March 18, 1991
"When Working Produces No Gain -- Or Even Worse"
San Jose Mercury News
By Timothy Taylor
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HOW MANY hours would you work if you had to pay for the satisfaction of holding
a job? The question isn't hypothetical for California welfare recipients, who
may literally reduce their spendable income by working.
The table at right, taken from a recent issue paper by the non-partisan Legislative
Analyst's Office, illustrates the point for a hypothetical single-parent family
with two children.
The first column gives monthly before-tax income of the family's wage-earner
-- think of it as the monthly paycheck. The second column lists spendable income,
once welfare payments and food stamps are added and federal taxes are subtracted.
The third column then shows the added spendable income from working, as opposed
to not working at all.
If the wage-earner in this family chooses not to work at all, the family will
receive $852 in spendable income from Aid to Families with Dependent Children
(AFDC) and food stamps.
If the wage-earner found a full-time job at slightly above the minimum wage
and grossed $800 per month, the family's spendable income increases only $99.
The increase is so small for three main reasons. First, the family doesn't keep
all of the $800; it pays Social Security taxes. Second, AFDC and food stamp benefits
decline as earnings increase. Third, the wage-earner now faces work-related expenses
for transportation and child care, which reduce spendable income still further.
More is Less
Working full-time for a gain of $100 per month in spendable income may seem a
miserable enough prospect, but matters get still worse. Imagine that the wage-earner
is eventually promoted to a job paying about $7.20 an hour, or $1,200 per month.
The promotion means that the family is no longer eligible for AFDC or for food
stamps, but is now eligible to begin paying income taxes in addition to Social
Security taxes. Because of these adjustments, the family's spendable income actually
declines to $714; they are worse off than before the promotion, worse off than
if the wage-earner had not worked at all!
In fact, even if our intrepid wage-earner managed to come up with a job paying
$8.40 an hour, or $1,400 per month, the family would find that its spendable income
is essentially the same as with no earned income at all.
Of course, a complete analysis of the family's situation might include the
value of other public assistance programs -- the medical care provided through
Medi-Cal, housing assistance, school lunches, and so on -- along with the impact
of state income and sales taxes.
But including these factors would only mean that the prospective wage-earner
below the poverty line would face losing even more in welfare benefits and paying
even more in taxes by going to work, making the disincentives to work even greater.
Clearly, this system needs changing. What might be done to provide greater
work incentives to California welfare recipients?
In his most recent budget, Gov. Pete Wilson proposes reducing AFDC benefits for
households earning less than $375 per month. One reason for this cut is the state's
budgetary crunch, but Wilson has also argued that the reduced welfare will also
provide a heightened work incentive.
But while those families with almost no earnings would get less state support,
not much would change for poor families with more than $375 in earnings. By working,
they would still gain almost no income, and sometimes even lose ground.
A second possibility is to expand California's GAIN program. GAIN stands for
Greater Avenues for Independence, and it requires most welfare recipients (except
those who have children under the age of 3) to participate in education and job-training
as a condition of receiving welfare. It sounds good, but GAIN is a relatively
new program, and even the preliminary results about its effectiveness will not
be available until October.
Moreover, GAIN doesn't affect the existing disincentives to work. Even if GAIN
found a job for a parent with two kids that paid $1,400 per month, the parent
would have no financial incentive to take or keep the job.
The ultimate solution to the work disincentives of welfare would involve having
the government re-evaluate all its welfare and tax programs, with the goal of
assuring that every time a poor person earned a dollar, her spendable income increased.
The analysis would also have to consider the value of benefits like medical insurance
through Medi-Cal, which aren't received in a cash form, but are surely important
to parents with children.
From California's viewpoint, however, that answer is unhelpful. It would require
comprehensive federal implementation, which isn't even a speck on the horizon.
In addition, reducing government benefits more slowly (or increasing taxes more
slowly) would cost money which neither the state nor federal government has.
But California's monthly AFDC caseload has been climbing about 1 percent faster
than the growth of the population during the 1980s, and it is now at 750,000.
The number of months that AFDC is received is also rising.
Even though California doesn't have the power to solve the welfare trap, it
has to suffer the consequences.
|STATE'S WELFARE TRAP
|As earnings increase, welfare payments decrease and taxes rise.
The result is that working may produce only a small gain, or even a loss. All
figures are per month, based on a single parent with two children.
Source: Legislative Analyst's Office, "California's AFDC Program: Current
Trends, Issues, and Options," Feb. 13, 1991.
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