17.5 Welfare Reform

1. Income Distribution and Welfare Programs Chapter 17 On August 22, 1996, President Bill Clinton signed into law the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), more commonly known as the welfare reform law. Before this law, cash welfare in the United States was a system in which states received matching grants to provide time-unlimited benefits to low-income single mothers. After the law, states received a lump-sum block grant, a flat amount, independent of state spending on welfare, earmarked to provide time-limited benefits to a broader range of low-income families. 17.1 Facts on Income Distribution in the United States 17.2 Welfare Policy in the United States 17.3 The Moral Hazard Costs of Welfare Policy 17.4 Reducing the Moral Hazardof Welfare 17.5 Welfare Reform 17.6 Conclusion

2. Overview and History of Welfare Reform

3. Established in 1935 as part of the Social Security Act Shared cost program between federal government and states Originally intended primarily for widows, AFDC increasingly served never-married mothers States had discretion primarily over setting income eligibility limits and benefit levels Activity requirements were weak and generally focused on education and training rather than work States were not allowed to time limit beneficiaries Beginning in early 1990s, states increasingly used waivers to try new approaches to reducing welfare dependence Overview of the Aid to Families with Dependent Children Program (AFDC)

4. The poor are victims of their circumstances and do not have opportunities to advance The poor are responsible for their circumstances and do not take advantage of available opportunities The emphasis of antipoverty policy in the U.S. has shifted between these two views The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 emphasizes the second view Two Views of Poverty

5. Poverty Rates for Children in the U.S. Have Been Higher than Those for Other Age Groups 65 years and over Under 18 years 16.2 18 to 64 years 10.2 9.4 Source: U.S. Census Bureau

6. The Census Bureau uses a set of money income thresholds that vary by family size and composition to determine who is poor The poverty thresholds do not vary geographically; they are updated annually for inflation but they have not kept pace with rising real incomes In determining who’s poor the Census Bureau counts money income before taxes and does not include non-cash benefits, the EITC, or work-related expenses. The National Academy of Sciences has recommended changes to deal with these and other issues. The thresholds in 2000 were: 1-person under 65 $8,959 3-person family (adult and 2 children) 13,874 4-person family (adult and 3 children) 17,524 The Measurement of Poverty Source: U.S. Census Bureau

7. 17.1 Facts on Income Distribution in the United States Absolute Deprivation and Poverty Rates

8. Countries that Spend More on Social Welfare (as percent of GDP) Have Lower Child Poverty Rates Cash and noncash social expenditures exclude health, education, and social services, but include all forms of cash benefits and near-cash housing subsidies, active labor market program subsidies, and other contingent cash and near-cash benefits. Nonelderly benefits include only those accruing to household heads under age 65. Source: Institute for Research on Poverty (IRP), University of Wisconsin-Madison

9. Political Background to the 1996 Welfare Reform Legislation

10. Majority are racial and ethnic minorities 4 percent of mothers in 1995 worked full-time, and another 5 percent worked part-time Total expected duration of all Awelfare spells@ was 13 years; more than 76 percent were expected to stay on for more than 5 years total Characteristics of the AFDC Caseload

11. Nixon’s Family Assistance Plan (1969-1972)--failed to pass Congress Carter’s Program for Better Jobs and Incomes (1977)--failed to pass Congress Reagan’s 1981 Budget Act changes--moderate cutbacks Reagan’s New Federalism (1982)--never introduced in Congress Family Support Act (1988)--incremental reform Efforts at Comprehensive Welfare Reform Usually Failed

12. Dramatic caseload increases after 1988 fostered perception that program was “out of control” Public opinion Public opinion had not united around all of the proposals in PRWORA: public had shifted to overwhelming support for work requirements for custodial parents, while remaining more divided on “hard time limits” and family caps Republicans in Congress were not trusted more than President Clinton on welfare reform issues in 1996 The AFDC program was very unpopular because seen as anti-work and anti-family. The public was willing to accept almost any alternative to the status quo Why Did Welfare Reform Legislation Pass in 1996 After Many Previous Failures

13. Social Science knowledge and evaluation studies increased policymaker concern about intergenerational transmission of welfare receipt and length of welfare spells gave support to “work first” approaches Budgetary considerations: Republicans needed to find budget savings (especially from cuts in Food Stamps and benefits to legal immigrants) in order to finance tax cut and budget balancing promises in the Contract with America State experiments under waivers increased confidence in innovative capacity of states Why Did Welfare Reform Legislation Pass in 1996 After Many Previous Failures Cont.

14. Critical role for political bargaining: Bill Clinton promised to “end welfare as we know it” Republicans in Congress committed to welfare reform by Contract with America Moderate Democrats in Congress followed President Clinton to the right in order to avoid being seen as more liberal than President Clinton on welfare issues Why Did Welfare Reform Legislation Pass in 1996 After Many Previous Failures Cont.

