Image: The “benefits cliff:” When household income exceeds the threshold, all benefits disappear. Image Credit: The Independent Fiscal Office
The Center Square [By Anthony Hennen] –
While low-income families saw an increase in their federal SNAP benefits when the pandemic hit, it also created a “benefits cliff” that could discourage work and the supply of labor.
A new policy brief from the Independent Fiscal Office explains the situation. Before the federal public health emergency (which is still in effect), SNAP benefits had a “phase-out” effect where an additional $100 in income reduced benefits by $30. With the phase-out suspended during the health emergency, “it is now all or nothing,” IFO Director Matthew Knittel wrote in an email.
While the expanded benefits have reached more families or increased how much a family receives, the consequence has been to discourage a transition into the job force.
Knittel emphasized that the IFO was not criticizing the decision to expand benefits during the pandemic.
“The main concern was the vertical cliff, as opposed to the income expansion,” Knittel said.
“Research finds that a key feature of successful safety net programs is an income phase-out because it avoids an ‘all or nothing’ benefits cliff for recipients,” the report noted. “A vertical cliff provides a strong disincentive for household members to seek employment, work more hours or accept promotions due to the potential loss of benefits.”
Pennsylvania has 101,000 more residents receiving SNAP benefits in May 2022 compared to May 2019, going from providing $218 million in monthly benefits to $456 million. The average monthly benefit has increased from $233 to $465, with the funding coming from federal sources.
The benefits cliff varies based on household size. A two-person household, for example, that earns up to $3,502 monthly can receive $516 per month. However, if they make $1 more, they become ineligible and lose all benefits. Rather than work more hours or accept a promotion, it makes more sense for a worker to avoid a pay increase to stay under the income threshold.
“While emergency allotments provide relief, they will also likely reduce the supply of labor, which is reinforced by expansion of the income thresholds,” the report noted.
While the research isn’t clear on the magnitude of the effect on the labor supply when benefits discourage work, the expanded benefits come as the Pennsylvania labor force shrinks.
“This is taking place at a time when the latest data from August 2022 show that the Pennsylvania labor force contracted by 110,000 compared to August 2019,” Knittel said.
With government programs, the problem of a benefits cliff isn’t a limited problem to emergency programs.
“There seems to be a trend away from the welfare reforms of the 90s, and in particular the design of benefits seems less focused on creating incentives to work,” said Veronique de Rugy, the George Gibbs Chair in political economy and senior research fellow at the Mercatus Center at George Mason University.
“Putting money in people’s pockets and reducing food insecurity are two noble goals, but we shouldn’t ignore that some trade-offs exist (including the added taxes people pay as a result of more government spending) between benefits and non-work. In some cases, the tradeoffs leave families worse off,” de Rugy said.
Instead, the negative effects can be balanced by better-designed policies.
“Some work requirements and reductions of the high-income limits are the way to go. Policies should not disincentivize work. Point blank,” de Rugy said. “In Pennsylvania, some 61% of recipients are families with kids. Disincentives to work means reduced income mobility for these families which falls back on the children when their parents’ income stagnates.”
