Child poverty is an issue that is often discussed both in the media and by policymakers. Unfortunately, the many faulty assumptions surrounding this issue lead to misdirected responses. These faulty assumptions include the following:
- The welfare state in the U.S. is small;
- Welfare benefits are meager and insufficient;
- Due to a lack of government support, poverty and deprivation are widespread;
- Welfare substantially penalizes work, trapping families in poverty; and
- Raising the minimum wage is an effective strategy for reducing child poverty.
Myth #1: The Welfare State in the U.S. Is Small.
The first faulty conception about the means-tested welfare system is that it is small. One reason for this misconception is that welfare is often discussed one program at a time rather than as an entire system. Means-tested welfare programs are scattered across numerous government agencies, making it easy for the large size of the welfare system to be hidden. Nowhere in government budgets is welfare spending presented in total.
In reality, the U.S. welfare system is enormous. The federal government operates over 90 means-tested welfare programs that provide cash, food, housing, medical care, and targeted services to poor and lower-income Americans. In 2014, federal and state governments spent over $1 trillion on these programs; 90 percent of this spending, or $924 billion, went to cash, food, housing, and medical benefits. (Social Security and Medicare are not included in this count.)
Approximately 50 percent of means-tested welfare spending goes to low-income families with children. Cash, food, and housing spending alone on those families in 2014 came to $222.8 billion. When medical care is added, the total came to $402.2 billion.
Most means-tested welfare spending is allocated among lower-income families, defined as those with pre-welfare incomes below 200 percent of the federal poverty level (FPL). For a family of four in 2015, 200 percent of the FPL equals $48,072.
In 2014, about 40 percent of all families with children, or 15.3 million families, had pre-welfare incomes below 200 percent of the FPL. If the $223 billion in means-tested cash, food, and housing spending on families with children were spread evenly among these low-income families, the average benefits would come to $14,575 per family. If medical care were added, the average would be $26,885 per family. Moreover, only a tiny portion of these families rely on welfare aid alone; most combine welfare with earnings or other sources of income.
The Poverty Gap. Another way to judge the size of the welfare state is to compare total spending to the pre-welfare poverty gap for families with children. The pre-welfare poverty gap is the total amount of money needed to raise every poor family’s income up to the federal poverty threshold. In 2014, the pre-welfare poverty gap for families with children was $86.3 billion. In other words, it would take $86.3 billion to raise the income of every poor family with children up to the poverty level.
At $222.8 billion, means-tested cash, food, and housing spending was two and a half times the amount needed to eliminate all poverty among families with children. At $402.2 billion, cash, food, housing, and medical spending was almost four and a half times the amount needed to eliminate all poverty among children.
However, the U.S. Census Bureau informs us that in 2014, there were nearly 15 million children in America living in poverty. How can government spend these enormous sums and still have 15 million children in poverty? The answer is simple: The Census counts a family as “poor” if its income falls below the official poverty income thresholds, but of the $402.2 billion spent on cash, food, housing, and medical care for families with children, the Census counted only $11.9 billion as “income” for purposes of measuring child poverty. When the Census Bureau informs the public that 15 million U.S. children are poor, it is important to understand that nearly all of the welfare state is excluded from that calculation.
Does All the Money Go to Bureaucracy? One conservative misconception about welfare is that the welfare state is large because of bureaucratic cost. According to this view, federal and state bureaucracies absorb most welfare spending, and very little reaches the poor. This is untrue. On average, administrative costs are less than 10 percent of means-tested cash, food, housing, and medical spending. More than 90 percent of this spending reaches low-income families as benefits.
The welfare state is expensive not because bureaucracy swallows the funds but because the welfare system provides very generous benefits to tens of millions of families. The real problem in welfare is not bureaucratic inefficiency but the “moral hazard” of existing welfare programs’ tendency to discourage self-support through work and marriage.
Myth #2: The Level of Welfare Benefits Is Meager.
A second, related misconception is that the amount of welfare benefits that households receive is meager. Since the welfare system is much larger than most imagine, so too are the benefits that households receive.
Consider a single mother who has two school-age children and has worked full-time for 52 weeks in the year at the federal minimum wage of $7.25 per hour. (The overwhelming majority of single parents actually work at a higher wage rate.) This mother would receive $13,853 in annual post-tax earnings. Based on earnings alone, this mother’s income is well below the official fiscal year (FY) 2015 poverty income threshold of $19,096 for a family of three.
