Josh Dukelow, WHBY Fresh Take Host and public policy professional
by Josh Dukelow
For months, Samantha Strong has reported in these pages on the struggle faced by women living in poverty in the Oshkosh community. She spoke to the agencies there to help, and the employers who wish they could do more. In response, some readers say these women need to work harder, to “pull themselves up by their bootstraps,” to get ahead.
But what does that mean in the context of escaping the cycle of poverty? How can putting in more hours and earning higher wages actually undermine efforts to achieve financial stability and independence? As part of the series, Samantha discussed the “benefits cliff” and how it can work against women trying to work their way out of poverty. So what is the benefits cliff, exactly?
In public policy, the goal of many social programs is to provide financial assistance to people in need. The definition of “in need” varies from one program to the next, but often uses annual household income as the measurement of financial condition. As such, if household income rises, benefits are often reduced, or cut off completely.
And that’s the idea. Benefit programs are not intended to be permanent. These “cut off” points can, however, cause abrupt changes in a household budget. That puts recipients in a tough spot, having to choose between slightly higher wages or continued benefits that might be worth much more.
For example, a mother could work full time and still receive benefits. When she is eligible for a raise, she has some math to do to determine if she should accept it. You see, those higher wages would mean a higher annual household income, and that higher income might eliminate her eligibility for the benefits she relies on.
What should she do? The amount by which her wages would go up does not equal the amount of benefits she lost. That means, by accepting the raise, she would actually reduce her total household resources (income plus benefits). Therefore, despite working hard to earn that raise, she might turn it down in order to preserve her benefits.
While this decision might make no sense in your mind, this is a rational choice for her to make. Despite the fact that she refused a raise, accepting it would mean having even less to run her household. She may want to reduce her reliance on benefits, but she can’t afford to lose out. So what can we do to reduce this perverse incentive?
First, we can change how eligibility is calculated. Most benefit programs use household income levels to determine eligibility. More programs could create sliding-scales, rather than hard “all or nothing” benefit cliffs, as people earn their way off the benefit.
In those cases, as your income grows your benefits decline gradually, thus reducing the cliff-effect that promotes the decision to turn down the raise. By keeping some benefits, though reduced, the impact on the household budget is mitigated. Wisconsin’s Homestead Tax Credit program is an example of a program that utilizes this kind of gradual scaling-down of the benefit payment. As you grow your annual income beyond a certain level, the benefit you get starts to shrink, but it doesn’t go away entirely. Therefore it shouldn’t blow a hole in your budget.
Another alternative employed in the design of some benefit programs is to partner with employers to ensure that wage increases (that can trigger benefit losses) are big enough to actually leave the worker better off in the end. Wage subsidies, paid through the employer, can eliminate the cliff effect and create incentives for working harder and earning higher wages without putting much-needed benefits at risk.
By addressing the benefits cliff problem, public policymakers can improve the plight of people working to escape poverty. The solutions are available, and public awareness of the problem has never been higher. Let’s see hope Oshkosh lawmakers will take the lead on tackling this tricky problem.
Josh Dukelow holds a master’s degree in public policy from UW-Madison, and started his career working as a policy analyst in state government. Dukelow is the radio host on WHBY’s Fresh Take program.
