The choice between welfare and work is not always an easy one, according to a new study by the Cato Institute. (Credit: LA Times)
(NOTE: This post was updated on September 23 to incorporate the government’s newly-released poverty rate data.)
If forced to choose between a full-time job that paid $24.40 per hour and enrolling in a package of government benefits that paid a comparable amount, which would you choose?
Some residents of the District of Columbia face that choice, according to a recent study released by the Cato Institute. Those residents, if they signed up for all the programs for which they were eligible, would collect the cash equivalent of $43,099, the study found. A worker would have to earn $50,820 to clear that amount after paying taxes (Table 15, p. 36). The study’s authors, Michael Tanner and Charles Hughes, argue that benefits of this size discourage people from working.
“The current welfare system provides such a high level of benefits that it acts as a disincentive to work. Welfare currently pays more than a minimum wage job in 35 states … and in 13 states it pays more than $15 per hour … In 11 states, welfare pays more than the average pre-tax first year wage for a teacher. In 39 states it pays more than the starting wage for a secretary. And in the 3 most generous states [Hawaii, DC and Massachusetts] a person on welfare can take home more money than an entry-level computer programmer.” (Executive Summary and p. 4)
The study also found that the pretax wage equivalent of welfare benefits exceeds the median income in 8 states, and is at least 90 percent of the median in 16 states. (Table 4, p. 10)
This difficult choice between welfare and work may be one reason why, after nearly half a century of increasingly higher spending on anti-poverty programs, the poverty rate stood at 15 percent for the third consecutive year in 2012, the first time it has stayed that elevated for that long since the mid-1960s. Last year, a record 46.5 million people lived below the poverty line, according to the Census Bureau.
The Cato study is not without its critics, who have faulted its methodology. The authors assumed that beneficiaries received support from 7 of the 126 federal anti-poverty programs – TANF (the cash welfare program, formerly known as AFDC), SNAP (formerly known as food stamps), housing assistance, Medicaid, WIC (a program that provides nutrition assistance to pregnant and postpartum women and their infant children), LIHEAP (assistance with utility bills) and TEFAP (a program that distributes food to households that states deem eligible). The authors acknowledge that few people actually collect benefits under all seven programs, although they argue that people who are on welfare for the longest period of time are most likely to be receiving benefits under all seven (p. 34). That said, when they consider only the three programs in which virtually all welfare beneficiaries participate – TANF, SNAP and Medicaid – the package of benefits still exceeds the minimum wage in 8 states (p. 34).
The study’s critics argue that work disincentives are tempered by the fact that acceptance of a job does not necessarily disqualify people from receiving benefits. You can collect food stamps, for example, even if you have a job, although benefits for workers are lower than for non-workers. They also note that the government subsidizes work as well as inactivity. Wage-earners qualify for subsidies for which non-workers are ineligible. The Earned Income Tax Credit, for example, subsidizes the wages of low-income workers.
Critics also point out that the welfare reform law adopted during the 1990s places work requirements on recipients. Here the authors note that welfare recipients are only required to engage in “work activities,” not necessarily in actual work, and that only a minority of beneficiaries is engaged in such activities at any point in time. “Work activities” include job training, education, and job search. Nationally, 41.6 percent of TANF recipients engage in some form of work-related activities, but participation rates vary widely by state (Table 17, pp. 40–1). Some of the states with the least generous benefits have the highest proportion of beneficiaries engaging in work activities, while states that provide richer benefits have lower work-activity participation rates. Idaho’s participation rate, for example, is 87.9 percent, while the rate in Massachusetts is just 18 percent.
But even conceding some of these criticisms, the study’s central point seems valid.
“It is undeniable that for many recipients – especially long-term recipients – welfare pays more than the type of entry-level job that a typical welfare recipient can expect to find. As long as this is true, many recipients are likely to choose welfare over work.” (p. 42)
That choice between welfare and work is a critical one for poor families. The disincentive to work, if not overcome, makes it much more likely that benefit recipients will remain poor. The study notes that only 2.6 percent of full-time workers live below the poverty line, compared with 23.9 percent of adults who do not work (p. 2).
None of this suggests that people on welfare are lazy. On the contrary, they are rational. I recently faced the choice between remaining on the job and retiring. Retirement means less income and a tighter budget. For me, eligibility for Social Security and federal retirement checks – both government benefits — helped tip the scales in favor of retirement. I have less income, but a better quality of life.
A poor person faces options that aren’t all that different. If their earnings potential is low, they face a genuinely difficult choice between entering the workforce and remaining at home. Even if their benefits are somewhat less than their potential wages, they may understandably be reluctant to trade away the freedom that comes with leisure for a slightly higher income. The frustrations and drudgery of a low-wage job — something with which few policymakers are familiar — and the expenses associated with working may not be worth the additional income. The more generous the benefits they receive for not working, the less attractive work becomes.
