When you hear the term “welfare state,” most people think of Europe and countries like Denmark or France. No doubt those countries offer a wide range of benefits targeted to the middle class, retirees and so forth.
But according to a study recently released by the Cato Institute, someone who is poor might just be better off in California.
The federal government currently funds more than 100 anti-poverty programs. While no one participates in all of them, many can and do collect assistance from multiple programs.
In California a mother with two children under the age of 5 who participates in these major welfare programs — Temporary Assistance for Needy Families, Supplemental Nutrition Assistance Program (food stamps), housing assistance, home energy assistance, Special Supplemental Nutrition Program for Women, Infants and Children — would receive a benefits package worth $30,828 per year.
By creating such a big disincentive for work, our tangled, ineffective welfare system can harm the same low-income people it is supposed to help.
Using a similar measure, Cato found that benefits in Europe ranged from $38,588 per year in Denmark to just $1,112 in Romania. The California benefits package is higher than in well-known welfare states as France ($17,324), Germany ($23,257) and even Sweden ($22,111).
In fact, California’s welfare system can be more generous than every country included, except Denmark. Moreover, this benefit package doesn’t include Medicaid, which would be worth roughly $4,459 for this household.
One of the problems with these welfare systems is that they can create situations where participants have little incentive to increase work effort because they would lose most of their earnings through lower benefits or higher taxes, while also having to bear the costs, like transportation, associated with going to work. These people would see little tangible improvement in their standard of living by taking up a job, working more hours or moving up the job ladder.
People in these programs are not lazy, but they also are not stupid. Like everyone else, they respond to incentives. If welfare pays better than work, people on welfare will be less likely to work.
Indeed, economists often discuss the danger that high marginal tax rates can discourage economic activity. But some of the highest effective marginal tax rates in the world are for someone leaving welfare for work.
By creating such a big disincentive for work, our tangled, ineffective welfare system can harm the same low-income people it is supposed to help, in addition to the taxpayers who must fund nearly $1 trillion per year in anti-poverty spending. After all, the evidence strongly suggests that work, even in a low-paying entry-level job, is an important route out of poverty: Fewer than 3 percent of Americans who work full-time are poor.
Many European Union countries have recognized some of these problems and begun to reform. For example, several countries have consolidated multiple programs in their patchwork welfare systems. In many cases, these reforms are tentative, but they are steps in the right direction.
In that sense, despite the conventional wisdom that welfare in Europe is more expansive and entrenched than in the United States, at least some of these countries are farther along in recognizing some of these problems and taking steps to address them.
California has not had a good record helping low-income people transition to work in the past, but in one positive development the state recently introduced a state level Earned Income Tax Credit targeted toward very low-income households, making work a more attractive option for them.
Unfortunately, the positive developments end there: California exempts able-bodied adults without dependents from SNAP’s work requirements, and these cases comprised almost a quarter of participating households in 2013. It’s also one of the few states without mandatory job search at application for TANF, and almost 80 percent of TANF cases with work-eligible adults had no earned income in fiscal 2013.
While a state EITC will make work more attractive for those affected, other aspects of California’s welfare system continue to fall short in helping people transition to self-sufficiency.