The Impact of Benefits Cliffs and Asset Limits on Low-Wage Workers: Evidence from a Nationally-Representative Survey

• In Event: Strengthening Public Benefits to Support Family Financial Resilience

Abstract

Background: Over 40 million workers in the United States receive public benefits. These workers would like to earn higher wages, work more hours, or find better jobs. However, doing so may push them over a benefit program’s income limits, reducing their benefit levels or even making them ineligible for the program. These earnings increases can sometimes make a worker worse off if those increases do not cover the value of the lost benefits. This is referred to as the benefits cliff. Relatedly, some programs impose asset limits that can cause individuals to lose benefit eligibility if their savings go above a certain threshold.

Though this is a widespread problem, the full scope of the issue is unknown, and estimates vary widely on the number of households affected by benefits cliffs and asset limits.  In this study, we present new evidence on the rates at which low-wage workers are affected by benefits cliffs and asset limits, and the employment and earnings decisions they make to stay on public benefits. We also examine the programs that low-wage workers were trying to stay on when they took these actions, the estimated costs of these actions in terms of wages and/or hours deferred, the relationship between the experience of benefits cliffs and material hardship over the subsequent year.

Data and Method: Data for this study come from the Workforce Economic Inclusion and Mobility Survey, a longitudinal, nationally-representative survey of 2,511 U.S. workers earning less than 250% of the Federal Poverty Line. Our analysis proceeds in three stages. First, we descriptively examine the rates of engaging in eight different benefits cliff-related behaviors, including reducing labor supply, declining raises, and keeping savings low, as well as the estimated earnings and work hours lost because of these decisions. Second, we examine sociodemographic patterns in who is affected by benefits cliff using linear probability models. Finally, we use random effects regression to examine the relationship between being impacted by benefits cliffs and measures of hardship over the subsequent year, including food insecurity, credit distress, housing instability, and severe liquidity constraints.

Preliminary Results: The most common action reported was not taking on additional hours, with 11.1% of program participants reporting that they made this decision to stay on benefits. However, noteworthy percentages reported declining raises or promotions (8.4%) and job offers (8.3%). In terms of asset limit responses, 9.1% of workers reported saving less to stay on benefits. Every measured response to benefits cliffs and asset limits was positively correlated with every other response, and in many cases the correlations were strong, implying that asset limits and benefits cliffs are working in tandem to reduce both earnings and wealth.

Implications: Benefits cliffs and asset limits are policy choices that create substantial barriers to work and economic mobility for households. Removing the barriers imposed by benefits cliffs requires modernizing the benefits system, including improving transparency by simplifying program requirements and streamlining application processes across program. We will discuss several approaches to softening or eliminating the impact of these policies.

Author

• Stephen Patrick Roll, Washington University in St. Louis
  Presenting Author