Welfare ProgramsLecture 17

Today’s readings:

Schiller Ch 12, Welfare Programs •Ehrenberg and Smith, “Supply of Labor to the Economy,” eReserves •House Ways and Means Committee 2004 Green Book, http://www.gpoaccess.gov/wmprints/green/2004.html •DeParle, Ch. 14: Golf Balls and Corporate Dreams: Milwaukee, 1997-1999

Today’s Questions

• What means-tested welfare programs are available for poor people in the United States?

• How much do these programs cost?• How many people are helped by these

programs? • How are welfare benefits determined?• Why is welfare so hard to reform?

What means-tested welfare programs are available for poor people in the U.S.?

• Federal and State governments funded 85 welfare programs in FY 2002 at a total cost of $522 billion.– Federal Share: 71%– State and Local Share: 29%

• The means-tested programs fall into 8 different categories.

– Source for Slides 3-24: House Ways and Means Committee 2004 Green Book, http://www.gpoaccess.gov/wmprints/green/2004.html

Eight Categories of Welfare Programs and Total Costs, 2002

– Medical Aid: $282 billion, 54%– Cash Aid: $102 billion, 20%– Food Aid: $39 billion, 7%– Housing Aid: $36 billion, 7%– Education Aid: $30 billion, 6%– Other Services: $22 billion, 5%– Jobs and Training Aid: $8 billion, 2%– Energy Aid: $2 billion, 0.3%

Medical Aid--$282 billion

Cash Aid--$102 billion

Food Aid--$39 billion

Housing Aid--$36 billion

Housing Aid, cont.

Education Aid--$30 billion

Other Services--$22 billion

Jobs and Training Aid--$8 billion

Energy Aid--$2 billion

Analysis of spending

• 54 cents of every welfare dollar went for medical assistance

• 80% of State and Local dollars went to medical aid

• Spending in each of 6 programs exceeds $10 billion and accounts for 77 percent of total spending.

7 largest programs by amount spent

• Medicaid ($258 billion)• SSI ($39 billion)• EITC ($28 billion)• Food Stamps ($24 billion)• TANF cash, ,services, child care, and work

activities ($24 billion)• Section 8 low-income housing assistance

($18 billion)• Pell Grants ($11)

Trends in Spending

• Real spending for cash and non-cash programs increased by 523 percent from FY1968 to FY2002.

• Real spending for cash and non-cash programs increase 36 percent between FY1992 and FY2002.

• Average annual rate of growth over this 32 year period was 5.5 percent.

• The U.S. population increased by 43 percent over this period.

• Real total per capita spending grew from $416 in FY1968 to $1,826 in FY 2002.

Spending Trends by Type of Aid FY1968-FY2002

(Constant FY 2002 Dollars)

0

100

200

300

400

500

600

1968 1980 1983 1986 1989 1992 1995 1998 2001

Total $Medical AidCashFoodHousing

Medical+Cash+Food+Housing Aid=.88 x Total Spending

Trends in Spending by Level of Government, FY1968-FY2002

(Constant FY 2002 Dollars)

0

100

200

300

400

500

600

1968 1978 1983 1988 1993 1998

Total $Federal $State/Local $

Trends in Federal SpendingFY1968-FY2002

(Constant FY 2002 Dollars)

• Real Federal spending climbed from $60 billion in FY1968 to $373 billion in FY 2002, an increase of 529 percent.

• Cash aid was the leading form of Federal welfare until 1980 when medical aid overtook it.

Trends in State and Local SpendingFY1968-FY2002

(Constant FY 2002 Dollars)

• State and Local real spending climbed from $24.5 billion in FY1968 to $149 billion in FY2002, an increase of 508 percent.

• Medical assistance overcame cash aid as the leading form of income-tested assistance in1976.

Share of Federal Budget used for Income-Tested Aid, FY1968-2002

02468

101214161820

1968 1978 1988 1992 1996 2000

TotalMedicalCashFood

Participation in Means-tested Programs, 2002

• We do not have an unduplicated count of welfare beneficiaries

• Average 2002 monthly numbers:– Medicaid: 50.9 million persons– Food stamps: 20.2 million recipients– SSI: 6.9 million recipients– TANF: 5.1million recipients

• EITC: 16.8 million tax filers

Source: CBO Economic and Budget Issue Brief, “Changes in Participation in Means-Tested Programs” http://www.cbo.gov/ftpdocs/63xx/doc6302/04-20-Means-Tested.pdf

Predicting Future Participation

• Assuming no legislative changes, future levels of participation in means-tested welfare programs will depend on:– Demographic trends– Distribution of income– The state of the economy

Participation in Means-tested Programs by Poor Persons, 2002• Census Bureau found 23 million poor persons

(two out of every three with pre-tax money income below the poverty threshold) lived in a household that received means-tested assistance.

