Safety net or snare? Reassessing the impact of public assistance
Your family has been struggling financially and is on public assistance. After completing a training program and proving yourself as an employee, you get a job offer that would more than quintuple your income. But then you realize that taking the position would actually make your family worse off financially.
As preposterous as that sounds, it’s a real potential scenario, according to a report from the Atlanta Fed. The report modeled a hypothetical family in Washington D.C. on various public benefits and found the family “would receive no financial gain from a wage increase between $11,000 and $65,000 of earned income.”
It’s emblematic of the set of perverse incentives and work disincentives that public assistance programs can create. Inherent to the idea of being an American worker – indeed, to the idea of the American dream – is an understanding that if you work harder and earn more, your family should be better off. But for some recipients of public benefits, the opposite might happen. The government safety net becomes an entangling trap.
For this reason, Sutherland Institute and partner organizations around the country are focused on addressing so-called benefit cliffs. A benefit cliff occurs when a worker advances in his career and takes a higher paying job (or works more hours), but ends up financially worse off. A related concept is a “benefit plateau” – whereby a worker gets more pay, but they’re just about as well off as they were before the raise due to a drop in public benefits.
We saw a broad-based example of how such a perverse benefits structure can work during the COVID era. Under the Federal Pandemic Unemployment Compensation program, the government initially paid out $600 per week in employment pay boosts. For a large majority of recipients, the amount was so high that it made better financial sense to stay home rather than go back to work. At first expected to last a few months, the $439 billion program lingered through most of 2021, causing a drag on worker return and the economic recovery. The scarcity in labor market supply almost certainly contributed to the ensuing runaway inflation.
By the way, if $439 billion sounds staggering, consider the full annual cost of America’s social safety net: $1.6 trillion. For that unfathomable number, you would expect a system that is calibrated to keep people moving upward on the economic ladder, not trapping them toward the bottom. You would expect a system that rewarded – rather than punished – healthy family formation.
Unfortunately, that’s not the system we have, and beneficiaries have noticed. On Sutherland’s “Defending Ideas” show, Marcella Patiño described her experience of using the social safety net and experiencing disincentives to economic progress: “It kind of destroys my spirit of work,” she said. “It’s kind of scary for me to be like, ‘Yes, I want to change my income,’ but then I have to remember I have kids to take care of.”
In a recent survey, Sutherland found that 62 percent of safety net beneficiaries reported feeling “stuck” in a low-income job because they believe that an income increase would trigger a benefits loss that wouldn’t be worth it. And 43 percent had taken at least one action – such as working fewer hours, turning down a job offer, not getting married, etc. – to avoid triggering a benefits loss.
We can’t go on like this. It makes no sense economically, socially or morally. We have in place a system that, to all appearances at least, creates disincentives to tried and true elements of long-term success: Work hard, get training, get married and move up the career ladder.
Sutherland’s November 2024 report calls for a federalism revolution to grant flexibility to states to fix safety net programs. This could mean block grants that give states broad authority, waivers to allow innovative state pilot programs, or granting states more authority to recalibrate eligibility tapering for various programs. The report also recommends: a pilot program to help Utah beneficiaries navigate benefit cliffs; education on alternatives to safety net dependency; exploration of “empowerment accounts” that allow beneficiaries to chart their own course free of bureaucratic entanglement; and a focused effort to address safety net recidivism.
Fortunately, we have reached a new frontier in public policy. As others have pointed out, the new Department of Government Efficiency (or DOGE), is representative of an emerging spirit of reimagined governance. To this end, a coalition of engaged policy groups (including Sutherland) submitted a letter to DOGE leadership calling for safety net reform. It calls for a reduction in regulations, a policy of federalism to enable state-based solutions, new technology-based innovations, and restructuring to simplify administration and reduce costs.
The stars are aligning. It is critical to seize the moment and bring sanity and efficiency to social safety net programs.
Peter Reichard is chief development officer at the Sutherland Institute in Utah. He has served as a public policy organization executive and researcher for more than 20 years.