15. Temporary Assistance for Needy Families Non-marital Births Supplemental Security Income for Children Child Support Enforcement Welfare for Non-citizens Child Care Food Stamps Overview of the 1996 Welfare Reform Law

16. Five Components of TANF 1. End Cash Entitlement 2. Block Grant Funding 3. Work Requirements 4. Sanctions 5. 5-Year Time Limit

17. Purposes of TANF 1. Provide assistance to needy families with children 2. End welfare dependency by promoting job preparation, work and marriage 3. Prevent non-marital pregnancies 4. Encourage formation and maintenance of two-parent families

18. Earned Income Tax Credit (EITC) Food Stamps and Child Nutrition Medicaid and SCHIP Child Care Housing Child Tax Credit Child Support Enforcement Workforce Development & Job Advancement Services State Income Supplements Elements of the Work Support System

19. Congressional findings on the negative effects of non-marital births Three of four TANF purposes address family formation Performance bonuses tied to purposes of law Illegitimacy reduction bonus Require teens to attend school Require teens to live at home or other supervised setting Abstinence education Child support enforcement Paternity establishment National goals to prevent teen pregnancy States establish numerical goals for reducing non-marital births Annual ranking of states on non-marital pregnancy ratios by HHS Allow family cap Allow reduction in cash benefits for non-marital births Provisions in Welfare Reform Law Designed to Reduce Non-marital Births

20. Support for Working Families Increases Dramatically, 1984-1999 51.7 5.6 Spending in 1999 under: 1984 Law 1999 Law Source: Congressional Budget Office

21. Government Benefits Lift Children Out of Poverty Source: Center on Budget and Policy Priorities; U.S. Census Bureau

22. How States Have Responded

23. Set eligibility limits and benefit levels for cash benefits (as before) Define who receives various benefits and services Set income supplements for working families Offer other “carrots” Set stricter “sticks” than those in federal law Spend funds on a variety of services other than cash benefits Save block grant funds for economic downturns Under TANF States Have Discretion To:

24. States Have Very Different Resources Under the TANF Block Grant

26. 17.1 Facts on Income Distribution in the United States Relative Income Inequality relative income inequality The amount of income the poor have relative to the rich.

27. Facts on Income Distribution in the United States 17 . 1 Absolute Deprivation and Poverty Rates absolute deprivation The amount of income the poor have relative to some measure of “minimally acceptable” income. poverty line The federal government’s standard for measuring absolute deprivation.

28. 17.1 Facts on Income Distribution in the United States Absolute Deprivation and Poverty Rates

29. Income, Poverty, and Health Insurance Coverage in the United States: 2008

30. 17.1 Facts on Income Distribution in the United States Absolute Deprivation and Poverty Rates

31. Problems in Poverty Line Measurement The poverty line has remained a mainstay of U.S. public policy, with its exact placement influencing billions of dollars of government spending each year. There have been three types of criticisms: Bundle Has Changed: The share of food in family consumption has fallen over time relative to clothing, shelter, medical care, and other goods. As a result, using the cost of food times three is no longer an appropriate way to compute a minimum standard of living. Differences in Cost of Living Across Areas Are Ignored: In 2005, the median single-family home in the Boston–Cambridge–Quincy area of Massachusetts cost $413,000. The median single-family home in St. Louis, Missouri, cost only $141,000. Yet the same poverty line applies to both locations. Income Definition Is Incomplete: If two individuals have the same cash income but only one of them has Medicaid coverage, then the individual with Medicaid is effectively richer because he or she doesn’t have to pay for medical costs.

32. Welfare Policy in the United States 17 . 2 In discussing welfare policy, it is important to understand two characteristics of each policy: 1. Categorical and Means-Tested Programs: categorical welfare Welfare programs restricted by some demographic characteristic, such as single motherhood or disability. means-tested welfare Welfare programs restricted only by income and asset levels.

33. Welfare Policy in the United States 17 . 2 2. Cash and In-Kind Programs: cash welfare Welfare programs that provide cash benefits to recipients. in-kind welfare Welfare programs that deliver goods, such as medical care or housing, to recipients.

34. Welfare Policy in the United States 17 . 2 Cash Welfare Programs Temporary Assistance for Needy Families (TANF) The TANF program provides support to low-income families with children in which one biological parent is absent. benefit guarantee The cash welfare benefit for individuals with no other income, which may be reduced as income increases. benefit reduction rate The rate at which welfare benefits are reduced per dollar of other income earned. Supplemental Security Income (SSI) SSI is a program that provides cash welfare to the aged, blind, and disabled.

