Welfare: A Better Deal than Work

Suppose someone offered you the same amount of money that you currently make at your job on one condition — you don’t work. Might you be tempted? That is exactly the deal that our welfare system offers too many people today.

The federal government currently funds 126 separate anti-poverty programs at an annual cost of $688 billion. Of these, 72 provide cash or other benefits directly to poor families. State, county, and municipal governments often operate additional benefit programs. The combined benefits from those multiple overlapping programs can easily add up to the point where welfare simply pays better than work.

This week, the Cato Institute released a new study calculating the state-by-state value of this typical welfare package for a mother with two children participating in seven common welfare programs — Temporary Assistance for Needy Families (TANF), food stamps (SNAP), Medicaid, housing assistance, WIC, energy assistance (LIHEAP), and free commodities. We found that, in 2013, the value of those benefits varied widely across states, from a low of $16,984 in Mississippi to an astonishing high of $49,175 in Hawaii.

America’s public-assistance system pays many people better than the jobs they’d otherwise have.”

In nine states — Hawaii, Massachusetts, Connecticut, New Jersey, Rhode Island, New York, Vermont, New Hampshire, and Maryland — as well as Washington, D.C., annual benefits were worth more than $35,000 a year. The median value of the welfare package across the 50 states is $28,500.

But that doesn’t tell the whole story. Welfare benefits are not taxed, while wages are, so we calculated how much money a welfare recipient receiving these six benefits would have to earn in pretax income if she took a job and left the welfare rolls. We computed the federal income tax, the state income tax, and the FICA payroll taxes one would have to pay on wage income; we also took into account both federal and state versions of the Earned Income Tax Credit (EITC) as well as child tax credits where available (these helped increase the relative value of work but did not fully offset the taxes due).

We found that, just to break even, a person on welfare would often have to take a job that paid considerably more than the value of the forgone welfare benefits. In Hawaii, for example, a person leaving welfare for work would have to earn more than $60,590 a year to be better off. In fact, welfare currently pays more than a minimum-wage job in 34 states and the District of Columbia. In Hawaii, Massachusetts, Connecticut, New York, New Jersey, Rhode Island, Vermont, and Washington, D.C., welfare pays more than a $20-an-hour job, and in five additional states it yields more than a $15-per-hour job.

Consider this: In ten states and the District of Columbia, welfare pays more than the entry-level salary for a teacher in that state. In 38 states and the District of Columbia, welfare is more generous than the average starting salary for a secretary. And in the three most generous states, welfare pays more than the wages for an entry-level computer programmer. In eight states, welfare recipients receive benefits worth more than the median salary there.This is not even to consider the other costs of going to work. As Casey Mulligan of the University of Chicago recently testified before Congress:

Earning income requires sacrifices, and people evaluate whether the net income earned is enough to justify the sacrifices. When [welfare programs] pay more, the sacrifices that jobs require do not disappear. The commuting hassle is still there, the possibility for injury on the job is still there, and jobs still take time away from family, schooling, hobbies, and sleep. But the reward to working declines, because some of the money earned on the job is now available even when not working.

Likewise, we should consider that, as the Congressional Research Service has pointed out:

Leisure is believed to be a “normal good.” That is, with a rise in income, people will “purchase” more leisure by reducing their work effort…. Thus, the increase in [the value of welfare benefits] is expected to cause people to reduce work hours.

Many welfare recipients, particularly long-term ones, lack the skills and attachment to the job market necessary to obtain the types of jobs that pay average or above-average wages. Individuals who do leave welfare for work most often start employment in the service or retail industries, in positions such as clerks, secretaries, cleaning persons, salesmen, and waitresses. And, although it would be nice to raise the wages of entry-level service workers, the government has no ability to do so. (Attempts to mandate wage increases, such as increases in the minimum wage, primarily result in fewer such jobs.)

It should be no surprise, then, that, despite the work requirements put in place by the Nineties welfare reform, fewer than 42 percent of recipients are participating in broadly defined “work activities.” In some states, such as Missouri and Massachusetts, less than one out of five welfare recipients are “working.” Moreover, work activity frequently means not a job but only looking for work or participating in a job-training program. In fact, fewer than one-fifth of welfare recipients are working in unsubsidized private-sector jobs.

Of course, not every welfare recipient meets our profile, and many who meet our profile do not receive all the benefits listed. (On the other hand, some receive even more.) Still, what is undeniable is that for many recipients — particularly the “long-term” dependents — welfare pays substantially more than an entry-level job does.

Nor does our study suggest that people on welfare are lazy. Indeed, survey after survey suggests that they would prefer to be working. By not working, welfare recipients are simply responding rationally to the incentive systems our public-policy makers have established for them.

But in the long term, policies that discourage work are bad for the recipients. One of the most important long-term steps toward avoiding or getting out of poverty is employment. Only 2.6 percent of full-time workers are poor, compared with 23.9 percent of adults who do not work. Even part-time work makes a significant difference — only 15 percent of part-time workers are poor. And, while many anti-poverty activists decry low-wage jobs, even starting at a minimum-wage job can be a springboard out of poverty in the long run.

Recently, the Cameron government in Britain has introduced a cap on welfare benefits at £500 a week, or about $40,000 a year. When the British are outpacing you on welfare reform …