What’s the Welfare Cliff Effect?

Accepting a pay raise seems like a no-brainer. That is until you realize this—the $1 or $2 an hour increase could slash hundreds or even thousands of dollars from your benefits. Believe it or not, if you’re in poverty and rely on government help, earning more money isn’t always the best answer. The reason? You risk getting pushed off the welfare cliff. 

If you’re a single parent or couple living near the poverty line, you’re probably desperate to stop receiving state and federal aid. Filling out forms, proving you’re poor, and waiting for monthly welfare checks is pretty stressful. Then, you have to juggle all the other stuff you have to deal with when you’re low-income. 

Of course, in an ideal world, you’d get a good pay rise, come off benefits, and be just as well off—if not better off—than you were before.  So, the idea that you’re going to end up losing money because you’re earning more money is hard to take. It seems like a total no-brainer to refuse the pay rise. After all, people living near the poverty line are generally not lazy and definitely not stupid.

Unfortunately, the situation can leave you trapped in poverty. A sudden reduction in benefits can amount to a loss of thousands of dollars a year—hardly something you can contemplate or even afford in most cases. 

The Welfare Cliff Effect Explained

In essence, the welfare cliff is where increased earnings result in a sharp drop in benefits. The situation leaves you worse off financially. The result is that there is little incentive to look for employment, or even accept a pay rise in some instances. 

The whole idea of welfare was to help you get through a tough time so you can get back on your feet. Welfare benefits should never trap a person. However, that’s often what happens.

The government’s many help programs are designed to assist single parents and families living on a low-income. Depending on a person’s level of income, the value of benefits can amount to tens of thousands of dollars annually. 

Some of these programs are: 

  • Temporary Assistance for Needy Families (TANF)—Gives help to families to pay for basic needs while looking for better jobs.
  • Supplemental Nutrition Assistance Program (SNAP)—Provides assistance to buy groceries and nutritious food. 
  • Women, Infants, and Children (WIC)—Financial support to single moms who’ve just had a baby and who are on low-income.
  • Low-Income Home Energy Assistance Program (LIHEAP)—Low-income families can apply for help to pay for energy bills. 
  • Head Start—Gives support to limited-income families who have children less than five years old. 
  • National School Lunch Program (NSLP)—If you can’t afford to give your kids lunch, the NSLP provides free or low-cost school lunches and breakfast.

So, losing one or more of these benefits can create a sharp drop in income called the welfare cliff, benefits cliff, or the “welfare trap.”

The Welfare Cliff: An Example

Let’s look at an example as to how a modest increase in earnings can result in a sharp drop in benefits. This example helps to understand why you may feel trapped in poverty. The figures are approximated because they change from state to state. 

Let’s say a hard-working single mom is earning $29,000 a year. Her boss recognizes her hard work and offers a pay increase. On the face of it, it sounds great. A few thousand dollars a year is going to come in mighty handy. But will it? Maybe not when you consider her loss in benefits. 

Earning just $29,000, our single mom can claim TANF, SNAP, assisted child care, and medical assistance. All these benefits could add up to a combined total of around $57,000.

However, the wage increase means that she no longer qualifies for certain benefits. In the year, this could amount to a loss of between $5,000 and $9,000. 

In our scenario, our single mom would have to start earning nearly $70,000 to climb out of the welfare chasm—in other words, to be at the same place financially when she was earning just $29,000. 

According to a study published by the CATO Institute, the benefits cliff deters many low-income people from getting better employment. Single moms and dads have to earn well above the minimum to keep the same standard of living as when they received benefits. 

How to Avoid Falling Off the Cliff

Although welfare is essential for many, the “benefits effect” can leave you feeling trapped in poverty, unable to get off government assistance. Is there anything you can do to avoid a sharp fall in income when taking on a new, better-paying job? How can you avoid the poverty trap?

Many states recognize that it can be difficult to avoid the welfare cliff if you receive several benefits. For example, one study found that one in three families refused income increases because it would impact their benefits too much. 

Many states are trying to implement policies to reduce the welfare cliff effect. The idea is to make the effect of changes more of a “slope” that gently goes down and then rises. The goal is to create minimal impact on your family’s finances. Legislation should help to ensure that payments decrease in line with higher earnings rather than abruptly stop.

What can you do in the meantime to avoid being trapped in welfare? Here are a few tips to help prevent the catch-22 situation of welfare and the welfare cliff: 

  • Accurately record the monthly limits of all the benefits you receive. These include medical, cash benefits, SNAP, and any other government help you get. 
  • If you get offered a better job or pay rise, figure out precisely what your new income will be. Do the math to calculate how this will impact your benefits. If the impact is too much, it could be best to refuse the work. Remember that Medicaid is one of the biggest benefits you receive and it’s worth holding on to that. 
  • Check with your local benefits office if there are ways to reduce benefits gradually rather than stopping them altogether. Different states have different laws and legislation may change. 

The Effect of the Welfare Cliff

You—like the majority of people on welfare—want to support your family and enjoy a comfortable life. Many government help programs can offset the impact of poverty and low-income. However, it can also create a situation where you may feel trapped in poverty. 

Check out these other articles to find out what you can do if you have fallen off the welfare cliff and need extra assistance.