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U.S. Welfare System

U.S. Welfare System. Aid to Families with Dependent Children (AFDC) and Temporary Assistance to Needy Families (TANF) Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) replaced AFDC in 1996 with TANF Aimed to “end welfare as we know it”

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U.S. Welfare System

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  1. U.S. Welfare System • Aid to Families with Dependent Children (AFDC) and Temporary Assistance to Needy Families (TANF) • Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) replaced AFDC in 1996 with TANF • Aimed to “end welfare as we know it” • Under AFDC, eligibility and benefit schedule determined by federal government; under TANF, determined by states • Under AFDC, federal government matched state AFDC spending dollar-for-dollar; under TANF, states receive federal block grants • Under AFDC, anyone could apply for AFDC and all eligible received AFDC; under TANF, states can deny eligible people • Recipients required to work after receiving TANF for 2 years • Recipients cannot receive TANF for more than 5 years over life

  2. Michigan TANF • Family Independence Program (FIP) • Monthly benefit = payment standard - countable income • Countable income = 80% ofearned income over $200 + unearned income • Ex.: Single mother of 2 with $500 earned, $100 unearned income • Earned income over $200 is $500 - $200 = $300, of which 80% ($300 x .80 = $240) is countable • All $100 unearned income is countable • Countable income = $240 + $100 = $340 • Payment standard for single mother of 2 in Ingham County is $489 • Monthly benefit = $489 - $340 = $149

  3. Michigan TANF • Family Independence Program (FIP) • Monthly benefit = payment standard - countable income • Countable income = 80% ofearned income over $200 + unearned income • Monthly benefits reduced by $1 for every $1 in unearned income • "Benefit reduction rate" of unearned income is 100% • Monthly benefits reduced by 80 cents for every $1 in earned income gained over $200 • "Benefit reduction rate" of earned income over $200 is 80%

  4. FIP Budget constraint for single mother of 2 in Ingham County with no unearned income, faces minimum wage of $5.15/hr Without FIP, faces simple budget constraint with zero consumption if zero labor supply, slope of 5.15 Michigan TANF c slope = 5.15 0 T l (L=0)

  5. FIP With FIP, single mother of two receives payment standard of $489 if labor supply equals zero Leisure equals T Since no nonlabor income, consumption = $489 Michigan TANF c slope = 5.15 $489 0 T l (L=0)

  6. FIP First $200 earned income not in countable income Recipient can earn an extra $200, keep original $489 benefit, bring home $689 At $5.15/hr., recipient can work up to 39 hours before earned income over $200 Since earning wage has no benefit reduction, slope of budget constraint = 5.15 Michigan TANF c slope = 5.15 slope = 5.15 $689 $489 0 T-39 T l (L=39) (L=0)

  7. FIP 80% of earned income over $200 included in countable income, subtracted from FIP benefits Every dollar earned reduces FIP benefits by 80 cents Every $5.15 earned from an hour's work cuts benefits by $5.15 x .80 = $4.12 Net employee wage = $5.15 - $4.12 = $1.03 Budget const. slope = 1.03 Michigan TANF c slope = 5.15 slope = 1.03 slope = 5.15 $689 $489 0 T-39 T l (L=39) (L=0)

  8. FIP At 157 hours work at $5.15, earned income = 157 x $5.15 = $811. Countable income = (earned inc. - $200) x .8 = ($811 - $200) x .8 = $489 FIP benefits = paymt. std. - countable = $489 - $489 = 0 No more benefits to lose as income increases, employee wage = $5.15 after $811 Michigan TANF c slope = 5.15 slope = 1.03 $811 slope = 5.15 $689 $489 0 T-157 T-39 T l (L=157) (L=39) (L=0)

  9. Implications of FIP FIP increases area within budget constraint when monthly labor supply is less than 157 hours Increases available leisure-consumption combinations Allows people to increase leisure and consumption, work less & consume more Negative income effect on labor supply Michigan TANF c slope = 5.15 slope = 1.03 $811 slope = 5.15 $689 $489 0 T-157 T-39 T l (L=157) (L=39) (L=0)

  10. Implications of FIP FIP reduces slope of budget constraint (employee wage) from 5.15 to 1.03 when monthly labor supply between 39 and 153 hours Reduces extra consumption gained from giving up extra hour of leisure Reduces incentive to give up leisure for consumption by increasing labor supply Negative substitution effect Michigan TANF c slope = 5.15 slope = 1.03 $811 slope = 5.15 $689 $489 0 T-157 T-39 T l (L=157) (L=39) (L=0)

