The United States Means-Tested Welfare System
Is the means-tested welfare system working?
To answer that question, we need to start with a broad overview of a means-tested welfare system. Investopedia describes it as a system that checks whether the applicant needs aid before allocating them aid. In the real world, this often means confirming whether someone is above or below an income threshold, which is defined as the federal poverty line in the US. Robert Rector and Vijay Menon of the Heritage Foundation explain in their 2018 report that the means-tested welfare system costs $1.1 trillion — nearly a third of the federal budget — and encompasses 79 federal programs, including Medicaid (which is specific to the disadvantaged in contrast to Medicare, which is not), SNAP (Supplemental Nutrition Assistance Program), TANF (Temporary Assistance for Needy Families), and Social Security, among others. Sizeable programs like Medicaid impact tens of millions while others are much more limited.
From Republican talking points like the welfare trap to Democratic views regarding aid for the poor, arguments for and against the welfare state take political tones. It’s hard to navigate to an unbiased and informed opinion. Let’s break down some of the arguments against the welfare state.
The first is the claim that the welfare state’s time limits and work requirement policies create disincentives rather than incentives to work. The CRS reports that welfare programs, especially the SNAP program, require people to “register for work and accept a suitable job if offered one in order to gain or retain eligibility for benefits.” However, this requirement increases the likelihood that the job chosen is the first job recipients find, which is often low-paying. Additionally, programs like SNAP and TANF have a time limit for aid, which is supposed to promote job searches but creates a disincentive to search for better-paying, rarer jobs and an incentive to settle for low-paying jobs. This problem isn’t likely to be solved soon, as work requirements can’t simply be eliminated because then no one would work, and recipients would live off their benefits. Welfare is not an easy system to reform.
The second argument is known as the welfare trap. It states that as people in welfare do better economically, their taxes increase exponentially while at the same time, welfare benefits are phased out, disincentivizing them from rising out of the welfare state. Jeffrey Dorfman from Forbes explained in 2016, “As income approaches the poverty line and rises above it, families on welfare programs can face effective marginal tax rates of 50 or 60 percent.” To put that in comparison, the effective tax rate of those in poverty is 11%. People would not seek promotions “because the higher earned income isn’t worth it given the losses they face from taxes and lost benefits.” Consider a single mother who gets a job paying five dollars per hour for eight hours of work for a total of forty dollars in income. Half of that goes to welfare, leaving twenty dollars for use. If the government imposes taxes on the money, at say 15% (six dollars), and there are extra child-care and commuting costs to take into account, she is now worse off than before getting the job. The situation, when framed with this perspective, seems to have been designed to fail Americans, but it’s important to recognize that there have been no studies conducted on the welfare trap, so it’s hard to tell if the argument is valid or simply a product of Republican pundits.
Finally, many point to the relatively consistent poverty rate to argue against the welfare system. Despite large increases in funding from the 1990s to 2000s, poverty has not fallen proportionally, as per the graph above. The excessive bureaucratic costs of the means-tested welfare system also evoke criticism as reallocating taxpayer money is another common campaign slogan. Ironically, Republican states are only setting in stone a cycle they started by imposing stricter requirements for welfare registration. Thus, the ineffectiveness of welfare should come as no surprise.
However, there are also buckets of statistical evidence indicating that means-tested welfare does work. Julia Wolfe of the Economic Policy Institute explained in 2018 that the means-tested welfare system kept 28 million people out of poverty. A study by the Center of Budget and Policy Priorities found that “Federal assistance lifted 40 million people out of poverty in 2011, including almost 9 million children…[and] Medicaid provided access to affordable health care to 66 million Americans in 2010.” Recent statistics from the United States Census Bureau estimate that poverty has decreased by 4.3% since 2014, even though it did not in the 1990s and 2000s. Still, this does not mean the means-tested welfare system is adequate; the decline in poverty could be a temporary fluctuation. It’s easy to prove correlation with the system but difficult to prove causation. The recent increase also doesn’t explain why welfare was ineffective at lowering poverty in previous years.
There is ambiguity regarding the welfare system’s effectiveness because it’s not clear whether the welfare system lifts Americans out of poverty or keeps them hovering above the poverty line before pushing them back in.
These are just semantics, though, and we need to look at the bigger picture. As Lexington Law explains, “Although a $1 trillion a year budget may seem large at first glance, the current welfare program consisting of 79 separate programs supporting 21 percent of Americans puts the large problem of poverty into perspective. Without any government safety nets, those living in poverty would not have the proper help to survive or tools to get back on their feet.” Even if the means-tested welfare system isn’t effective, what is the alternative? To cut millions of people from assistance with no support? At the bare minimum, the welfare state is preventing these millions from starving. Whether or not that is enough depends on your point of view.
An interesting question to consider is the possible replacement of the means-tested welfare system with a UBI (Universal Basic Income). The proposal consists of a monthly $1000-payment to each American. Would it be better than the current system? Well, that’s a whole other question to consider and another article to write.
