On
Labor Day 2013, Welfare Paid More Than Minimum-Wage Work In 35 States, 9/2/13.
Charles Murray launched the welfare
reform movement in 1984 with his landmark book, Losing Ground: American Social
Policy 1950-1980.
Since 2009, the Fair Labor Standards Acthas dictated that the federal minimum wage is $7.25 an
hour. Some people think that’s too low; others think it’s too high. But it
turns out that, in 35 states, it’s a better deal not to work—and instead, to
take advantage of federal welfare programs—than to take a minimum-wage job.
That’s the takeaway from a new study published by Michael Tanner and
Charles Hughes of the Cato Institute.
“The
current welfare system provides such a high level of benefits that it acts as a
disincentive for work,” Tanner and Hughes write in their new paper. “Welfare
currently pays more than a minimum-wage job in 35 states, even after accounting
for the Earned Income Tax Credit,” which offers extra subsidies to low-income
workers who take work. “In 13 states [welfare] pays more than $15 per hour.”
Losing ground in the war on poverty
The
welfare system, at its best, is a system that gives people a way to live when
they can’t find work for themselves, when they’re down on their luck. At its
worst, the welfare system rewards people for not working, and incentivizes
people to develop habits that make it harder for them to find work in the
future, miring them in permanent poverty.
In
1984, a predecessor of mine at the Manhattan Institute, Charles Murray,
published the definitive book on this subject, Losing Ground: American Social Policy
1950-1980. Murray
found that despite the fact that we were spending trillions of dollars on
anti-poverty programs, poverty was not improving; indeed, on many measures, it
was getting worse.
Things
had gotten so bad that a Democratic presidential candidate, Bill Clinton,
campaigned in 1992 on a platform to “end welfare as we know it, to make welfare
a second chance, not a way of life.” In 1996, Clinton signed into law a
landmark welfare-reform bill called the Personal
Responsibility
and Work Opportunity Reconciliation Act, which, among other things, required
recipients of cash welfare payments to seek work, or lose their benefits.
But
though the 1996 reforms did shrink the cash welfare rolls, other programs have
grown substantially in the last 17 years, so much so it appears that the
significance of the 1996 reforms may have been overstated.
The welfare system has grown since 1996. In 1995, Cato published The Work vs. Welfare Trade-Off, which examined the value of welfare
benefits in every state. They found that, in 40 states, welfare paid more than
$8 an hour; in 17 states, welfare paid more than $10 an hour. Tanner, the
principal author of that study, decided to reexamine the numbers in the context
of 2013.
In Cato’s new 2013 study, welfare paid
more than $10 an hour in 33 states; 17 paid less than $8 an hour. Comparing the
two data sets and accounting for inflation, 18 states saw a decline in the
total value of welfare benefits; 32 states and the District of Columbia saw
increases.
Tanner and Hughes award the national
welfare championship to Hawaii, which offers $60,590 in annual welfare
benefits, once you account for the fact that welfare benefits are tax-free to
the recipient, compared to work-related wages. That’s the equivalent of $29.13
an hour. Rounding out the top five were D.C. ($50,820 per year and $24.43 an
hour), Massachusetts ($50,540 and $24.30), Connecticut ($44,370 and $21.33),
and New York ($43,700 and $21.01).
States with the lowest welfare benefits
were Idaho ($11,150 and $5.36), Mississippi ($11,830 and $5.69), Tennessee
($12.120 and $5.83), Arkansas ($12,230 and $5.88), and Texas ($12,550 and
$6.03).
Vermont increased welfare payments by
the largest amount
The biggest jump in welfare payments
between 1995 and 2013 was enjoyed by Vermont, where annual pre-tax-equivalent
benefits jumped from $31,580 to $42,350 in 2013 dollars: an increase of
$10,770. Other big gainers were D.C. ($6,850), Hawaii ($5,589), New Hampshire
($5,299), and Oregon ($5,288).
The biggest decrease was in Alaska,
where benefits dropped from $48,655 to $26,400, a difference of $22,255. The
other major belt-tighteners were Virginia (-$20,035), Maine (-$18,718),
Colorado (-$16,830), and Idaho (-$16,048).
Tanner and Hughes count 126 distinct
federal means-tested anti-poverty programs in force today. For the purposes of
their study, they looked specifically at: (1) Temporary Assistance for Needy
Families (TANF), the post-1996 cash welfare program; (2) the Supplemental
Nutrition Assistance Program (SNAP), formerly known as food stamps; (3)
Medicaid; (4) housing assistance; (5) utilities assistance; (6) the Women,
Infants, and Children program (WIC), and (7) the Emergency Food Assistance
Program (TEFAP).
Not all of these benefits apply to every
welfare beneficiary, and some are time-limited, like TANF. But it remains true
that an alarming number of welfare beneficiaries do not have an economic
incentive to find entry-level work.
Also striking about the Tanner and
Hughes study is the degree to which this problem would be much worse without
the Earned Income Tax Credit, which offers subsidies to working low-income
individuals. In effect, the EITC serves as a negative income tax for those with
little-to-no income tax liability. It ameliorates the disincentive that welfare
recipients have to seek work.
The Swedish solution: Tax welfare
benefits
- A better way to
address this problem would be to treat welfare benefits like taxable income.
Even low-income workers with no income tax liability have to pay Social
Security and Medicare taxes. But welfare benefits are entirely tax-free.
As Reihan Salam has noted, Sweden has a generous welfare state.
But Sweden treats welfare benefits as taxable income. This gives even welfare
beneficiaries an incentive to support efficient government, providing a welcome
blur between “makers” and “takers.” In Sweden, according to Tino
Sanandaji, “an astonishing 85 percent of working-age native Swedes
work and pay taxes, far above the European average of 70 percent.”
You could even increase the scale of
welfare benefits, in order to ensure that the taxable net income to welfare
beneficiaries remained similar. Such a change would allow for more
straightforward comparisons of income from work and income from welfare, and
reduce the disincentive for work.
Obamacare is doing much to make it harder for Americans to
find work, especially full-time work. At the same time, the aging of the Baby
Boomers and the growth in welfare payments is making it easier for Americans to
give up on looking for work. Absent reform, this won’t end well.
INVESTORS’ NOTE: Obamacare’s employer mandate
is having profound effects on businesses that employ hourly-wage workers, such
as restaurant chains McDonald's;
Burger King; Dunkin Brands Group; Yum! Brands, owners of Taco Bell, Pizza Hut,
and KFC; and Darden Restaurants (,
owners of Red Lobster, Olive Garden, and Capital Grille, among others.
Norb Leahy, Dunwoody
GA Tea Party Leader
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