Scott Lincicome’s new book, Empowering the New American Worker, is focused, unsurprisingly, on American workers. However, my chapter in this book is, in fact, focused on those who are not working—or at least not working as much as necessary to help them escape poverty. Specifically, I raise concerns about the ways in which the modern welfare state can discourage work, savings, and family formation.
Households in or near poverty that receive assistance often face marginal effective tax rates that are counterproductive, deterring work effort or putting a low ceiling on how much these families can increase their standard of living. In those cases, much of each additional dollar earned is clawed back through higher taxes or reduced benefits.
Perhaps this is best illustrated by the Federal Reserve Bank of Atlanta’s Career Ladder Identifier and Financial Forecaster Policy Rules Database, which illustrates the public assistance program eligibility based on household incomes. The examples in Figures 1 and 2 below depict the welfare benefits earned by a single parent with two children under five years of age. The most common welfare programs (TANF, SNAP, EITC, WIC, Medicaid, and Section 8 Housing Vouchers) were chosen to portray the benefit drop-off as household incomes increase. The two counties in question, Los Angeles County, California, and Wake County, North Carolina, have very different eligibility rules for various programs leading to differing marginal tax rates in the two jurisdictions. Yet, both show a sizable barrier to leaving welfare for work.
Moreover, many programs are designed in ways that further discourage economic and geographic mobility. Some also include a bias against marriage, which has been shown to be correlated with higher earnings and financial independence. A mother who marries the father of her children may lose a substantial portion of her benefits depending on her new spouse’s income. Unmarried parents are better able to meet the income and asset eligibility tests for programs such as TANF and SNAP. For example, if a single mother with a net income of 125 percent of the federal poverty level marries someone with an income, it could push them over the threshold, and no one in the household would be eligible for SNAP. If they chose instead to cohabitate without marrying, the benefits would continue to flow.
Attempts to solve the problem of such welfare cliffs by pushing benefits higher and higher up the income scale do little to solve the problem but do add significantly to the burden on taxpayers and the economy. Increasing the eligibility range for benefits also risks bringing middle-class families into the trap of dependency.
The U.S. welfare system is enormous, with roughly 134 different programs and costing more than $1.8 trillion per year. While it has done a reasonably good job of reducing material deprivation, in effect making poverty a little less miserable, it has done a remarkably poor job of equipping families to escape poverty altogether.
Truly improving the lives of the poor is not a question of spending slightly more or less money, tinkering with the number of hours mandated under work requirements, or rooting out fraud, waste, and abuse. We need a new debate, one that moves beyond our current approach to fighting poverty to focus on what works rather than noble sentiments or good intentions—a system built on work, individual empowerment, and Americans’ philanthropic impulse. That would be a system that enables more low-income Americans to leave welfare for self-supporting work.
