When Work Is Punished
Again: "If You Accept This Raise, You Fall Off The Welfare Cliff"by Tyler Durden, 8/30/16
Four years ago we first exposed the dismal fact that in the U.S., for the lowest income American Dreamers, work is punished. Sadly, the situation has grown worse as buying votes amid a burgeoning welfare state has left
millions in the so-called 'low-wage-trap' leaving Americans
teetering on the welfare cliff.
The situation can be summed up
perfectly, as Foundation for Economic Education's Howard Baetjer explains, "If you accept this raise... you fall
off the welfare cliff"...
Pretend you are a poor, single parent of two in Chicago, earning $12 an
hour, working full time, and determined to do what is best for your family. And suppose your employer, impressed with your
work, offers you training for and promotion to a new job paying $15. Should you take the offer? It sounds like a no-brainer, but it’s not.
At your present $12 an hour you are
eligible for refundable tax credits, food assistance, housing assistance, child
care assistance, and medical assistance worth $41,465 combined. Together with
your earned income after taxes of $22,121, you are now bringing home to your
kids about $63,586 a year.
If you take your employer’s offer,
you’ll earn $5,451 more after taxes, $27,572. You will also become eligible for
an Affordable Care Act (ACA) premium tax credit. But at that level of earned
income all your other benefits would decrease by $8,336, more than your
increase in net pay. That means the income you would bring home would decrease from $63,586
to $60,701.
Now, would
you take your employer’s offer? What would be best for you and your family, a
move up the job ladder with a loss of $2885 in income? Or staying in your same
job and keeping the larger income?
The Low-Wage Trap
This example, which is taken from a
fascinating, and appalling study by the Illinois Policy Institute entitled “Modeling Potential Income and Welfare Assistance Benefits in Illinois,”
illustrates with clear charts and tables what is known as “welfare cliffs” or the “low wage trap,” which can trap families
in poverty. When
earning more means taking home less, the disincentive to work is obvious.
The report provides striking visual
representations of the “welfare cliffs” that poor people’s total incomes can
fall off as they increase their earned incomes. Here is the chart on which the
hypothetical above is based (the particular numbers in our example come from
tables in the report, which clarify the visual data in the charts.)
Notice that welfare cliff
we considered above, which occurs between $12 an hour and $15 an hour, is
relatively small. A bigger one (and the reason I call the report “appalling”)
occurs between $15 an hour and $18 an hour. An Unaffordable Raise?
To pick up our thought experiment,
let’s suppose that you want to get free of welfare eventually, and you know
that moving up the job ladder is key to doing so, so you take your employer’s
offer of a raise to $15 an hour and the corresponding loss of $2,885 in annual
income. You cut back on spending where you can and look to the future. Now
suppose further that you do well in your new job, you boost your knowledge and
skills, and your employer offers you another promotion, with still more
training and a raise to $18 an hour. Should
you take it? Can you afford to take it?
At $18 an hour full time you would
earn gross income of $37,440, and net income (after taxes) of $33,023. But
earned income that high would reduce your refundable tax credit and ACA premium
assistance, and eliminate your cash assistance, food assistance, housing
assistance, and child care assistance, for a total reduction in government
benefits of $26,820. So if you take the promotion and raise, your income would
decrease from $60,701 to $39,332! A case could be made that it is irresponsible
for you to reduce your family’s income that way.
Just think what that kind
of welfare cliff does to the incentive to work (“on the books,” at least) and
thereby to get off welfare. And the problem is not restricted to Chicago; the
same kind of problem exists all across the country.
One of the tragedies of America today is that so
many adults of sound mind and body do not support themselves and their
families. It’s a tragedy not because they suffer material want;
indeed, relatively few suffer so, because government assistance satisfies many
of their material needs. It’s tragic because one of the
keys to human happiness is earned self-respect, which requires, as Charles
Murray has written, making one’s own way in the world. The vast
majority of poor people don’t want welfare; they don’t want handouts; they want
a good job with which they can support themselves and their families
comfortably.
The tragedy of the American welfare system is that
it traps so many people in dependency on government, by hindering them from
getting on and climbing up the job ladder, and thereby earning self-respect and
happiness.
Welfare cliffs are of course not the only reason so
many capable Americans languish in partial dependency on government assistance.
Dreadful government schools in poor areas and systematic obstacles to
getting a job, such as minimum wage laws and occupational licensing laws, are
also to blame. But the perverse incentives of America’s
welfare system really hurt.
http://www.zerohedge.com/news/2016-08-30/when-work-punished-again-if-you-accept-raise-you-fall-welfare-cliff
No comments:
Post a Comment