But this mother would also be eligible for basic means-tested benefits including the Earned Income Tax Credit (EITC); the Additional Child Tax Credit (ACTC); food stamps; school lunch; and (in some cases) school breakfast benefits. As Chart 2 shows, in addition to $13,853 in post-tax earnings, the mother would receive $5,548 in cash benefits through the EITC and $1,800 cash benefits through the ACTC. The family would also get $3,974 in food stamp benefits and $1,269 in school lunch and school breakfast benefits. The combined value of earnings, cash welfare, and food benefits would come to $26,444, nearly 40 percent above the official poverty level. Counting both earnings and benefits, the effective hourly wage rate would be $12.71 per hour.
Income would be even higher if the mother earned a more typical wage of, say, around $9.00 per hour. Assuming the mother worked full-time through the year, post-tax earnings would come to $17,547. Cash and food benefits would raise combined income substantially to $28,705, or 50 percent above the official poverty level. The effective wage rate would be $13.80 per hour.
Adding Medical Benefits. In a Medicaid non-expansion state, both children would be eligible for Medicaid. The average cost to the taxpayer of the medical benefits provided per child would be $2,807. On average, the combined cost of the two children would be $5,614. When post-tax earnings of the minimum-wage worker, cash welfare, food aid, and medical benefits are combined, the sum would be $32,057. The effective wage rate for benefits and wages combined would be about $15.40 per hour.
In a Medicaid expansion state, both the children and the parent would be eligible for Medicaid. The average cost to the taxpayer of the medical benefits provided to the parent would be $4,391. The combined average benefits for a parent and two children would be $10,005.
As Chart 3 shows, when post-tax earnings of the minimum-wage worker, cash welfare, food aid, and medical benefits for the children and parent are combined, the sum would be $36,449, which is nearly twice the official poverty level for the family. The effective wage rate would be more than $17.50 per hour.
Do Low-Wage Families Actually Access Basic Benefits? Critics on the left might argue that the fact that the mother was eligible for these benefits does not necessarily mean she would apply for and receive them, but among families with children, the take-up rate of benefits is extremely high. (The take-up rate measures the ratio of the number of persons who receive benefits to the number who are theoretically eligible.) For example:
- The actual take-up rate of the EITC for adults claiming children appears to be over 100 percent. There appear to be more adults claiming the credit than there are families eligible for it.
- The food stamp take-up rate among single parents with children appears to be around 130 percent: The number of beneficiaries greatly exceeds the number of eligible families.
- The Medicaid take-up rate for low-income children is around 90 percent. There is a single enrollment process for Medicaid: If the children in a family are enrolled, the parent, if eligible, would be automatically enrolled as well.
- The take-up rate for free school lunches is also over 100 percent. On the other hand, only half of schools operate the school breakfast program; the benefits in the charts in this paper and the text have been prorated to reflect that fact.
Single-Parent Families with Housing Benefits. The welfare benefits included in Chart 3 represent the basic welfare package in the U.S. As noted, nearly all low-wage working parents with school-age children will receive benefits from the six programs described above.
However, many low-income families with children receive other benefits in addition to the basic package. The most important of these are rent subsidies provided by the U.S. Department of Housing and Urban Development (HUD). In 2015, some 1.6 million single-parent families received HUD rent subsidies. This represents about one-quarter of poor and near-poor single parents.
The most common type of subsidized housing is Section 8 benefits, which are generally distributed as vouchers. When Section 8 housing or other subsidized housing is added to the basic benefit package, the overall benefit stack becomes quite high. As Chart 4 shows, the combined earnings and benefits could reach $47,385 per year. The effective hourly wage rate is $22.78 per hour.
Myth #3: Due to a Lack of Government Support, Poverty and Deprivation Are Widespread.
Despite the massive spending and expensive benefits available to low-income families, the U.S. Census Bureau reports that in 2014, nearly 15 million children in America were living in poverty. How can government spend enormous sums and still have 15 million children in poverty? As noted, the answer is simple: The Census counts a family as “poor” if its income falls below the official poverty income thresholds, but of the $402 billion spent on cash, food, housing, and medical care for families with children, the Census counts only about $11.9 billion, or 3 percent, as “income” for purposes of measuring child poverty.
Thus, the government’s poverty measure says very little about the actual material living conditions of the poor. Examining other government data provides a very different picture of poverty in the United States. For example, the average poor household in the United States has air conditioning, a car or truck, cable or satellite TV, a computer, a cell phone, and (if the household has children) a video game system. They have enough to eat and are not undernourished. They live in comfortable housing that is in good repair and have more living space than the average non-poor person in Germany, France, Sweden, and the United Kingdom. The average poor household in the United States also reports that they have access to medical care when they need it.
