Recently, we successfully placed a young single mom, “Maria”, in her first full-time professional job making $17 an hour, or over $35,000 a year. That’s the good news.
The bad news is that we successfully placed a young single mom in her first full-time professional job making over $35,000 a year. Due to her new income, Maria will lose her government child-care support benefit totaling over $13,000 a year. She will also lose her cash assistance and food stamps, and a portion of her housing subsidy. Despite growing her income from $6,000 to $35,000 a year, Maria is worse off than before (see chart below). She wonders whether she can afford to keep her new job. Welcome to the Cliff Effect.
The Cliff Effect occurs when individuals or families on government subsidies begin earning more money. As their income increases, their family support benefits go away. While this is desirable in the long run, some benefits end abruptly, when specific wage levels are achieved, leaving the wage earners worse off than before. Individuals or families transitioning from poverty to self-sufficiency are hit hardest. Even a raise of $.25 per hour, which equals about $500 a year, can trigger the loss of nearly $9000 in child care benefits. This has been studied in the Colorado context for years, by organizations like the Women’s Foundation and the Bell Policy Center. How serious is the Cliff Effect? According to Circles USA, a community-based organization serving thousands of families in 23 states:
“In 2014 the Circles network was asked what is the biggest barrier to getting out of poverty. The answer was unequivocally the Cliff Effect.”
The Cliff Effect hinders thousands of individuals from working, from accepting raises or higher-paying jobs, and from moving out of poverty. Individuals like “Jose”, a maintenance/operations worker at Prime Trailer Leasing. An immigrant from Central America, Jose was a hard-working, valuable, and loyal employee, married and with 4 children. He was given a $5,000 annual raise. Wes Gardner, founder and CEO of Prime Trailer, recalls Jose’s excitement about his new salary. Three weeks later, Jose sheepishly asked Wes to “take it back.” The raise would cost his family their Medicaid benefits, totaling over $10,000 annually. Jose simply couldn’t afford to make more money. Or “Jennifer”, a young single mom working in a clerical position at Prime Trailer. One week, she earned an extra $50 in overtime, causing her to lose her entire $7200 in annual childcare benefits needed for her 3-year-old daughter. Gardner spent months unwinding the $50 increase in her pay and helping Jennifer reclaim her benefit.
In 1996, with the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), the Clinton administration sparked a modern revolution in welfare, fulfilling President Clinton’s campaign promise to “end welfare as we have come to know it.” The laudable intent was to move people from dependency to self-sustainability. Unfortunately, the Cliff Effect is one of the unintended consequences of the new law. The chart below illustrates this effect for Maria, showing resources (government aid and income) minus household expenses. (The visual was developed using the NCCP’s Family Resource Calculator.) A person making $18,000/year in this scenario would decide not to earn more unless she could feel secure about jumping to at least $60,000/year — very unlikely for most people. Given these disincentives for earning more, the Cliff Effect hinders individuals from achieving self-sufficiency. Those of us walking alongside families trying to escape poverty feel like we’re spitting into the wind.
This problem is invisible to most, and little political will exists to solve it. The family support benefits are administered by different agencies at the federal, state, and county level, making the Cliff Effect even more opaque. However, from a policy perspective, turning the cliff into an onramp would be relatively simple. After certain wage rates are achieved, benefits should be reduced gradually until the recipients earn enough income to cover these expenses on their own. For example, at $35,000 per year, a wage-earner like Maria could begin contributing to her child care. Her child-care subsidies could gradually decrease as her wages increase. Similarly, as her income grows, other benefits could be phased out gradually, rather than lost immediately. In the long run, Maria could maximize her earnings potential and flip from being a net tax-user to a tax-payer.
If we are going to help Maria and people like her become self-sufficient, then we must address the policies that create a cliff for her and thousands of others in our communities. The good news is that the solution to this problem is attainable. We call on policymakers to enact much-needed change to create a win for Maria, a win for taxpayers, and a win for society.
-Helen Young Hayes, Founder/CEO Activate Workforce Solutions