35. Welfare Policy in the United States 17 . 2 In-Kind Programs Food Stamps Individuals are issued a card for a certain value of food, which is drawn down as they make purchases. Households without elderly or disabled members must have income below 130% of the poverty line to receive food stamps. Medicaid This is by far the largest categorical welfare program in the United States, with expenditures of $292 billion in 2004.

36. In-Kind benefits: Food Stamps

37. Welfare Policy in the United States 17 . 2 In-Kind Programs Public Housing The public housing system in the United States consists of two separate programs: • Public housing projects, typically large apartment buildings. • “Section 8 vouchers,” which individuals can use to subsidize private rentals from participating landlords. Benefits are restricted to low-income families, typically those with incomes below 50% of the median income in a metropolitan area. Other Nutritional Programs Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), which provides funds for nutritious food purchases. Women who are pregnant or recent mothers, as well as children under five years old, are eligible if they are on cash welfare, are on Medicaid, or have incomes below 185% of the poverty line.

38. The Moral Hazard Costs of Welfare Policy 17 . 3 Moral Hazard Effects of a Means-Tested Transfer System • This system is a simplified version of TANF or other redistributive programs, but it allows us to clearly show the effects of moral hazard that come with redistribution. • The benefit to any individual would be equal to: Where B= benefits G=Guarantee level t=implicit tax w= wage rate h=hours worked Addtl Earn.= Guarantee/t

39. The Moral Hazard Costs of Welfare Policy 17 . 3 Moral Hazard Effects of a Means-Tested Transfer System

40. The Moral Hazard Costs of Welfare Policy 17 . 3 Solving Moral Hazard by Lowering the Benefit Reduction Rate

41. Benefit Reduction in TANF example Kari can earn $10 per hour if she works; the state provides a $500 per month grant A. Use labor leisure model to show her budget constraint B. show the effect of a 100% effective tax ( C. show the effect of a 50% effective tax

42. The Moral Hazard Costs of Welfare Policy 17 . 3 The “Iron Triangle” of Redistributive Programs iron triangle There is no way to change either the benefit reduction rate or the benefit guarantee to simultaneously encourage work, redistribute more income, and lower costs.

43. Reducing the Moral Hazard of Welfare 17 . 4 Moving to Categorical Welfare Payments By targeting welfare payments to observed earnings, the government introduces incentives for individuals to work less hard in order to qualify for larger welfare payments. This problem could be eliminated if the welfare program could target those who are truly less capable of earning, to ensure that benefits go to those who really need them, not just to those who are working less hard in order to qualify for benefits. What Makes a Good Targeting Mechanism? • Individuals have no way to change behavior in order to qualify. • The best mechanisms target those with low earning capacity.

44. 17.4 Reducing the Moral Hazard of Welfare Moving to Categorical Welfare Payments Targeting by Single Motherhood

45. Reducing the Moral Hazard of Welfare 17 . 4 Using “Ordeal Mechanisms” ordeal mechanisms Features of welfare programs that make them unattractive, leading to the self-selection of only the most needy recipients. The Paradox of Ordeal Mechanisms If the government provides a benefit that is not attractive to the non-needy but helps out the truly needy, then targeting will be more efficient. The paradox of ordeal mechanisms is therefore that apparently making the less able worse off can actually make them better off.

46. An Example of Ordeal Mechanisms The government wants to set up a soup kitchen for low-ability individuals who are poor, but the government cannot tell whether individuals are truly low-ability, or high-ability and just lazy. The government can: • Hire a large number of workers for this soup kitchen, so that no one has to wait very long for a bowl of soup. • Hire a small number, so that there is always a line outside. The long line might prevent the more able from using resources that they don’t need and are not really intended for them. Through the use of ordeal mechanisms, such as waiting in line, welfare programs can use the fact that the low-ability want the good more, and have a lower disutility from this ordeal, to more effectively target the redistribution of scarce resources.

47. Reducing the Moral Hazard of Welfare 17 . 4 Increasing Outside Options

48. Reducing the Moral Hazard of Welfare 17 . 4 Increasing Outside Options Training Training programs lead to modest declines in welfare receipt and increase the earnings for welfare recipients. Labor Market Subsidies Subsidizing work increases employment and reduces the number of people on welfare, and this impact rises with the size of the subsidy.

49. Reducing the Moral Hazard of Welfare 17 . 4 Increasing Outside Options Child Care Subsidizing child care has been shown to raise female labor supply: recent estimates suggest that for each 10% rise in child care subsidies, female labor supply increases by about 2%. Child Support child support Court-ordered payments from an absent parent to support the upbringing of offspring. The major advantage of stronger enforcement of child support is that it potentially reduces the incidence of single motherhood by making it financially costly for fathers to abandon their families.

50. Reducing the Moral Hazard of Welfare 17 . 4 Increasing Outside Options Remove “Welfare Lock”