Chart 5 provides data on the actual living conditions of the nearly 7 million families with children that the Census Bureau identifies as living in poverty. Over 80 percent have a car or truck, more than three-quarters have air conditioning, nearly two-thirds have cable or satellite TV, 61 percent have a computer, and half have Internet access in the home. Some 96 percent of poor parents report that their children were never hungry during the previous year due to a lack of food resources; only 4 percent of poor parents report that their children had been hungry at some point during the previous 12 months.
The large amount of money spent on government welfare programs helps to raise the material living conditions of low-income Americans, but because very little of this assistance is counted, the poverty measure continues to suggest that these individuals are “poor.” The misleading poverty measure thereby allows some policymakers to call for ever-larger amounts of government welfare spending.
Myth #4: Welfare Substantially Penalizes Work, Trapping Families in Poverty.
There are two common misconceptions about work and welfare. The first is that individuals who receive welfare and do not work will have higher incomes than those who do work. For example, it is sometimes asserted that in most states, welfare benefits pay more than a minimum-wage job. The apparent implication is that welfare recipients therefore have no financial incentive to take a job.
This assertion would be true only if welfare aid were eliminated when a job was taken, but this is not the case. In fact, welfare benefits will continue at roughly the same level for a parent who takes a low-wage job. While Temporary Assistance for Needy Families (TANF) and food stamp benefits do decrease as earnings rise, EITC and ACTC benefits rise; the two effects largely offset each other. As Chart 6 shows, basic welfare benefits begin around $22,000 when earnings are zero and remain at roughly that level as earnings rise to $16,000 per year. They decline slowly as earnings rise to $22,000 per year.
This means that taking a job will generate a very substantial gain in family income. When parental earnings are zero, basic welfare benefits for a mother with two school-age children are around $22,500. If a parent earns $10,000 per year, combined welfare and earnings will rise to $31,995. If parental earnings rise to $20,000, combined welfare and earnings rise to $39,000—twice the official poverty level.
In general, in the U.S. welfare system, families with children that receive welfare but have no parental employment have incomes below the poverty level. However, in most cases, families with even modest levels of parental work will have combined incomes from work and welfare that rise well above poverty.
A second, related misconception is that many families are caught in a “poverty trap” because the welfare system phases their welfare benefits down quickly when a recipient takes a job. According to this view, low-skill parents have little incentive to work their way out of poverty because each additional hour of work produces very little net gain in income. This is often referred to as the marginal tax rate (MTR) problem in welfare.
In fact, the problem is generated by the aggregate benefit reduction rates (BRR) in welfare programs rather than by taxes. A high BRR regime, for example, might mean that welfare benefits would be cut by 75 cents for every additional dollar of earnings. As a consequence, the recipient would gain little from his labor and would therefore have less incentive to escape from poverty.
In reality, for parental earnings between zero and $20,000 per year, the combined marginal rate of taxes and the welfare benefit reduction rate (MTR/BRR) is around 17 percent on average. For every dollar of earnings, the parent will have a net gain of around 83 cents. (This calculation is based on states with the Medicaid expansion. In a Medicaid non-expansion state, the MTR/BRR between zero and $20,000 in earnings is 21 percent on average, although there is a temporary dip in combined earnings and benefits in the income range where the parent loses Medicaid but has not earned enough to qualify for Obamacare benefits.) The welfare benefit reduction rate is kept very low in the zero to $20,000 earnings range precisely to ensure that low-wage parents will have a combined welfare and earnings package that rises well above the poverty level.
Chart 7 shows how the combined value of post-tax earnings and welfare benefits increases as earnings increase. As in Chart 6, the figures represent a single mother with two school-age children in a Medicaid expansion state. The X-axis represents pre-tax earnings, and the Y-axis represents the combined value of basic welfare benefits and post-tax earnings.
The dotted diagonal line on the chart represents points where combined post-tax earnings and benefits equal pre-tax earnings. This could be called the break-even line. At points along this line, benefits received equal taxes paid; for points above the line, benefits received exceed taxes paid; for points below the line, taxes exceed benefits. On the chart, the break-even point where benefits equal taxes is around $47,000 per year in pre-tax earnings. If earnings are less than that, benefits will exceed taxes.
When earnings rise above $22,000 per year, benefits are phased down fairly rapidly, falling to around $5,000 as earnings reach around $45,000. The phasedown of benefits in Chart 7 is apparent as the slope of the value of combined earnings and benefits rises slowly as earnings on the X-axis rise from $20,000 to $45,000. This effect is regrettable, but it occurs because it would be prohibitively expensive to extend welfare benefits farther up the income scale.
