A Study on Universal Basic Income (part 2) - Welfare Traps: Getting Less Money with More Income

A Layman's Guide to Getting Less Money with More Income

 

Income and wealth are traditionally considered to be in a linear, positive correlation. It makes sense too, after all, if you have a higher income, you would take in more money right? Generally, this statement holds true, save for a small group of people hovering at around a gross monthly income of 130% of the poverty line and a new monthly income at the poverty line. 

This is because making 130% of the poverty line marks the qualification barrier for means-tested welfare. This embodies the 79 different programs that subsidize necessities such as food, housing, or medical care for those who have trouble affording it. For instance, the qualification barrier for SNAP (supplemental nutrition assistance program) is a gross monthly income of $2790 (130% poverty line) for a family of four. This same family of four averages a monthly benefit of $465 thanks to the SNAP program. If SNAP were the only benefit that they took advantage of (fully hypothetical since families that qualify for means-tested benefits take advantage of multiple), then this family would essentially take in $3255 per month.

However, it's crucial to recognize what happens at the this boundary of qualifying for means-tested welfare. A family of four that has a gross monthly income of $3000 will not qualify for means-tested welfare, which means that they don't have access to the same benefits that the family with a lower income has. Without these benefits, the family that earns more income actually takes in less money because the money they take in is solely based off income, rather than income plus welfare benefits. 

Let's look to actual examples. The CATO institute cites in 2014 that "a single mother with two children who increases her hourly earnings from the Illinois minimum wage of $8.25 to $12 only sees her net income increase by less than $400. Even worse, someone in this scenario who works hard and increases her earnings all the way to $18 an hour, a wage level which would place her in the middle class, would actually see her net income decrease by more than $24,800 due to benefit reductions and tax increases".

This is the gist of the welfare trap, wherein people are incentivized to earn less money in order to keep access to their welfare benefits. Welfare ends up working as a negative incentive for people to put less effort into their work and discourages them from climbing the employment ladder. After all, why would they work harder for a promotion that only costs them their free welfare benefits? 

This then begs the question: is welfare a suitable system in the United States? If it only serves to de-incentivize people from working harder and traps them in cyclical poverty, then how can we incentivize people to climb the career ladder?

https://www.fns.usda.gov/snap/recipient/eligibility
https://www.cbpp.org/research/food-assistance/a-quick-guide-to-snap-eligibility-and-benefits
https://www.cato.org/blog/new-study-finds-more-evidence-poverty-traps-welfare-system