Welfare Reform at 30

Ending Welfare as We Knew It

The old Aid to Families with Dependent Children (AFDC) cash welfare program operated under a matching grant system, in which federal taxpayers matched between $1 and $3.55 for every dollar states spent on AFDC benefits.¹ This financing model rewarded states for increasing dependency on government assistance—a state that cut $1 in AFDC benefits saved as little as 22 cents, while higher caseloads automatically drew additional federal funds. As the Ways and Means Committee noted thirty years ago, “despite the short welfare spells of some families, the average length of stay on [AFDC], counting repeat spells, for families enrolled at any given moment [was] 13 years.“²

Congress addressed this perverse incentive in AFDC by replacing the program with Temporary Assistance for Needy Families (TANF), a block grant that featured work requirements and five-year time limits for beneficiaries. These reforms challenged the presumption of cash welfare as an unconditional entitlement and ended states’ ability to draw additional federal taxpayer dollars to finance caseload expansions. In the years after welfare reform, AFDC/TANF caseloads shrank by more than half—from 5 million families in 1994 to 2.2 million in 2000—as millions of beneficiaries moved off welfare and into the workforce.³

TANF’s Discipline Incentivized States to Shift Costs to SSI

While the 1996 welfare reforms imposed stricter discipline on states running TANF, Congress did not extend similar restraints to other programs. Consequently, in the years after welfare reform, many states circumvented TANF’s budget constraints by shifting spending onto other, still open-ended entitlements—particularly Supplemental Security Income (SSI), a federally funded and administered welfare program for low-income seniors and people with disabilities.

The Social Security Administration studied this trend and, in 2006, found that converting AFDC into the TANF block grant multiplied a state’s fiscal payoff from moving a recipient onto SSI by two to four times, since each state now retained the full savings from caseload reductions, rather than only that state’s share of the matching grant formula.

Families on TANF faced a parallel incentive. In 1996, the average maximum TANF benefit was $396 for a single-parent family of three; the maximum federal SSI benefit was $470 for an individual. SSI also carried neither work requirements or time limits for beneficiaries, unlike TANF.⁴

As David Wittenburg, Ph.D., previously testified before the Ways and Means Committee, low-income parents with disabled children had “financial [incentives] to apply for SSI, and could even be encouraged to do so by [state workers].“⁵ After welfare reform, some states pursued this outcome directly by paying third-party contractors to help TANF recipients apply for and receive SSI benefits.⁶ The fiscal consequences of this dynamic accrued to federal taxpayers. One academic paper estimated that every $50 reduction in a state’s monthly TANF cash assistance to a single-parent household corresponded with an average $27 increase in that household’s monthly Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps) and SSI benefits. Because TANF’s federal funding is fixed, the resulting spending increase occurred in addition to, rather than substituting for, existing federal TANF spending. The paper’s analysis estimated that federal SNAP and SSI spending on single-parent households would have been $1.1 billion lower in 2014 had states maintained 1997-level TANF benefits and eligibility rules.⁷

Open-Ended Financing Still Invites Cost-Shifting

The incentives for states to expand eligibility and spending on open-ended entitlements at the cost of federal taxpayers remain in place today, particularly in SNAP and Medicaid.

Many states use TANF as a mechanism for expanding SNAP eligibility far beyond congressional intent. Broad-based categorical eligibility (BBCE), a policy used by 43 states and the District of Columbia, allows a household that receives minimal TANF-funded benefits, including informational pamphlets and hotline referrals, to automatically qualify for food assistance. Through BBCE, states can raise gross income limits up to 200 percent of the federal poverty level, and raise, or even eliminate, countable asset limits, when determining SNAP eligibility for applicant households.⁸ Because SNAP benefits are currently 100 percent federally funded, BBCE allows state policymakers to capture the political rewards of appearing generous to their constituents through benefit expansions at the cost of federal taxpayers.⁹ The Republican Study Committee estimated that expanded SNAP enrollment of otherwise ineligible households due to states’ use of BBCE will cost federal taxpayers $100 billion over the next decade.¹⁰

Medicaid follows a similar pattern. Like the old AFDC program, Medicaid operates on a matching grant system, with federal taxpayers matching between $1 and $9 for every dollar states spend on the program. This financing model makes Medicaid structurally prone to waste, fraud, and abuse, and incentivizes states to exploit the matching grant system through financing schemes that shift financial responsibility for the program to federal taxpayers.¹¹ The incentive to maximize federal matching funds has also encouraged states to use Medicaid to pay for services that other welfare programs, or beneficiaries’ cash benefits or earned income, might otherwise cover. Twenty-five states, for example, use Section 1115 waivers to fund “social determinants of health,” nonmedical factors believed to influence health outcomes. States have used these waivers to pay for housing assistance, groceries, non-medical transportation, and other services with Medicaid funds that have little connection with the program’s purpose of providing medical care to low-income households.¹²

The Path Forward After Welfare Reform

Congress should build on the success of the 1996 welfare reforms by implementing transparent, predictable budget constraints into other welfare programs, ensuring that state legislators confront more of the costs and trade-offs of their policy decisions.

Legislators could begin by replacing the open-ended federal financing of Medicaid and SNAP with fixed federal allotments, such as block grants. This would give states greater flexibility over program design while limiting states’ ability to shift the fiscal consequences of enrollment and benefit expansions onto federal taxpayers. A state electing to provide assistance beyond that state’s federal allotment would finance the incremental cost from state revenues. Over time, this would align program size more closely with state priorities while placing greater fiscal responsibility with the governments that administer welfare programs.

Congress brought structural reform to one welfare program, but did not reform the welfare system, in 1996. Congress should use the next generation of welfare reforms to finish the job.

Sincerely,

Romina Boccia
Director, Federal Budget and Entitlement Policy
Cato Institute