Welfare and Welfare Reform. AFDC (Aid for Families with Dependant Children) Cash Welfare 87% of...

Welfare and Welfare Reform


Table 3.1 Expenditures on Assorted Federal Antipoverty Programs(Billions of Real $1999)

1970 1975 1980 1985 1990 1995 1999 2010AFDC/TANF 17.5 26.0 24.2 22.6 23.6 24.1 13.4 21.3Disability Insurance 13.2 26.1 31.2 29.2 31.6 44.7 51.3Supplemental Security Income 12.6 18.2 16.1 17.1 20.5 30.7 29.7Food and Nutrition 5.3 19.9 26.4 24.8 23.8 34.8 26.1 73.4Housing 2.2 6.6 11.1 17.7 19.7 30.0 27.6 45.2Medicaid 20.8 39.1 52.1 63.4 92.4 171.0 188.8 216.0EITC 0.0 3.9 4.0 3.2 9.6 28.4 31.9 42.2


AFDC (Aid for Families with Dependant Children) Cash Welfare 87% of funds generally went to those who would be poor Targeted at single mother families (officially benefits could be cut even

if a man was found “living” in the house)


Work incentives under AFDC Prior to 1968, benefit payments decreased $1 for every $1 earned 1968-1981, benefit not affected by first $30/mo. of earnings, after that

benefit payment reduced by $2 for each $3 earned. 1981-1992, first 4 months of earnings didn’t affect benefit payment,

after that, benefit payments decreased $1 for every $1 earned.

How does this impact work incentives (think about “apple farm”)?


By early 1990s many critics charged that the welfare system (especially AFDC) was actually making poverty worse.

Encouraged single parenthood, discouraged work This created a “culture of poverty”

The longer one is on welfare, the harder it is to get off. Passing on welfare dependence to next generation.

Studies of this provide mixed evidence, mostly because these things are hard to identify. Heterogeneity vs. state dependence. “Reflection” problem


Welfare Reform 1992 Clinton ran on “ending welfare as we know it” 1996 Personal Responsibility and Work Opportunity Reconciliation Act

(PRWORA).

Beginning in 1992, states could experiment with welfare regulations but still be funded via Federal Government. 29 states did so.


By 1996, Federal government replaced AFDC with TANF (Temporary Assistance for Needy Families) Essentially, Feds provide a block grant to each state, and state then

determines how to use it. Comes as a block grant (not dependant on number of people enrolled),

so states have an incentive to reduce welfare roles, since any overspending must come from state budget, and any savings can be used for state tax relief.

Block grant does not depend on state of the economy. Like AFDC, only available to families with kids under 18 with low

incomes (< 85% of poverty line) and low assets (< $4000).

The two most notable components of TANF are: work requirements time limits


Work Requirements Many of the states have implemented much smaller benefit reduction in

response to earnings than was true under AFDC (e.g., benefit only reduced by $0.33 for each $1 earned)

Still work incentive issues, but not as severe (think of it as a change in price or a tax on the “apple farm”)


Work Requirements (cont) There are also explicit work rules.

Under AFDC, mothers with children under 3 yrs old were exempt from any work requirement, TANF lowered this to one year old (some states even lower)

After two years of receiving TANF, unmarried recipients must work at least 30 hrs/week to maintain eligibility. At least 50% of recipients must meet these requirements to keep

funding. Up to 12 months of vocational training can count, which is

somewhat controversial (given job training literature).


Time Limits TANF has a limit of 60 months (5 yrs) lifetime. However, states can provide non-cash support (subsidized with TANF

funds) to people longer than that. States can also exempt up to 20% of their caseloads.

23 states used 60 month limit, 17 chose shorter, 8 use own funds to provide longer.

Idea is to provide correct incentives to work and/or invest in self-sustaining human capital.

Concern was that “a million kids will go hungry”


Other issues Child support – Under AFDC, half of child support payments went back to state

for those on welfare. TANF not only set up a better tracking system to enforce child support, but also all of child support goes to custodial parent.

TANF increased money for government child care.

Case workers were trained differently and expected to become more like case managers, figuring out solutions and helping clients get back into labor market.

One controversial aspect is that PRWORA limited benefits to only immigrants who have legally been in US for 5 yrs or more.

In general, welfare reform was a pretty radical policy change. Some aspects are very in line with economist thinking, some things are purely political.


