(Or when a 25 cent raise can cost thousands of dollars)
Many of us have heard stories about a single mom who receives training for a better paying job, but then turns down the job offer because she would lose more in welfare benefits than the pay raise would provide. These stories are often mistakenly disregarded as anecdotal.
We now have computational evidence that the rules of the game are stacked against many welfare recipients. Georgia Center for Opportunity recently released my study demonstrating how the accumulation of benefits from welfare programs can act as an economic disincentive to seek higher paying jobs.
Most people think of welfare benefits as simply TANF cash grants and food stamps. These are just two of twelve programs considered in the computer model. Other programs include the Earned Income Tax Credit, the Additional Child Tax Credit, Supplemental Security Income, national school meal programs, supplemental nutrition packages for Women, Infants and Children, Housing Choice Vouchers, subsidized child care, Medicaid, PeachCare, and Affordable Care Act health exchange subsidies.
Put together with public housing, these programs represent 95 percent of all federal welfare spending in the areas of health, cash, food, housing and child care assistance. Approximately $20 billion—in federal and state money— is spent on these programs in Georgia each year— and that total does not count administrative costs.
An estimated 2.5 million Georgians benefit from the Earned Income Tax Credit, 1.8 million collect food stamps, 1.3 million receive low-income Medicaid; another 159,000 are on PeachCare. Nearly 190,000 live in public housing or receive Housing Choice Vouchers, while 62,000 children are in subsidized child care.
If families participates in enough of these benefit programs, especially housing assistance and subsidized child care, they can become locked into earning a low wage. In essence, there are specific wage thresholds they cannot exceed, and if they do they stand to lose far more in benefits than what they gain in additional earnings.
Let us consider the case of Coweta County. Suppose we have a single mom with a daughter in school and a son too young for school. This family type—a single mom with two children—is the statistical average of a family receiving welfare benefits.
The computer model calculates several thresholds or “cliffs” that can trap this mom. The first major cliff occurs at $9.50 per hour where she grosses $19,760 annually. Her net earnings after taxes are $18,196, plus she is eligible to receive $32,103 in benefits from refundable tax credits, food assistance, housing, subsidized child care and medical assistance.
If she were offered a job for $9.75 per hour, just 25 cents more, she would be crazy to take it. Her combined income in earnings and welfare benefits would drop $7,445 annually. As bad as that seems, it does not end there. As her earnings climb beyond $9.75, she will encounter other cliffs, where she would again lose by earning more. In fact, in order for her to fully recover her potential loss in earnings and benefits from $9.50 per hour, she would need to earn $28.25 per hour. Jumping from $9.50 to $28.25 is a highly unlikely jump in wages for anyone, and is especially difficult to imagine for a single mom struggling to keep her household afloat.
While the system is structured to penalize work, it doesn’t have to be this way. If we want to reduce dependency and encourage work, the system must be changed so that it always pays more to work and earn more.
To learn more and see how the model changes depending on family structure and welfare programs received, visit http://georgiaopportunity.org/... .
(Erik Randolph, an independent consultant, is a contributing scholar to the Georgia Center for Opportunity.)