Mitigating the Benefits Cliff: A Linchpin for Economic Recovery

Document Type

Article

Publication Date

2021

Abstract

The economic recovery policy solutions advanced by President Biden – from racial and climate justice to the minimum wage to clean energy jobs – depend on a functioning safety net coordinated with employment. But the cliff effect – also known as the benefits cliff – produces a major stumbling block in the path to economic mobility. The cliff effect occurs for low-income families when small increases in income result in a reduction or a loss of essential public benefits. As a result, families do not have the resources required to meet even basic needs and employers are stymied in their attempts to hire and promote employees.

While pandemic-related efforts are focused on emergency support and reemployment, in the long run, economic mobility ought to be at the forefront of the recovery plan. The cliff effect must be mitigated to achieve meaningful wage progression for the nearly 23 percent of Americans who rely on means-tested public benefits – a likely growing number given job losses from the pandemic.

Resolving the benefits cliff is crucial for racial equity. Workers of color are disproportionately concentrated in low-wage jobs and therefore more likely to rely on benefits, resulting in higher marginal tax rates. This, in combination with rising costs of living, means that it is nearly impossible for families of color to escape poverty and move up the economic ladder.

For example, Lucia is a recent widow of three children. She works at the deli counter at her local grocery store, earning $15 per hour. She relies on Medicaid and SNAP (food stamps) to help make ends meet for her family. But when her boss offered her a promotion to deli supervisor with a raise to $18 per hour, she had to turn it down because her Medicaid premiums would increase, her SNAP payments would decline, and she would receive a lower tax refund.

The safety net consists of a wide array of benefits programs, many of which are rooted in federal statute. They are administered by federal, state, and local agencies with varying degrees of ability to enact laws and regulations at the state level. As a result, while states have made progress on cliff mitigation, ultimately, the intersecting programs must be untangled at the federal level to create permanent solutions.

To make progress on the benefits cliff impediment to economic mobility, we urge the new administration to take the following actions:

Create a Cross-Secretariat, Cross-Agency Task Force to Mitigate the Benefits Cliff. The federal government should follow the lead from the states, several of whom have created interagency task forces and launched pilot initiatives to address the cliff effect. The administration can gain insights from states, many of whom have engaged impacted families and workers of color directly in their efforts to mitigate the benefits cliff.

First, the administration should coordinate across programs to address cliffs by synchronizing benefit eligibilities, rules, and regulations. Program alignment reduces complexity for recipients and program staff and facilitates financial decision-making. The task force should directly address the barriers for policymakers to align rules across programs, including the financial impact of changes on individual benefit programs.

Increase Access to Benefits. Increasing benefit amounts is essential for families to stay afloat given the rising costs of living. For example, policies that enable workers to continue receiving public benefits as they are transitioning to new jobs promote both work and family stability. Another option is to increase earned income disregards, which allow some earned income or work-related expenses to be excluded for purposes of determining eligibility and benefit amount.

The task force should also analyze lessons learned from pandemic-related support programs as well as analyze the impacts of minimum wage increases to anticipate and address challenges in advance.

Boost Support for Working Families. Our Center for Social Policy simulations demonstrates that investing in public goods, such as implementing high-quality universal child care, would significantly reduce the benefits cliff. This will also increase resources for families and allow parents to work with the knowledge that their children are receiving high-quality care.

Explore Tax Solutions. Benefit program alignment must be synchronized with tax reform to create the largest impact for workers and to encourage work. The administration should make permanent its efforts to expand the Earned Income Tax Credit (EITC), one of the most successful anti-poverty programs for encouraging work and increasing family net resources. In addition, the EITC can be more tightly integrated with state EITC policy, thus smoothing out cliffs. Also, the Child Care Tax Credit should be fully refundable beyond 2021, thus increasing access for low-income families.

Another approach suggests lessening the severity of the benefits cliff effect by using a tax credit to make taxpayers whole. Essentially, each affected worker would be awarded a credit to make their post-tax financial position up to the maximum level it would have been had the worker decided not to earn additional income from work.

Ensure Transparency Through a User-Friendly Tool. Because the public benefits system is highly fragmented, teasing out the repercussions of wage increases is nearly impossible. Thus families, and the case managers assisting them, lack the information they need to guide families towards effective decisions and take control of their financial lives. The new administration should continue to support plans to release a marginal tax rate calculator currently in development by Health and Human Services.

State-level benefit cliff tools have proven to be challenging to develop and code, due to the complexity of regulations. Furthermore, they are difficult to sustain, especially given fluctuating funding environments and staff turnover. Thus, financial assistance should be made available to states to adapt and sustain the calculator. This will help workers make decisions based on reliable information about how their benefits and the anticipated tax burden will be impacted if they take a raise or pursue a higher wage job.

Prior to the pandemic, employers were struggling to hire workers, in part due to job seekers’ apprehension about losing their public benefits. While immediate concerns about the cliff effect have receded, the underlying problem remains.

It is essential to prepare for a brighter future – one that reduces inequality and paves the way toward economic mobility. Otherwise, recovery efforts will be hampered and will set the U.S. economy – especially essential workers – up for a relapse.

Publisher

Spotlight on Poverty and Opportunity

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