• Percent of the poverty population living in a household that received:– Medicaid: 53 percent– Food Stamps: 33 percent– cash assistance: 22 percent– Subsidized or public housing: 18 percent

Participation by Total Population, 2002

• Percent of the total population living in a household that received:– Medicaid: 19 percent– Food Stamps: 6 percent– cash assistance: 7 percent – Subsidized or public housing: 4 percent– Some form of major means-tested aid: 25 percent

Eligibility vs. Participation

• To be eligible, a person, family or household must satisfy conditions regarding– Citizenship– Demographic characteristics (children present?)– Countable income– Accumulated wealth (assets including cars,

homes, insurance policies, bank accounts)– Employment status

Eligibility vs. Participation

• Participation refers to actual receipt of cash, non-cash benefits, or services.

• Not all eligible persons participate.– Participation rates = participating

population/eligible population• Participation levels/rates depend upon:

– Demographic trends, labor market conditions, distribution of income, health care costs, and the level of benefits.

Eligibility vs. Participation, cont

• An individual’s decision depends on the net benefits of participation:

• Net benefits=Gross Benefits-Costs• Gross Benefits include:

– Primary benefits (cash, non-cash, services)– Secondary benefits (eligibility for subsequent programs

depends on enrollment in the primary program

• Costs include:– Hassle– Transportation– documentation– Stigma

How are benefits determined?

• Generic formula: B=G - t(E-DE) - (U-DU), where

• B=Benefit level• G=Maximum benefit (other income=0)• T=marginal tax rate• E=gross earnings• DE=earnings disregard• U=non-earnings incomes (pensions, interest)• DU=non-earnings disregard

Source: House Ways and Means Committee 2004 Green Book, pp. 38-39 http://www.gpoaccess.gov/wmprints/green/2004.html

How are benefits determined?, cont.

• Note that in the preceding table grants vary with family size up to 6 persons.

• Example using Texas:• Assume a mother of two works 30 hours a

week for 4.2 weeks at the minimum wage $5.15 per hour. She has no other income.

• B=$201-.67($649-30)=$201 - 415=-$214• Source: Work Related Provisions of State TANF Plans

http://www.acf.dhhs.gov/programs/ofa/WRKREL.HTM

Benefit Calculation, cont.

• In the previous example, the mother would not receive a benefit. Negative benefits are raised to $0.

• At the level of work hours (30) required by Federal law for a TANF mother to qualify as a work recipient, our Texas mother is not eligible for benefits. At what level of earnings could she receive benefits?

Calculating Break-even Level of Earnings

• Recall that B=G - t(E-DE) - (U-DU).• Set B=0, and solve for E:• Generally, EB=G/t + D, when U=0.• In our example, the Texas mother would be

eligible for cash benefits if her earnings were less than $330.

– EB=201/.67+30– EB=$330She loses eligibility if she works more than 15.25 hours

per week.

Source: House Ways and Means Committee 2004 Green Book, pp.36-37, http://www.gpoaccess.gov/wmprints/green/2004.html

Source: CBO Economic and Budget Issue Brief, “Changes in Participation in Means-Tested Programs” http://www.cbo.gov/ftpdocs/63xx/doc6302/04-20-Means-Tested.pdf

Source: House Ways and Means Committee 2004 Green Book, pp.45-47, http://www.gpoaccess.gov/wmprints/green/2004.html

Source: House Ways and Means Committee 2004 Green Book, p. 89 http://www.gpoaccess.gov/wmprints/green/2004.html

Why is welfare so hard to reform?

• We can gain insight into the difficulty of reforming welfare by considering the implications of the break-even earnings formula:

EB=G/t + D

Why is welfare so hard to reform?, cont.

• Traditionally, policy makers heed three goals:– Adequacy– Cost minimization – Encouraging independence through work

Why is welfare so hard to reform?, cont.

• Policy makers have three parameters they can alter to achieve these goals:– G, maximum guarantee– t, marginal tax rate– D, the earnings disregard

• Given the relationship of G, t, and D, at most two of the three goals can be achieved at any one time.

Why is welfare so hard to reform?, cont.

G t D

Adequacy

Cost Minimization

Work incentives

Why is welfare so hard to reform?, cont.

• Welfare is so difficult to reform, that is it is difficult to find a long-lasting policy equilibrium, because our political parties differ in the emphasis they give the three goals. Traditionally,– Republicans pursed cost minimization and

promoting work above adequacy, while Democrats championed adequacy.