- Our social safety net is not intentionally designed to discourage work and marriage. Rather, the disincentives are unintended consequences of too many separate programs. Tweet This
- Two recent proposals from the center-right suggest permanent reforms that feature simplification and cash benefits. Tweet This
- Entrenched attitudes on both the left and right have made it hard to unwind the fragmentation and perverse incentives of American anti-poverty policy. Tweet This
America’s social safety net is full of perverse incentives. It all too often discourages paid employment by aggressively reducing benefits as earnings rise. As I explained last week, several provisions also penalize marriage, despite evidence that children raised in stable families experience improved economic, social, and educational outcomes. To add insult to injury, these flaws in welfare policies apply with special force to those who are just at the point of making the transition from poverty to self-sufficiency.
These problems have long been known. So why have they not been corrected long ago? And what can be done to fix them now?
The Fixes Are Simple and Obvious
Our social safety net is not intentionally designed to discourage work and marriage. Rather, the disincentives are unintended consequences of too many separate programs, each aimed at one part of the problem of poverty and written with little attention to how each policy interacts with others. Disincentives could be greatly mitigated by following a few simple principles:
- Cash out in-kind benefits wherever possible.
- Consolidate programs to simplify administration and eliminate unintended consequences of overlapping policies.
- Eliminate abrupt “cliffs” where benefits end suddenly at some earnings threshold and minimize the rates at which means-tested benefits are phased out.
Elsewhere, I have suggested a policy of Integrated Cash Assistance that embodies these three principles. It would have just three components: a basic grant for adults whether they work or not, a child grant that did not depend on family structure or marital status, and a wage subsidy to give an extra incentive to those who are just entering the labor market. The three would be subject to a single, coordinated phase-in/phase-out schedule with no cliffs and with a uniform, moderate benefit reduction rate as participants achieve economic self-sufficiency.
However, as simple as they are, these principles of reform face pushback from both the left and the right.
On the left, advocates of strong anti-poverty policy are skeptical that the disincentives targeted by reformers have much effect on actual behavior. They doubt that workers understand complex EMTR calculations and think that workers have little power to adjust hours or change jobs in response to changing incentives. Seeing little political prospect for comprehensive reform, the skeptics are content to advocate better funding of underused programs, such as TANF and housing vouchers, despite their known work and marriage penalties. Other writers suggest adding new programs that have new disincentives without replacing old ones.
On the right, reforms that emphasize cash or provide benefits to nonworkers encounter a different kind of skepticism—one based in deep-seated paternalism. A recent study by Zachary Liscow and Abigail Pershing, both of Yale Law School, found that self-identified conservatives were nearly twice as likely as liberals to prefer in-kind assistance. When asked why, those who preferred in-kind programs often used words like “drug,” “alcohol,” “frivolous,” and “waste” that reflected a general distrust of the poor. In practical terms, such attitudes lie behind requirements that welfare recipients undergo fingerprinting, drug tests, or unannounced home visits, or, where cash benefits are provided, prohibitions on spending them in lingerie shops, nail salons, or movie theaters.
These entrenched attitudes on both the left and right have made it hard to unwind the fragmentation and perverse incentives of American anti-poverty policy. Still, it would be wrong to conclude that reform is impossible.
One hopeful sign is the acknowledged success of the large-scale experiment in cash assistance undertaken during the COVID pandemic. An analysis of Census Bureau survey data by Patrick Cooney and H. Luke Shaefer of the University of Michigan found that stimulus payments had strikingly beneficial effects:
- Material hardship in U.S. households fell sharply.
- Food insufficiency fell by over 40%, financial instability fell by 45%, and reported adverse mental health symptoms fell by 20 percent.
- These outcomes affected low-income households most strongly.
The authors concluded that “the success of the federal government’s relief measures may be due to the speed, breadth, and flexibility of its broad-based approach, primarily relying on cash transfers.” Far from spending on alcohol or lingerie, stimulus money was largely spent on “food, housing, and household expenses, as well as to pay down debt and get on stable financial footing.”
The COVID payments were temporary, but two recent proposals from the center-right suggest permanent reforms that feature simplification and cash benefits. One is a proposal for a simpler safety net for families from Angela Rachidi of the American Enterprise Institute. Her plan would consolidate the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) into a single credit for working families. In the process, it would increase payments to married couples in order to reduce the marriage penalty, while sharply reducing the benefit reduction rate to improve work incentives.
The “Family Security Act” from Sen. Mitt Romney (R-Utah) also reflects the principles of cash, simplicity, and the elimination of perverse incentives. Like Rachidi’s plan, Romney’s proposal would reform both the EITC and the CTC for working families. In Romney’s plan, the child benefit would vary with the number of children and would be paid monthly rather than as an annual tax credit. That feature alone would significantly improve work incentives. In addition, the benefit schedule for the EITC, which would now apply to adults only, would be changed in a way that would eliminate its present marriage penalty.
Neither of these proposals represent a complete reform of the social safety net. Neither would do much to help the nonworking poor, nor do they deal directly with the disincentives built into existing programs for nutrition, housing, and healthcare. Still, it is encouraging that both proposals embrace the principles of cash benefits, simplicity, and the elimination of perverse incentives.
Ed Dolan is a Senior Fellow at Niskanen Center, writing on social policy, climate, and political economy.
Editor's Note: The opinions expressed in this article are those of the author and do not necessarily reflect the official policy or views of the Institute for Family Studies.