Cliff Effects: A Barrier to Escaping Poverty

Work support programs are designed to sustain low-income earners and encourage work. In this they have been successful, as SNAP alone lifted an estimated 3.9 million Americans out of poverty in 2009.  And according to the Center on Budget and Policy Priorities’ blog “public programs lifted 40 million people out of poverty in 2011, including almost 9 million children.”

Most of us know families must fall below certain income limits in order to qualify for government benefits. In many cases, individual states administer federally funded safety net programs and often set certain eligibility requirements for benefits such as SNAP or child care subsidies. For some benefits, the state or federal government also sets asset limits, meaning in some states even a modest savings account can disqualify families from receiving assistance.

Yet another harsh side effect of eligibility guidelines is called the “Cliff Effect.” It refers to situations where a small increase in income leads to an abrupt end to a critical benefit. Two work support benefits often associated with income limits are child care assistance, which makes daycare affordable for working parents, and food assistance, which often includes work requirements.

The dilemma posed by cliff effects is that it penalizes people who are slowly working their way out of poverty and into higher income brackets. As income increases,

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Getting Behind by Getting Ahead, continued

Last week I linked to an OK Policy post about “cliff effects” that reduce or disqualify people for benefits whenever they increase their earnings, sometimes leaving people even farther behind even as they get better jobs or benefits.

The Associated Press reports that ARRA, the stimulus legislation, is causing some cliff effects of its own, and giving the unemployed a little bit of boost and a little bit of bust:

Under the economic recovery plan, laid-off workers have seen a $25 weekly bump in their unemployment checks as part of a broad expansion of benefits for the poor. But the law did not raise the income cap for food stamp eligibility, so the extra money has pushed some people over the limit.

One unemployed man in Georgia was pushed over the limit by the bump, causing him to miss out on $300/month in food stamps assistance.

Since policymakers are becoming increasingly aware of the problems of cliff effects, they wouldn’t intentionally cause such dramatic consequences in entirely new, emergency relief programs, right? Wrong:

Lawmakers crafting the stimulus knew this would become a problem, said Stacy Dean, director of food assistance policy at Center on Budget and Policy Priorities, a liberal think tank. They could have headed it off by raising the income tax or declaring that the $25 stimulus checks would not affect food stamp eligibility. Both were expensive options that could have forced states to reprogram their computer systems.

But more importantly, hashing out those details would have taken time.

“People were aware of this but, as you recall, the stimulus was moving along and then it was passed in about a day,” Dean said. “There was not a lot of policy discussion on this.”

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Getting Behind by Getting Ahead

David Blatt at OK Policy does a nice job of explaning the “cliff effect”, whereby people lose important public benefits as their earnings increase. This means that struggling families who manage to raise their incomes face a sort of “tax” on their efforts toward economic self-sufficiency:

The cliff effect is most dramatic for Medicaid health insurance coverage, which tends to be an all-or-nothing benefit. Children in Oklahoma are eligible for Medicaid up to 185 percent of the federal poverty level, while adults lose eligibility when they make less than 50 percent of the poverty level. Other work support programs, including the earned income tax credit, the food stamp program, and child care subsidies, minimize the cliff effect by phasing out the amount of benefits at higher incomes, or in the case of child care subsidies, requiring higher co-payments. The cumulative effect, however, is that for most low-income workers who are attempting to move up the income ladder, additional earnings can be largely or fully offset by higher taxes and the loss of benefits. At a certain threshold, workers find themselves in a situation where the rational response to an offer of a raise or a better job is to respond, “Sorry, but I just can’t afford it.”

I did some work on this issue a while back, in order to better understand what exactly those “cliffs” look like to our families. We found that a single mom with two children takes home an average of just 34 cents for every additional dollar she earns, with the largest impact (as Blatt notes) caused by the loss of health care coverage for her and her children.

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