Welfare Programs
Lecture 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)
600
500
Total $
Medical Aid
Cash
Food
Housing
400
300
200
100
0
1968 1980 1983 1986 1989 1992 1995 1998 2001
Medical+Cash+Food+Housing Aid=.88 x Total Spending
Trends in Spending by Level of
Government, FY1968-FY2002
(Constant FY 2002 Dollars)
600
500
400
300
200
100
0
1968 1978 1983 1988 1993 1998
Total $
Federal $
State/Local $
Trends in Federal Spending
FY1968-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 Spending
FY1968-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
20
18
16
14
12
10
8
6
4
2
0
8
6
19
Total
Medical
Cash
Food
8
7
19
8
8
19
2
9
19
6
9
19
0
0
20
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=$330
She 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.