Computational model exposes severe problems with the welfare system

Pop quiz: When does $9 + $1 equal –$6,000?

This may look like new math, but it is not.

This seemingly nonsensical equation illustrates the challenges faced by families who receive assistance from means-tested welfare programs.

In fact, these exact numbers come from a computer model I designed, which was sponsored by the Georgia Center for Opportunity. It evaluates financial incentives, or more precisely, disincentives embedded in our nation’s welfare system.

This computer modeling examined the potential case of a single mom with two children in Gwinnett County, Georgia. Using 2015 data, if she were offered the opportunity to earn $10 per hour instead of earning $9 per hour, she would lose nearly $6,000 in welfare benefits within a year’s time.

The reason for the loss is not due to her earned income. By increasing her earnings from $9 per hour to $10, she nets an additional $1,820 a year. The reason for the loss has to do with the way the welfare system is designed, or more accurately, the way it has been haphazardly put together over the past fifty years. At $9 per hour, the single mom would be eligible for the following means-tested programs:

  • the earned income tax credit ($5,419),
  • additional child tax credit ($2,000),
  • food stamps ($2,772),
  • free or reduced-cost school meals ($502),
  • WIC food packages ($480),
  • Section 8 housing choice voucher ($9,805),
  • subsidized childcare ($8,918), and
  • Medicaid ($4,570).
  • When added together, this single mom has a benefits package—courtesy of the taxpayers—estimated at $34,467. So instead of bringing home $17,266, her estimated income is actually $51,733 after government subsidies are included. To state it differently, for every $1 she earns in net income, she is eligible for nearly $2 in welfare benefits.

    Now consider the case if she would earn $10 per hour. She would still receive means-tested benefits, but the benefit amounts will change as follows:

  • earned income tax credit ($4,977),
  • additional child tax credit ($2,000),
  • food stamps ($2,352),
  • free or reduced-cost school meals ($502),
  • WIC food packages ($480),
  • subsidized childcare ($8,658),
  • Medicaid ($4,570), and
  • Affordable Care Act credits and subsidies ($3,152).
  • In summary, her benefits drop to an estimated value of $28,938. When combined with her take-home pay, she is worse off by nearly $6,000 from earning $10 per hour than earning $9 per hour.

    What this example demonstrates is the infamous welfare cliff, that unintended consequence of the current welfare system whereby an individual or family loses by earning more.

    Unfortunately, this example is not an isolated incident. It represents what’s happening everywhere.