Welfare Cliffs...

Here's a beautifully simple illustration (click to enlarge) of the problems caused by the “welfare cliffs” (reductions in welfare benefits triggered by earned wages).  This is worth studying, as an example of public policy with unintended consequences (at least, I sure hope they were unintended!).

The example on the chart below starts with a single mom earning (through a job) $29,000 a year.  She also qualifies for several kinds of welfare payments, which (added to her wages) brings her net income and benefits to over $57,000 a year.   Now consider what happens if she gets a raise to $32,000 a year in wages: the welfare payments she qualifies for drop steeply (the “welfare cliff”), and her total income and benefits drop to about $50,000 a year.  So...she gets a raise of $3,000 a year, but gets a total income cut of over $7,000 a year.  If you were in that single mom's place, would you ask for a raise?

The example in the chart below illustrates a slightly different point.  That same single mom would have to get a raise from $29,000 to over $69,000 before she saw higher net income and benefits. This happens from a combination of two factors: the previously described “welfare cliffs” and our progressive income tax system that confiscates larger percentages of your income as you make more.

Only the stupid welfare recipients are going to try to earn more, to make a successful career.  All the smart ones have the game figured out: you win by making between about $20,000 and $29,000 in wages.  Anything more than $29,000, you lose.  The winners coast along, taking in those nice, free welfare dollars...

What's the solution?  It isn't hard.  Design our tax code and welfare system such that no matter what situation someone is in, if they earn a dollar more in wages, an interesting percentage of that goes into their pocket.  Better yet: do away with the welfare entitlements altogether, and turn it back into what it was originally intended to be: a safety net.  There are many ways to accomplish this, but perhaps the easiest one is what some other countries already do: gradually reduce the amount of welfare over time...