Thus, there are high benefit reduction rates in welfare, but they occur at the point where combined earnings and benefits are well above poverty. It is simply untrue that welfare benefit reduction rates in any sense trap families in poverty. At the point where welfare benefits begin to phase out (around $22,000 in earnings), families will typically have earnings above the poverty level and combined earnings and benefits that are nearly twice the poverty level.
It is inaccurate to claim that high welfare benefit reduction rates (or marginal tax rates) cause low-wage parents not to work or to work little. The more likely problem is that generous benefits may reduce the financial necessity of work or of full-time work.
Myth #5: Raising the Minimum Wage Is an Effective Strategy for Reducing Child Poverty.
One prominent strategy for reducing child poverty is to increase the minimum wage. For example, Melissa Boteach, Rebecca Vallas, and Eliza Schultz of the Center for American Progress argue that “[d]ecades of wage stagnation have trapped millions of working families in poverty…. At its current level, [the federal minimum wage] leaves a full-time worker with two children thousands of dollars below the poverty line.”
Statements like this and nearly all discussions about the minimum wage ignore welfare benefits. A parent who sought to support a family with a minimum-wage job alone would indeed be poor, but under the current welfare system, no parent is expected to support a family solely on minimum-wage earnings.
The system generously allows parents to combine earnings and welfare. It ensures that all parents, even the small number working at the federal minimum wage of $7.25 per hour, will have a combined income from earnings, welfare cash, and food aid that is well above the poverty level. When earnings, cash, food, and medical benefits are combined, the effective wage rate for a minimum-wage parent is typically $17.50 per hour. Even a parent who earns only $7,000 per year will typically have a combined income from wages, welfare cash, and food aid that is over the poverty line.
The high effective wage rate for earnings and welfare combined means that those families with children that are actually poor are poor because the parents work comparatively little during the year. For example, in the average family with children that is still poor after welfare benefits are counted, the parent or parents worked only around 640 hours per year. That is about 12 hours per week. Because the number of hours worked is so low, simply raising the wage rates for these families would not be an effective anti-poverty strategy. For example, adding $3.00 per hour to the wage earned by these parents would yield only $1,920 in added earnings per year; nearly all would remain in poverty.
Since these families can already earn at least $15.40 per hour in combined wages, food, and cash benefits, the key to reducing child poverty is to increase the amount of work the parents perform. This can be accomplished by increasing the work requirements attached to welfare benefits and by strengthening the economy to make more jobs available.
Raising the Minimum Wage Would Hurt Poor Families. Raising the minimum wage would actually push many families deeper into poverty by destroying the jobs they need to climb above the poverty level. When the government arbitrarily raises the wages of low-skill workers, businesses will hire fewer of those workers. The job-loss effects from an increase in the minimum wage will focus on the most vulnerable within the low-skill group.
For example, research by Joseph Sabia and Richard Burkhauser on increases in the minimum wage in the State of New York found that a 10 percent increase in the minimum wage resulted in a 7 percent job loss among workers ages 16 to 29 who lacked a high school degree. Among individuals aged 20–24 without a high school degree, a 10 percent increase in the minimum wage resulted in an 8.4 percent job loss. By contrast, the increase had no negative effects among high school graduates of the same age. Analyses that measure the impact of increases in the minimum wage across broad population groups will generally miss the serious negative effects among truly disadvantaged workers.
Professor Sabia has authored another article examining the impact of federal and state increases in the minimum wage on single mothers from 1992 to 2005. He found that minimum wages were ineffective in reducing poverty in this group. Most working single mothers were not affected because they were already earning wages above the minimum wage. However, the increases had a significant negative effect on the most disadvantaged group: single mothers without a high school degree. Within this group, “a 10 percent increase in the minimum wage was associated with an 8.8 percent reduction in employment and an 11.8 percent reduction in annual hours worked.”
These numbers imply that an increase in the federal minimum wage from $7.25 to $10 per hour could reduce employment of single mothers without a high school degree by one-third. Ironically, these are precisely the workers who should be the main target of any policy aimed at reducing child poverty. In reality, as a result of job loss, a minimum wage hike like this would result in a substantial increase in poverty for many of these mothers.
Of course, as this paper has shown, those low-skill single parents already have de facto, post-welfare wage rates well above the poverty level. What these parents need is more jobs, not wage rates that price them out of the labor market. A minimum wage hike is both unnecessary and counterproductive for reducing child poverty.