How big are TANF payments?

Size of benefit group Max Monthly Benefit Monthly Income limit

1 $266 $768 2 $357 $1033 3 $447 $1297 4 $539 $1562 5 $630 $1828 6 $721 $2092 7 $812 $2357 8 $922 $2622 9 $1013 $2887 10 $1102 $3152 each additional person +$91 +$265


Assessing Welfare Reform – Effect on Caseload


Assessing Welfare Reform – Effect on Labor Force Participation


So can we say welfare reform was a success?


Assessing Welfare Reform – Effect on Total Income



10th % no kids5th % 10th% 25th %

income

%

Pre-reform (c. 1992)



5th % 10th% 25th % 10th % no kids

income

%

Post-reform (c. 2002)

Earned Income Tax Credit Earned Income Tax Credit (EITC)

Essentially provides an earnings subsidy via the tax system. Tremendous growth and expansion in this program over last 15 years.

Eligibility and benefit levels were expanded dramatically in 90s.

Earned Income Tax Credit

Earned Income Tax Credit (EITC)

Worker with no children - benefit rate was 7.6% of earnings, to a max of $390 for those earning $5100. From $5100 to $6400, benefit stays at $390. Benefit then reduced by 7.6% of earnings for earnings beyond $6400, meaning no benefit if earnings exceed $11,490.

Worker with 1 child - benefit rate was 34% of earnings, to a max of $2,604 for those earning $7,650. From $7650 to $14,050, benefit stays at $2,604. Benefit then reduced by 16% of earnings for earnings beyond $14,050, meaning no benefit if earnings exceed $30,338.

Worker with 2+ children - benefit rate was 40% of earnings, to a max of $4,306 for those earning $10,750. From $10,750 to $14,050, benefit stays at $4,306. Benefit then reduced by 21% of earnings for earnings beyond $14,050, meaning no benefit if earnings exceed $34,458.

For married – the range where credit is flat and maximum income to receive benefit $1,000 higher.


So how are work incentives affected by this program? To look at this question, we must first understand: Substitution Effect

Income Effect

How are work incentives affected by this program (compared to what?)

How will it affect utility/well-being for the poor?


How can we evaluate effect of EITC on labor supply? Compare hours worked by those eligible for greater EITC benefit to

those who are not?

Compare hours worked by those eligible for greater EITC benefit (two or more child families) to those who are eligible for lesser benefits (one or no child families)?

Compare change in labor supply for those eligible for EITC as benefit increases over time?


Hotz, Mullin, Scholz use a Difference-in-difference (diff-in-diff) approach (combines above ideas) Exploits the fact that pre-1994, EITC payments did not differ much by

number of children, but after 1994 there are big differences. Compare change in labor supply behavior of 2 child parents pre- post-

1994 to a similar change in behavior for 1 child parents.

Effect of increased benefit =

(avghrspost, 2 child - avghrspre, 2 child) - (avghrspost, 1 child - avghrspre, 1 child)

What is being estimated (in words)?

What is implicit assumption for the result to be deemed “causal”?


Table 3.2 Rates of Labor Force Participation1993-1998

1993 1998 Difference 1993 1998 DifferenceOne Child 33.13 46.08 12.95 38.35 56.55 18.20Two-Plus Children 24.02 43.21 19.19 29.47 56.61 27.14Difference -9.11 -2.87 6.24 -8.88 0.06 8.94

(1.97) (3.74)

1993 1998 Difference 1993 1998 DifferenceOne Child 42.21 42.06 -0.15 51.75 49.92 -1.83Two-Plus Children 36.01 39.12 3.11 49.68 53.98 4.30Difference -6.20 -2.94 3.26 -2.07 4.06 6.13

(2.62) (3.45)

Single-Parent Familes Two-Parent Families

Long-Term AFDC RecipientsSingle-Parent Familes Two-Parent Families

New entrants to AFDC Program

What does this table tell us about the importance of accounting for selection and time trends in this context?


EITC and the minimum wage Why might they be related?


In-Kind vs. Cash Transfers In 1999, far more was spent on food and housing aid (“in-kind” aid)

than standard cash welfare (AFDC/TANF and SSI).

What is argument against in-kind aid?

What are arguments for in-kind aid?

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Welfare and Welfare Reform. AFDC (Aid for Families with Dependant Children) Cash Welfare 87% of...

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