This is not a new problem for policymakers, but it is one that they have yet to solve. We all want to provide assistance to people who are down on their luck. But public assistance lifts no one out of poverty. It merely makes poverty more tolerable. The trick is to find a way to provide assistance without discouraging people from taking the step most likely to lead them out of poverty: getting a job.
Instead, we have pursued policies that vastly increase transfer payments to individuals without reducing poverty rates. The chart below (you can click on it to enlarge) illustrates both the increase in government spending on welfare programs and the relatively high rates of poverty that have survived half a century of growing social welfare spending.
The green line charts spending on the welfare programs that the Cato Institute paper discusses – Medicaid and programs such as TANF and SNAP. In 1964, the year before Medicaid was created, spending on these programs amounted to less than 1.2 percent of gross domestic product (GDP). By 2008, that had nearly quadrupled to 4.6 percent. And then it really took off, reaching 5.3 percent in 2009, the first year of the Obama Presidency. It has remained above 5 percent ever since.
The chart’s red line tracks spending on all transfer programs, including those examined in the Cato paper, as well as programs aimed at alleviating poverty among specific groups – the elderly (Social Security and Medicare), veterans (VA benefits) and job-seekers (unemployment insurance). Spending on these programs has more than tripled in real terms, from 4.6 percent of GDP in 1964 to 14.2 percent in 2012. It had never been exceeded 12.5 percent until 2009. In every year since 2009, roughly $1 out of every $7 the economy produced was transferred to people who did not earn it.
Such a massive transfer of wealth should dramatically reduce poverty, if not eliminate it entirely. It has not. The blue line charts the poverty rate over the period from 1964–2012. That rate declined quite sharply with the creation of Medicaid and Medicare in 1965 and the expansion of other “Great Society” programs. In 1964, 19 percent of the country lived in poverty; by 1969, that percentage had fallen to 12.1 percent. This is the result we would expect: as the red and green lines pitched upward, the blue line sloped downward. But then progress stopped.
Social welfare spending continued to rise, but the poverty rate stopped its decline. In 2012, it stood at 15 percent for the third straight year. That is the worst three-year period since 1963–1965, when the government’s “War on Poverty” was in its infancy. Anti-poverty spending has since risen dramatically, but high rates of poverty persist.
The money transferred to lower-income households through welfare comes predominantly from the highest earners. The Tax Foundation, using IRS data, found that the top 1 percent of earners accounted for over 37 percent of federal income tax revenues in 2010; the top 5 percent provided 59 percent; the top 10 percent, 70 percent of the federal government’s income tax receipts. The bottom 50 percent contributed just 2.4 percent of revenues.
The US has precisely the sort of system that is favored by most on the center-left – the most progressive income tax system in the developed world, according to the OECD, coupled with a social welfare system that transfers a substantial share of the taxes government collects from the highest earners to the poorest households.
The government will make nearly than $2.4 trillion this year in transfer payments to individuals, according to the Commerce Department’s Bureau of Economic Analysis (BEA). Those payments will consume 86 percent of what the government will collect in income and payroll taxes, according to BEA data. This should reduce the poverty rate and narrow income disparities. It has done neither. Poverty not only persists, but affects a larger percentage of the population today than in the late 1960s. Income disparities have worsened. It seems that the policies that aim to reduce poverty and income disparities are having the opposite result.
Nor are such disparities a uniquely American problem. Other developed countries, with more ambitious social welfare programs, are seeing wealth-to-income ratios grow along with social welfare spending, reprising levels of disparity not seen in Europe since the 19th century.
None of this is likely to change the minds of those who are convinced that the way to eliminate disparities and alleviate poverty is to more closely align our social policies with those of Europe. They want to further increase tax burdens on the highest earners, while expanding social welfare payments to the lowest. That this course of action, pursued for nearly half a century, has yielded disappointing results only convinces advocates that we need to do more of the same. Similarly, the suggestion that generous welfare benefits might discourage work and trap people in poverty is rejected on the grounds that more generous benefits would weaken work disincentives.
Political attitudes and allegiances are deeply rooted and difficult to change. Liberals and conservatives alike persist in certain beliefs in the face of contrary evidence. Both sides are attached to their theories. Since their policies derive from good intentions, they believe that the policies achieve good results. Those who offer contrary evidence are ignored, belittled or ridiculed. Opponents of their policies are more than mistaken; they are malevolent. If they find fault with a particular program or pronounce it a failure, they must oppose its purpose. To question a policy is to question the good intentions behind it. Pointing out that anti-poverty spending has not reduced poverty is tantamount to saying that you don’t care about the poor. Suggesting that welfare programs as currently constituted discourage work is the mark of a calloused soul.
A similar mindset prevails on the right. Obamacare must be rejected root and branch: repealed, defunded, expunged. Those who suggest that the law might do some good or that some of its provisions might be worth preserving are regarded as collaborators, heretics and not truly conservative.
Such is the state of our governing class. Any wonder why our problems go unresolved?