Poor Targeting. One final problem with raising the minimum wage as an anti-poverty policy is that very few minimum-wage workers are poor, even if welfare is not counted. Only 11 percent of the workers who would benefit from an increase in the minimum wage from $7.25 to $9.50 live in poor households. (This figure excludes most welfare benefits in calculating poverty; the number would be even smaller if welfare were counted.) Nearly two-thirds of those who would benefit from this increase actually live in households with incomes that are more than twice the poverty threshold.
The cost of higher minimum wages is generally passed on to consumers. The fact that few minimum-wage workers are poor means that for every dollar in added consumer costs produced by a hike in the minimum wage, only about 10 cents goes to the poor.
Six Strategies for Success
The goal of welfare policy should not be merely to reduce financial poverty by increasing cash incomes. Policy should also seek to enhance human dignity and psychological well-being and to promote upward social mobility among children. Often, simply transferring income through the welfare system can undermine these latter objectives.
Incomes can be increased and poverty reduced through three mechanisms: increased welfare, increased work, and increased marriage. Policies that focus primarily on welfare transfers will be inefficient at best. In a sound welfare system, welfare aid would complement and encourage, rather than displace, self-support through work and marriage.
Moreover, work and marriage do not just reduce poverty; they directly enhance dignity, psychological well-being, and upward mobility. For example, marriage rates in a community are the strongest factor promoting upward social mobility among children. A welfare system in which benefits complement and reinforce work and marriage not only will be more efficient in reducing poverty, but also will be far more effective in meeting deeper human needs.
Accordingly, policymakers should implement the following six strategies to reform the welfare system.
Establish work requirements in welfare. Traditional welfare programs such as food stamps and subsidized housing provide one-way handouts; they give aid to able-bodied non-elderly recipients without any requirement to work or engage in other constructive behavior in exchange. By offering income without labor, these programs encourage idleness and reduce the incentives to work. Ironically, while a combination of work and welfare will readily raise a family out of poverty, welfare alone will rarely do so. By encouraging idleness, these programs actually push families deeper into poverty.
Work requirements should be established or strengthened in welfare. Specifically, work requirements in the Temporary Assistance for Needy Families program should be strengthened to require that two-thirds of non-employed recipients engage in training, perform community service, or at least search for a job under supervision in exchange for their benefits. For parents who cannot readily find a job, TANF should emphasize community service work. Food stamps should be similarly reformed. Able-bodied non-elderly parents who have received food stamp benefits for over three months and who are not currently employed should be required to undertake training, community service, or at least a supervised job search in exchange for benefits. Representatives Jim Jordan (R–OH) and Mark Meadows (R–NC), with leadership in the Senate from Senator Mike Lee (R–UT), have introduced the Welfare Reform and Upward Mobility Act (S. 3047; H.R. 5360), which embodies these principles.
Reform the Earned Income Tax Credit. The Earned Income Tax Credit and related Additional Child Tax Credit are superior to other welfare programs because recipients are required to work in order to receive benefits. Last year, however, some $22 billion in fraudulent and erroneous cash payments were made under the EITC and ACTC welfare programs. Much of this fraud involves activities to circumvent the programs’ work provisions. Fortunately, nearly all of this waste can be eliminated by requiring that incomes and identities be verified before cash payments are made and by limiting eligibility to adults with legal custody of a child.
Another problem is that EITC work incentives are hampered because the value of the credit is not linked to actual hours worked. A parent who works all year at $10 per hour gets the same credit as a parent who works for half a year at $20 per hour.
The EITC benefit scales should be adjusted so that their value increases as the number of hours worked increases while not increasing overall spending on the program. This approach would target resources more effectively toward low-wage families who need the most help. It would also allow the maximum EITC benefit to be increased for low-wage parents without increasing overall program costs.
Limit excessive piggybacking of means-tested benefits. Benefits can become very high and benefit reduction rate issues intensify when additional welfare benefits are added on top of the widely available basic benefit package shown in Charts 2, 3, 6, and 7. This is particularly true of housing rental benefits. In contrast to broadly available entitlement programs such as the EITC, food stamps, Medicaid, and school nutrition, subsidized housing is a rationed program that is available only to a limited number of families. Housing benefits are particularly expensive; as shown in Chart 4, receipt of housing aid can easily push a family’s combined earnings and welfare income to more than $47,000 per year.
As with other welfare programs, there should be a work requirement on able-bodied adults receiving housing aid. In addition, there should be a limit on the number of welfare benefits a family can stack on top of each other. In particular, families that receive housing aid should not also receive the EITC and ACTC.
