Devolving responsibility of Social Security to the States increases inequality and spurs a “race to the bottom”—PRWORA proves

The passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) devolved responsibility for the design and implementation of welfare programs from the federal to state governments in the U.S. The motivation was to prompt states to create effective and innovative programs in order to promote higher levels of labor participation and decreasing levels of welfare dependency. As states were given more capacity to design their programs, the reform produced some kind of ‘laboratories of democracy’, using the phrase popularized by U.S. Supreme Court Justice Louis Brandeis. Two decades later, considerable evidence has accumulated showing that in the process of welfare reform state and local governments have followed differing strategies and ended enacting very different programs. We have also learned that some states and localities have been more responsive to the new framework than others as they have taken more advantage of the opportunity to change the design of the programs. This diverse response became more evident with the Great Recession, renewing discussion about the potential social welfare costs in terms of the resulting differences in benefit levels across states. While the success of the programs should be measured mainly according to their initial objectives –promoting higher levels of labor participation and decreasing levels of welfare dependency– some of the strategies implemented might have had the effect of severely reducing the protection received by the most vulnerable households in some states. Inequality arising from the increasing differences of cash benefit levels across states has been also perceived as an additional distributional concern with potential welfare implications. There are several avenues through which PRWORA can potentially increase differences in welfare benefits across states. States have broad discretion to determine policies while 2 complying with three federal requirements: fostering labor transitions through work requirements, imposing sanctions to those who fail to comply with the work requirements, and setting time limits on the receipt of benefits. States can also modify eligibility requirements, including asset and earnings disregards. Additionally, states have the ability to choose the intensity of benefits provided through the program. A key issue is whether this increase in discretion for state governments has led to more generous welfare programs providing better protection or, in contrast, to more punitive welfare programs that offer lower level of benefits, stringer eligibility criteria and more restrictive work requirements. A second, less investigated, set of issues is whether decentralization has given rise to a substantial divergence in the level of benefits across states and what are the distributional consequences of this process. An important concern is whether higher levels of labor participation and decreasing levels of welfare dependency might have been obtained at the same time that benefits became lower and distributed more unequally across states. These potential outcomes may have relevant implications in terms of inequality. First, higher adequacy in welfare benefits can be crucial to improve the situation of the most disadvantaged households and to some extent can represent the gains in social welfare resulting from public intervention. Some previous studies have proposed social welfare indices characterized in terms of the level of welfare embodied in a given distribution of adequacy rates (Ayala and BárcenaMartín, 2018). Second, other studies looking at variation in the decentralized social safety net have found that it fosters new forms and dimensions of inequality and have used inequality indicators to measure these differences (Bruch et al., 2016; Meni and Wiseman, 2017). Unevenness across states in adequacy rates have important distributional consequences for economically-vulnerable families. If we assume that the sufficiency of economic resources 3 provides to a certain extent an overall judgement of social welfare in a given country or region, we can look at the distribution of adequacy rates across states in a similar way to the standard analysis of inequality. According to the intensive literature on abbreviated social welfare functions (Sen, 1973; Chakravarty, 2009), a lower mean –in this case decreasing adequacy rates– and higher inequality –larger differences across states– yield lower levels of social welfare. In this way, social welfare does not only depend on the level of adequacy in each state but also on differences across states. Decentralization might also give rise to a ‘race to the bottom’ with lower benefit levels and higher differences across states (Peterson and Rom, 1989; Shroder, 1995; Rom et al., 1998; Figlio et al., 1999; Brueckner, 2000; Saavedra, 2000; Berry et al., 2003; Bailey and Rom, 2004; Baicker, 2005a, b), and, as a consequence, lead to considerable welfare under-provision (Gramlich et al., 1982; Brown and Oates, 1987; Wheaton, 2000; McKinnish, 2005; Toolsema and Allers, 2014). While the evidence is somewhat mixed regarding the size and causes of the ‘race to the bottom’ effect, most studies confirm it. The empirical importance of such differences across jurisdictions has also been addressed in studies of some European countries with decentralized welfare related policies, such as personal social services in the UK (Revelli, 2006), local welfare benefits in Norway (Fiva and Rattsø, 2006), and the refugee placement program in Sweden (Dahlberg and Edmark, 2008) As the evidence on lower benefits in real terms with respect to the levels before the reform in many states is increasingly robust, there has been renewed academic discussion over how a more decentralized system of welfare provision can lead to higher differences in welfare levels across states. As stressed by Chernick (2000), if more fiscal responsibility for redistribution is left to subnational levels of government, then states with weak fiscal capacity or limited preferences for 4 redistributions might choose benefits and levels of access that fall below some supposed minimum national standards of adequacy.