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January 19, 1992
"The Look of Real Reform"
San Jose Mercury News

By Timothy Taylor
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CONTRARY to popular belief and some of the rhetoric emanating from Gov. Pete Wilson's office, the level of welfare payments has almost no effect on the work incentives of recipients.

What does make a difference, though, is how much a welfare recipient can improve his or her standard of living by taking a job. That may sound like the same thing, but it's not. Consider the distinction with care, because it is central to understanding what real welfare reform would look like.

If welfare recipients lose a dollar's worth of benefits every time they earn a dollar, then the incentive to work is nil. If the recipients lose less than a dollar of benefits -- say, only 50 cents -- every time they earn a dollar, then there is an incentive to work. Thus, the work incentive is not solely related to whether the level of benefits provided to those who do not work is high or low. Wilson has proposed cutting payments under Aid to Families with Dependent Children, the main welfare program, by 10 percent, and then cutting payments by 15 percent more for able- bodied recipients on AFDC more than six months.

As just explained, cuts in the level of payments, taken alone, do almost nothing for work incentives. In California, as in every state, AFDC, food stamps, Medicaid, and other payments are all reduced when a welfare recipient earns other income. This is the "welfare trap": When the additional income from working is compared to the lower welfare benefits (and the costs of working), it makes little economic sense to work.

To Wilson's credit, his plan recognizes the welfare trap, at least to a limited extent. It allows welfare recipients to earn some income without having AFDC benefits reduced at all.

A single mother with two kids who has just started on welfare, for example, could earn $100 a month without suffering any cut in AFDC. If she was on welfare for more than six months, and her payments had been cut the additional 15 percent, she could earn up to $190 per month without having AFDC benefits reduced. At a job paying roughly minimum wage, it would take four to eight hours worked per week to earn these amounts.

But for any amount this mother earned that exceeded $100 (or $190) per month, welfare payments would still decline by about $1 for every additional $1 earned, even under Wilson's plan.

Now, offering people a chance to earn money to offset a cut in welfare payments is clearly better than not offering them a chance to earn the money. But even if welfare recipients respond to the incentive to work four to eight hours, the welfare trap then immediately kicks in and they have no incentive to work more. In addition, jobs are hard to come by in a recession.

A more fundamental problem is that about half of those on AFDC at any point in time will be on welfare for eight or more years. The other half of the welfare caseload, however, consists of people who are falling into welfare for a time and then climbing out, mainly for reasons such as divorce and marriage, or births and children leaving home, as shown in the table at left.

What would a welfare reform truly oriented toward work incentives look like? First, the concept of welfare reform must be broad enough to include any program of continuing education or job placement. Wilson recognized this need by not proposing any cuts in the GAIN program, which is aimed at helping welfare recipients complete their education or get jobs. In addition, a program to offer child care for pregnant teens on AFDC, so they can finish their education, is scheduled for a significant increase.

A second step would be for Wilson to rethink his welfare initiative. Instead of offering an economic incentive to work four to eight hours, but no more, why not offer some additional incentive to work 10 or 15 or 20 hours per week?

Additional steps toward welfare reform would require federal action to coordinate the incentives of all programs for the poor -- AFDC, food stamps, Medicaid, school lunches and everything else. In particular, as long as poor parents know that they need to be on welfare to make sure their children have medical insurance through Medicaid, they have little incentive to seek out jobs.

None of these changes necessarily implies lower (or higher) welfare benefits for those without jobs. Instead, they focus on whether welfare recipients have the skills, opportunity and incentives to work.

Using data compiled from surveys, the Ways and Means Committee of the U.S. House of Representatives compiled these reasons for why people go on welfare and why they no longer need assistance.

Divorce/separation 45%
Childless, unmarried woman has a child 30%
Earnings of female head of household fall 12%
Earnings of others in family fall 3%
Other 10%
Marriage 35%
Children leave parental home 11%
Earnings of female head of household rise 21%
Earnings of others in family rise 5%
Child support, or other income source, increased 14%
Other 14%

Source: 1991 Green Book, Background Material and Data on Programs Within the Jurisdiction of the Committee on Ways and Means, May 7, 1991.

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