Don’t destroy jobs. Over the past 20 years, the U.S. has moved tentatively toward a work-based welfare system. In that system, able-bodied parents are not expected to support their families by welfare alone. Welfare benefits by themselves rarely are sufficient to raise a family out of poverty. By contrast, a combination of steady work and welfare will readily lift even low-wage parents out of poverty. For a work-based system to be successful, ample jobs must be available to the lowest-skilled parents.
Seen in this light, raising the minimum wage is counterproductive. When welfare and earnings are combined, the effective wage rate for minimum-wage parents is already around $17.50 per hour. To reduce child poverty effectively, what is needed is more parental work, not higher wages. Ironically, raising the minimum wage will reduce the number of jobs available to low-skill parents, thereby pushing many families deeper into poverty.
Limit low-skill immigration. Both legal and illegal immigration bring a disproportionate number of less-skilled workers into the U.S. For example, half of illegal immigrants lack a high school degree. Overall, there are around 8 million illegal immigrant workers in the U.S. and about 17 million legal immigrant workers. About three-quarters (74 percent) of illegal immigrants between 25 and 64 years of age have a high school education or less, and about half (46 percent) of legal immigrants have a high school education or less. These immigrant workers reduce wages for low-skill native workers. Low-skill immigrant labor also displaces low-skill native workers, leading to unemployment and detachment from the labor force.
The decline in employment of lower-skill black workers is particularly troubling. Between 1960 and 2000, the employment rate of black high school dropouts fell catastrophically from 72 percent to 42 percent. A recent paper by prominent Harvard economist George Borjas and others found that an increase in lower-skill immigrant labor led to a substantial drop in wages and employment among similar skilled blacks and a noted increase in black incarceration.
Specifically, a 10 percent increase in immigrant labor within a particular skill group led to a 4.0 percentage point drop in wage rates, a 3.5 percentage point drop in employment, and a 0.8 percentage point increase in incarceration among blacks with similar skills. Overall, the surge in low-skill immigration between 1980 and 2000 accounted for 40 percent of the large drop in low-skill black employment without a high school degree during that period. Job loss and lower wages among male workers lead in turn to lower marriage rates, lower upward mobility, and higher child poverty.
Low-skill immigrants also impose heavy fiscal costs directly on U.S. taxpayers. For example, legal immigrants without high school degrees have the highest level of welfare use of any group in the country. The average household headed by a legal immigrant without a high school degree receives nearly four dollars in government benefits for every dollar of taxes paid. Each household, on average, imposes a net cost (total benefits received minus total taxes paid) of nearly $37,000 per year on the taxpayer. To save taxpayer cost and to reduce child poverty in the U.S., the number of low-skill immigrants who enter the country, either legally or illegally, and compete with less skilled American workers should be strictly limited.
Reduce marriage penalties. Around 70 percent of child poverty occurs in single-parent families. Children in single-parent homes are about five times more likely to be poor than are children in married-couple homes. Most non-married fathers are employed and typically have higher incomes than the children’s mothers. If poor single mothers were married to the fathers of their children, about two-thirds would immediately be lifted out of poverty.
Marriage provides benefits beyond mere finances. Research consistently demonstrates that married adults are physically and emotionally healthier than non-married adults. A healthy marriage is one of the two most important factors contributing to personal happiness. As noted, family structure is also the most important factor in predicting the upward social mobility of children; children with two parents do best.
Unfortunately, the welfare system imposes substantial financial penalties on low-income parents who marry. This in turn reduces the marriage rate. A recent study found that an anti-marriage penalty of $1,000 in the EITC reduced the probability that low-income women would marry by 10 percent. Marriage penalties should be eliminated in the EITC and reduced in other welfare programs.
The foundational principle of a sound welfare system is that benefits should complement and reinforce efforts toward self-support through work and marriage rather than weakening or displacing those efforts. A welfare system that melds assistance with an individual’s self-help efforts is more efficient, is more humane, and confers greater dignity on the beneficiary.
Over the past two decades, the U.S has moved tentatively toward a work-based welfare system. Families with work and earnings are much better off than are families without work. In most cases, a combination of full-time employment (even at low wages) and benefits will place a family income well above the official poverty level. Families with children that remain in poverty do so because the parents either do not work or work for only a limited number of hours during the year.
