New Study Finds More Evidence of Poverty Traps in the Welfare System

A new study from the Illinois Policy Institute analyzes the welfare benefits package available at different levels of earnings in that state. The authors find that low-income workers have limited economic incentive to increase their earnings from the minimum wage, and at some higher levels of earnings these workers actually see a reduction in net income. America’s complex welfare system can too often create these perverse situations where beneficiaries are financially worse off as they increase work effort and earned income. In these poverty traps, lost benefits and increased taxes outweigh any additional earnings, making it harder for beneficiaries to escape from poverty and reach the middle class

Author Erik Randolph finds that a single mother with two children who increases her hourly earnings from the Illinois minimum wage of $8.25 to $12 only sees her net income increase by less than $400. For many low-income workers striving to climb the ladder of prosperity, our welfare system takes away almost all of their incentive to move up from an entry-level job as they do not get to realize almost any of these gains. Even worse, someone in this scenario who works hard and increases her earnings all the way to $18 an hour, a wage level which would place her in the middle class, would actually see her net income decrease by more than $24,800 due to benefit reductions and tax increases. Instead of making it easier for beneficiaries to become independent and achieve a level of prosperity, the welfare system traps them into low levels of earnings. This parent would have to increase her earnings all the way to $38 an hour in order to replace the lost benefits and achieve the same standard of living.

These findings echo some of the insights from our Work versus Welfare Trade-off paper, in which we compared the benefits available to a similar family in each state to the equivalent wage that family would have to earn to obtain the same level of net income. Our study found that the high level of benefits available combined with benefit cliffs created situations that would deter work. In 34 states, the parent would have to earn well above the minimum wage to achieve the same standard of living she had when not working.

This new report from the Illinois Policy Institute illustrates some of the biggest problems with our current welfare system and corroborates many of the findings of our past work. Work versus Welfare looked at two situations, one where the parent worked and one where she had no earned income. This new study from the Illinois Policy Institute provides valuable additional insight, as it looks at this tradeoff at different levels of earned income to analyze the poverty traps in place as beneficiaries move to higher levels of earned income. Instead of encouraging work, the current welfare system often takes away much of the incentive for low-income workers to increase work effort and earnings. As Randolph puts it, “[r]ather than providing a hand up, Illinois’ welfare system can become a trap,” and this is unfortunately the case throughout the country. This study shows yet another reason why our welfare system needs fundamental reform.  

Cato will host a conference in New York January 29th to further explore poverty and the welfare system. The conference agenda and registration information can be found here