  11. Implications of FIP Since budget constraint slope reduced when labor supply is between 39 and 157 hours, neg. substitution effect of FIP only affects working welfare recipients Strongest disincentive to increase labor supply, leave FIP on recipients on verge of leaving FIP Michigan TANF c slope = 5.15 slope = 1.03 $811 slope = 5.15 $689 $489 0 T-157 T-39 T l (L=157) (L=39) (L=0)

  12. Michigan TANF • Welfare to Work Requirements • Most welfare recipients required to participate in employment related activities including employment, schooling, and/or training • Schooling option only available to teenagers finishing high school • Single parents must participate 30 hours/week, 20 hours/week if child is under age 6 • Parents in two-parent families must participate 55 hours/week total • Exemptions from requirement: age under 16 or over 65; mothers with children under age 3 mos.; mothers in absence of child care; disability; temporary incapacity; caregiver for disabled; domestic violence; local office discretion • Noncompliance with welfare to work requirements carries penalty of reduction of benefits, closure of case

  13. Reduce the benefit reduction rate Reduce amount by which benefits are reduced for each dollar of income Reduce benefits recipients lose as a consequence of working, earning income Increase what recipients “net” from working Increase employee wage of welfare recipients Options for Reform c Tw slope = w slope = w(1 – brr) g T l

  14. Reduce the benefit reduction rate Increases budget constraint slope to those who were welfare recipients before (those within dotted lines) Improves rate at which leisure can be exchanged for consumption by work Increases employee wage Positive substitution effect on qty. of labor supplied Options for Reform c Tw slope = w slope = w(1 – brr) g T l c, l of those on welfare before brr reduction

  15. Reduce the benefit reduction rate With benefits reduced less for each dollar earned, people with higher labor supply, incomes become eligible for welfare benefits More people eligible for benefits = more ppl. losing benefits as a consequence of working, earning income Changes break-even point Options for Reform c Tw slope = w slope = w(1 – brr) g T l c, l of those not on welfare before brr reduction, on welfare after

  16. Reduce the benefit reduction rate Reduces constraint slope of lower-leisure, higher-labor people who didn’t get welfare before but do now Reduces rate at which leisure can be exchanged for consumption by work Reduces employee wage Negative substitution effect on qty. of labor supplied Options for Reform c Tw slope = w slope = w(1 – brr) g T l c, l of those not on welfare before brr reduction, on welfare after

  17. Reduce the benefit reduction rate Positive substitution effect on qty. of labor supplied of people already on welfare Negative substitution effect on qty. of labor supplied of people brought into welfare system as a result of drop in benefit reduction rate Negative income effect for all (constraint further out) Options for Reform c Tw slope = w slope = w(1 – brr) g T l

  18. Reduce the benefit reduction rate, but don’t change break-even point People lose fewer benefits as their income increases But don’t give higher-income, higher-labor supply people benefits and bring them into welfare system Must reduce guarantee Options for Reform c Tw slope = w slope = w(1 – brr) g g T l

  19. Reduce the benefit reduction rate, but don’t change break-even point People lose fewer benefits as they work more and earn more income because there are fewer benefits to reduce in the first place Steeper budget constraint Higher rate at which leisure can be exchanged for consumption by working Options for Reform c Tw slope = w slope = w(1 – brr) g g T l

  20. Reduce the benefit reduction rate, but don’t change break-even point Higher employee wage Positive substitution effect on qty. of labor supplied Budget constraint is further in and to the left Positive income effect on qty. of labor supplied Options for Reform c Tw slope = w slope = w(1 – brr) g g T l

  21. Reduce the benefit reduction rate, but don’t change break-even point Work incentive, qty. of labor supplied of welfare recipients greater when guarantee, benefit reduction rate are reduced together So why not reduce both to 0 and eliminate welfare? Must care about more than work disincentives Options for Reform c Tw slope = w slope = w(1 – brr) g g T l

  22. Reduce the benefit reduction rate, but don’t change break-even point Welfare reduces poverty (see chart in Danziger) Reducing welfare by reducing guarantee, brr increases work incentives but also increases poverty Increasing welfare by increasing guarantee, brr does the opposite Options for Reform c Tw slope = w slope = w(1 – brr) g g T l

  23. Reduce the benefit reduction rate, but don’t change break-even point Welfare policy often a tradeoff between reducing work disincentives and reducing poverty Few “free lunches” Ultimately a value judgment: which of the two is more important? Options for Reform c Tw slope = w slope = w(1 – brr) g g T l

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