Efforts to reduce child poverty should focus on increasing parental work and marriage. This can be done by tightening work requirements in programs such as Temporary Assistance for Needy Families, food stamps, and the Earned Income Tax Credit. Stronger economic growth would increase employment opportunities, and limiting low-skill immigration, both legal and illegal, would make millions of jobs available to less-skilled American workers. In addition, penalties against marriage in the welfare system should be reduced. Finally, raising the minimum wage is a misguided policy that would push the many disadvantaged families with children deeper into poverty by eliminating the jobs that low-skill parents need to sustain their families.
—Robert Rector is a Senior Research Fellow in the Institute for Family, Community, and Opportunity at The Heritage Foundation. Rachel Sheffield is a Policy Analyst in the Richard and Helen DeVos Center for Religion and Civil Society, of the Institute for Family, Community, and Opportunity, at The Heritage Foundation.
Appendix 1: Benefit Calculations
In the calculations presented in this paper, the family is assumed to receive only earned income and means-tested benefits. The family is assumed to have no income from interest, dividends, or other unearned income sources. It does not receive Social Security or other retirement or disability benefits.
The means-tested benefits are calculated as follows:
TANF. The analysis follows the rules of the State of Iowa, which uses the most common method but also has “standard of need” and payment standard values that are close to both the median and mean of all the states. In 2014, the monthly median payment standard for all states was $428 for a family of three, and Iowa’s standard was $426. In addition, Iowa’s standard of need for a family of three was $849, which was virtually the median of states that utilized a standard of need. These numbers compare well to a report submitted to Congress that showed that the average monthly TANF cash benefit for a family of three with no other income was $436 per month or $5,232 per year in 2011.
TANF benefit reduction rates also vary by state. The analysis in this paper assumes that the benefits phase out by deducting 50 percent of earned income, which is both the median and mode of the states that phase out benefits with a percentage reduction on the remainder of earned income after an earned income disregard is deduced.
Food Stamps. The maximum food stamp allotment for a family of three in 2015 was $511. The value of the maximum food stamp allotment is reduced in response to earnings and TANF income according to standard rules. Food stamp recipients are assumed to have shelter costs equaling the higher of 50 percent of national fair market rent or 30 percent of pre-tax earnings and TANF benefits. When shelter costs exceeded 50 percent of countable income, costs in excess of 50 percent were deducted from net income.
School Nutrition Benefits. The $498-per-child average cost of a free school lunch was calculated from the average cost per meal in school year 2015–2016 times the average utilization rate of 164.5 meals per year. Both school-age children were assumed to receive income-appropriate school lunch subsidies. The $273-per-year average cost of free school breakfast subsidies was calculated from the average cost per meal in school year 2015–2016 times 167 meals per year. Only half of low-income school children receive school breakfast subsidies, so only one of the two children was assumed to receive the benefit. Children in families with incomes below 130 percent of the federal poverty level were assumed to receive free school meal subsidies; those with family incomes between 131 percent and 185 percent of poverty received reduced price meal subsidies, and those above 185 percent received lower paid meal subsidies.
Medicaid and SCHIP. The national average costs of medical services per enrollee in 2013 were $4,391 for each non-elderly, non-disabled adult and $2,807 per child. Nationwide, the average single mother with two children enrolled in Medicaid therefore received $10,005. Charts 3, 4, 6, and 7 in the text are based on Medicaid expansion states. In Medicaid expansion states, parents are eligible for Medicaid until pre-tax earnings reach 137 percent of the FPL. Based on average eligibility standards in these states, the two school-age children are eligible for Medicaid until family earnings reach 198 percent of the FPL. They are assumed to receive a national average of $2,222 per child in State Children’s Health Insurance Program (SCHIP) benefits when family earnings are between 199 percent of the FPL and 276 percent of the FPL.
Obamacare Exchange Subsidies. Both the health insurance premium tax credit and the out-of-pocket cost subsidy have been calculated. The procedures for calculating these subsidies are available upon request.
Housing Subsidies. The maximum housing payment equals the national average fair market rent for a three-bedroom unit weighted by the distribution of subsidized units. As countable income is increased, the rent paid by the household is increased and the maximum subsidy is reduced. Countable income includes earnings; dividends; interest; Social Security; Supplemental Security Income (SSI) benefits; unemployment insurance; and TANF benefits. The EITC, ACTC, and food stamps are not counted as income. Allowable deductions are made from countable income. The actual rental subsidy equals the maximum payment minus 30 percent of countable income.
EITC and ACTC. The value of these two benefits allows straightforward calculation based on national rules.
Federal Taxes. Federal income tax and the employee share of Federal Insurance Contributions Act (FICA) taxes have been calculated. The single mother is assumed to file as head of household and to claim the standard deduction. State income taxes and state EITC benefits have not been included.
