFITS CLIFFS PROBLEM—AND IT’S WORSE THAN YOU THINK
• The Limited Prospects for a Single Mom in North Carolina
• The Cliffs Explained
• Some Actionable Ways to Find Solutions
Introduction
The American Dream is intended for everyone. Yet, a recent WSJ/NORC poll showed
that only 36 percent of registered voters believed the dream still holds true. The
plurality at 45 percent said that it “once held true but not anymore.” Respondents
were prompted to define the American Dream as “if you work hard, you’ll get ahead.”
The same poll also asked registered voters whether they agreed with this statement:
“The economic and political systems in the country are stacked against people like
me.” Half of those surveyed strongly or somewhat agreed with that statement.
The poll did not delve into the reasons why so many respondents lacked belief in the
American Dream or that the system is stacked against them, but our analysis of the
safety-net system in North Carolina gives evidence to support their skepticism that
the system could indeed be stacked against them.
Safety-net programs are defined as means-tested government assistance programs
meant to alleviate poverty. It includes refundable tax credits, cash grants, food
assistance, medical care assistance, child care subsidies, and rental assistance for
housing. While the system provides important relief for many Americans struggling
in poverty, it also can disincentivize those who want to escape the system. Along their
prospective journey of economic mobility, families will likely find circumstances when
the loss of earnings from taxation in combination with the loss of safety-net benefits
will not make it worthwhile for them to earn more or seek promotions. This
phenomenon is a direct result of high Earnings Loss Rates, also called high Effective
Marginal Tax Rates by economists.
Benefit cliffs are the extreme case of high Earnings Loss Rates. They happen when
families lose more income than what they gain from an increase in earnings. In other
words, they paradoxically take a financial hit from earning more money. It presents
them with an unfair tradeoff between choosing a loss in income and advancing their
long-term prospects for prosperity.
Work itself has many benefits, and some safety-net programs not only encourage
work but have work requirements. The Georgia Center for Opportunity (GCO)
conducted literature reviews of academic research into both the benefits of work and
the negative consequences from nonwork. Work has far more benefits than simply
financial gains. Work is associated with improved mental health, a sense of self-worth
and dignity, improved education outcomes for children, and reduced recidivism for
property crimes and robbery. Conversely, nonwork can be devastating to a family
and is associated with a lower personal sense of wellbeing, deterioration of familial
relationships, worse mental and physical health, and lower probability of better
outcomes for their children with regard to education and future carrier earnings.
The Earned Income Tax Credit (EITC) is an example of a safety-net program that
encourages work. The benefits are calculated based on earnings, and, after tapering
up to a maximum, they taper off slowly. Previously known as the Food Stamp
Program, the Supplemental Nutrition Assistance Program (SNAP) is an example of a
program that has work requirements. It has a general work requirement, but also a
more stringent work requirement for Abled Bodied Adults Without Dependents.
However, work requirements do not overcome the systemic and aggregate
disincentives to earning more embedded in the safety-net system—the topic of this
paper. SNAP participants can do both: fulfill the program work requirements and
hold back on the number hours they work or refuse to accept pay raises. Additionally,
SNAP work requirements are inconsistently enforced, diluting their effectiveness.
Therefore, it is necessary to address the disincentives to work embedded in the
system. These disincentives are unintended consequences of the very programs
intended to help people. Naturally, if there were no safety-net programs or taxation,
workers would be incentivized to earn more every time because they would get to
keep all the fruits of their labor—as opposed to having most of their gains taken by
the government—and they would never run into the all-to-common extreme case
where they lose more in income than what they gain from increased earnings.
This report will demonstrate that in the case of a single mom in North Carolina, the
system discourages her from seeking higher earnings across her prospective range
of potential earnings. She will require massive pay raises to have that incentive
restored, encouraging her to seek more safety-net benefits and not more earnings.