Growing Pains: How Benefit Cliffs Can Derail Government Support
President Joseph R. Biden late last month introduced the American Families Plan (AFP), his second major public investment proposal since assuming office. The AFP follows the passage of the American Rescue Plan Act (ARPA), both of which address more than relief for pandemic-era losses. The AFP and ARPA together act as a legislative tour de force, working to bolster existing public benefits in the United States and curb economic inequality that has long plagued the country. Early projections suggest that the ARPA will reduce poverty by one-third and child poverty by one-half. The AFP is positioned to continue this trend.
The ARPA in particular takes steps to remedy steep benefit cliffs in publicly-funded health insurance that, if left unaddressed, could cause low-income families to lose some or all of their essential public benefits due to a small increase in income, including wage increases from an earned promotion or an annual raise. This “cliff effect” disproportionately impacts Black and Hispanic families and often traps families in poverty instead of lifting them out of it.
To fully support moving families out of poverty, policy leaders and legislation must go one step further to untangle and eliminate benefit cliffs that stall economic mobility.
The Cliff Effect
Benefit cliffs are exactly as they sound: a single person or family may lose—or “fall off”—public benefit eligibility due to small increases in their income, leaving them worse off despite earning more.
Take Tracy, a mother of a two-year old child in Louisville, Kentucky. Tracy works full-time as a security guard and makes $31,000 per year. At this salary, she qualifies for public health insurance for her child, child care subsidies, SNAP (commonly known as food stamps), WIC nutritional assistance, and the Earned Income Tax Credit. With the combination of her earnings and these public benefits, she can pay her basic living expenses. If Tracy were to receive a $3,000 raise, she would no longer be eligible for child care subsidies or SNAP.
To some, it may be logical to reduce access to benefits as income increases. However, for the one in five people who rely on public benefits, the increase in income and the loss in benefits don’t balance out.
On the contrary, what happens is this: Tracy’s $3,000 salary increase led to a $6,000 loss in public supports, meaning those expenses now come out of her paycheck.
Benefit cliffs are a consequence of our extraordinarily complex public benefit programs. Public benefits are administered through dozens of separate programs, often operating in silos. There are food supports, public health insurance, child care subsidies, support to pay utilities, housing supports, and more. Rules may differ by program and families’ characteristics. They may differ by state and/or locality. And federal rules may interact with state rules in unexpected ways.
Families, on the other hand, experience benefits as a whole—a set of supports that allow them to pay their bills, safeguard their families’ well-being, and go to work.
Without permanently changing the structure of our public benefits system, benefit cliffs will continue to undercut economic mobility among lower-income people. The ARPA addresses two, but others still exist in our public benefit system. And even those remedies are temporary, with some parts expiring in September 2021 and the rest in December 2022.
New policy ideas, for example, can be derailed before they are even tested. Guaranteed Basic Income (GBI) is an example of an idea with legislative potential, but which can fall short of its goal to reduce poverty in the U.S. if we’re not careful. Early modeling shows that GBI can kick people off of Medicaid and Supplemental Security Income (income supports for people with disabilities). Recipients would either lose these benefits entirely, or be forced to requalify, creating not only a bureaucratic nightmare but also delays in accessing money or services.
The Way Forward
The good news is that benefit cliffs, and other system interactions that wind up harming families, can be prevented with a combination of best practices, updated infrastructure across governments, and well-resourced data and modeling.
To date, we have seen some positive results in establishing steady “phase-outs” vs. abruptly ending access at a particular income level. The Earned Income Tax Credit, which has been credited with lifting 5.6 million people out of poverty, works this way.
Other strategies include eliminating asset tests for programs like SNAP and TANF (Temporary Assistance for Needy Families), enabling low-income families to save for the future while continuing to cover their basic needs. Or, states can raise earned income disregards for public benefits to ensure that the total deduction in benefits does not exceed the additional income earned by families as they earn more. Finally, expanding universal pre-kindergarten, a signature feature of the AFP, reduces child care costs inherently, with the added benefit of ensuring quality education for all children.
In addition, modeling tools are essential for success. NCCP, working with state partners, models the full complexity of federal and state public benefits interactions, leading to improved public benefit systems in multiple states. In 2011, NCCP’s analysis found a number of benefit cliffs hidden in Indiana’s state benefit programs. Our state partner, the Indiana Institute for Working Families, used this analysis to successfully advocate for changes in eligibility limits and co-payment structure for childcare subsidies, a change that would support over 14,000 families to exit assistance programs without facing destabilizing benefit cliffs.
At the National Center for Children in Poverty (NCCP), we believe now is an opportunity to thoughtfully structure current and emerging legislation with attention paid to these issues. There is increasing momentum in the national conversation around strong, thoughtful, and equitable public support, especially after the ARPA and Cares Act touched so many lives. Our hope is that legislators use this moment to transform public benefits to work for all families and continue to support them as they pursue opportunities for personal and professional growth.
Heather Koball is the Co-Director of the National Center for Children in Poverty (NCCP), overseeing the Family Economic Security team. Over 20 years ago, NCCP developed a policy modeling framework and application—called the Family Resource Simulator, or FRS—that takes a comprehensive approach to examining public benefits’ impact on family budgets. The framework helps policymakers design public benefits systems that support, rather than hinder, economic mobility. The application can also inform families about how to best navigate the public benefit system. With the proper data flowing in, a public benefits calculator can measure the impact of any incoming policy on existing ones at the federal, state, and local level.