Appendix 2: Analysis of Receipt of Benefits
This appendix examines the take-up rate of various means-tested programs. Benefits are calculated as follows:
Receipt of EITC and ACTC. A study that compared IRS tax records with Census demographic surveys concluded that 83 percent to 85 percent of families with children that are eligible for the EITC claim and receive the credit. The study also found that the EITC take-up rate increased as the value of the EITC benefit increased; in general, individuals who were eligible to obtain a credit but did not do so were eligible only for a low level of benefits.
However, this study is seriously limited because it did not examine the large number of ineligible tax filers who routinely claim and receive the EITC. For example, 10 percent of EITC claims from claimants with children (2.8 million claims each year) involve residency errors, or benefits paid to individuals who do not reside with the child. Another 750,000 EITC claims for children involve filers who have no legal relationship to the child. In both cases, the lawful parent will have allowed someone else who can obtain higher EITC benefits to claim the child for purposes of maximizing EITC receipts. The higher EITC benefits presumably are split between the lawful parent and the erroneous filer. The number of ineligibles who receive the EITC for children exceeds the apparent number of eligible filers with children who do not receive the credit. The effective take- up rate for the EITC for children probably exceeds 100 percent.
The ACTC is obtained through the same tax return as the EITC. A single mother who earned the federal minimum wage would be eligible for both credits. If she received the EITC, she would also receive the ACTC.
Receipt of Food Stamps. A single mother with two children earning the minimum wage would also be eligible for food stamp aid. The odds that she would receive food stamps are around 100 percent. In fact, according to the U.S. Department of Agriculture (USDA), in 2014, 130 persons in single-adult families with children were receiving food stamps for every 100 such persons who were potentially eligible for benefits, based on Census surveys. The disparity between the number of individuals receiving benefits and the number of eligible persons probably occurs because many households conceal adult members with earnings in order to obtain benefits unlawfully.
Receipt of Medicaid and SCHIP. In all states, children in families with incomes below 138 percent of poverty are eligible to enroll in Medicaid or SCHIP. Ninety percent of children who are apparently eligible for Medicaid or SCHIP and who reside in families with incomes below 138 percent of poverty are currently enrolled in these programs. In half of the cases where a child is eligible for Medicaid/SCHIP but remains uninsured, the parent believes the child is eligible to receive aid under the program but has not bothered to enroll the child.
Overall, in 2012, approximately 3.7 million children who were apparently eligible for Medicaid and SCHIP were not enrolled. However, a number of low-income children who appear to be eligible for Medicaid/SCHIP but are not enrolled may in fact be ineligible because they are illegal immigrants. There are over 700,000 illegal immigrant minors in the U.S. The survey data conventionally used to determine participation rates do not distinguish between legal and illegal immigrants.
In the 26 Medicaid expansion states, parents with incomes below 100 percent of the FPL are also eligible for Medicaid. There is a single enrollment process for parents and children; therefore, it is reasonable to conclude that if 90 percent of eligible children in expansion states are enrolled in Medicaid, then 90 percent of eligible parents in those states are also enrolled.
Receipt of School Nutrition Benefits. The take-up rate of free school lunch benefits appears to be over 100 percent. In FY 2014, 14.5 million U.S. school-age children (ages 5 to 17) came from homes with income low enough (below 130 percent of the poverty level) to qualify them for free school lunch. However, far more students received free school meals during that year: 19.2 million. Some of these students are likely preschool-age students, but not nearly enough to make up for the entire difference.
The number of students receiving free school breakfast equals 56 percent of the number of students receiving free school lunches. In the analysis, the dollar cost of free school breakfasts is cut in half to reflect the fact that roughly half of poor and near-poor children do not participate in the program.
HUD Rental Assistance. Roughly one-quarter of poor and near-poor single mothers receive HUD rental subsidies such as public housing or Section 8 housing subsidies. HUD rental assistance programs provide disproportionately expensive aid to a small portion of low-income families with children. Most low-income working families do not receive housing benefits. In 2015, approximately 9 million families with children had non-welfare cash incomes below 125 percent of the FPL, but only 1.8 million families with children (or one-fifth of these low-income families) received housing aid from HUD. Housing aid programs generate a substantial problem of “horizontal inequity,” which means the unequal treatment of individuals with the same incomes.
HUD aid programs appear to discriminate heavily against married couples with children. Nine out of 10 families with children receiving housing benefits were headed by single parents in FY 2015. Roughly one-quarter of poor and near-poor single mothers receive HUD rent subsidies, compared to only 6 percent of married couples with children at similar income levels.