Even slight raises in income cause families to fall off the “benefit cliff”---lose eligibility for food stamps and health insurance

Eligibility for work support benefits is typically based on income, so as their earnings increase, families lose eligibility for supports. A benefit cliff occurs when just a small increase in income leads to the complete termination of a benefit. The result is that parents can work and earn more, while their families end up worse off than they were before.8

Returning to the example of a single parent living in Denver County with two children (one preschool-aged and one school-aged), Figure 3 illustrates the impact of benefit losses on the family’s efforts to get ahead. It shows how the family’s net resources—that is, resources after subtracting the cost of basic expenses—change as wages gradually increase from $6.85 to $20 an hour. In practice, workers may only experience a subset of this wage range.

In this example, when eligible, the family receives all of the benefits discussed above: the federal EITC, the state child care tax credit, TANF cash assistance, food stamps, LEAP, child care assistance, and public health insurance for children. (Even at $6.85 an hour, the parent is ineligible for public health insurance if she works full-time.) With these benefits and a full-time job at the state’s minimum wage of $6.85 an hour, the family is unable to make ends meet. In fact, the family’s “net resources” are about $3,500 below the “breakeven line”—the point at which total resources equal basic expenses. In other words, the family faces an annual shortfall of about $3,500.

As the parent works and earns more, a series of benefit cliffs keeps her family struggling. The first benefit the family loses is TANF cash assistance,9 but there’s no cliff at this point because TANF benefits phase out gradually. The family experiences its first cliff when wages increase from $10 to $10.50 an hour, resulting in a loss of more than $2,500 in food stamps. This occurs just as the family’s net resources are approaching the breakeven line. Then, when wages rise to $15 an hour, the family simultaneously loses child care assistance and LEAP.10 The loss of subsidized child care, in particular, is a huge financial hit.11 With this loss, the family receives a somewhat larger state child care tax credit, but this only makes up a fraction of the increase in the family’s child care expenses. Another raise to $16 an hour puts the family over the income limit for Child Health Plus. Now the family must pay a premium for family health coverage. As a result of these losses, the family is worse off at $16 an hour than it was when the parent was making the minimum wage.

Figure 4 offers another view of the cliff effect by providing detailed information about the changes in family resources and expenses as earnings increase. Again, the analysis is based on a single parent with two children living in Denver County, receiving the following benefits when eligible: the federal EITC, the state child care tax credit, TANF cash assistance, food stamps, LEAP, child care assistance, and public health insurance.

With work supports and full-time minimum-wage employment at $6.85 an hour (the first column in Figure 4), the family has just over $23,000 in annual earnings and other resources. However, the family’s basic expenses total $26,564—leading to an annual shortfall of close to $3,500. In addition, at this income level, the parent is ineligible for public health insurance, though the children are eligible for coverage. This analysis assumes that the family has access to employer-based health insurance, so premiums are relatively low. In practice, few low-wage workers receive such benefits.

At $8 an hour, the gap between the family’s resources and expenses is somewhat smaller, and at $12 an hour, the family is able to afford the cost of basic necessities.14 But a raise to $16 an hour pushes the family back into the red. Increased earnings are outweighed by a reduced federal EITC benefit and the loss of subsidized child care and children’s public health insurance (adding children to the parent’s employer-based plan increases premiums). As a result, at $16 an hour, the family is more than $6,000 short of being able to cover annual expenses. With a further increase to $20 an hour, the family is doing somewhat better, but continues to face an annual deficit of about $1,600.

Figure 5 highlights the benefit losses that occur as the parent’s wages double from $8 to $16 an hour. This raise means an increase of $16,640 in the parent’s annual earnings, but the family loses food stamps, LEAP, child care assistance, public health insurance, and most of its EITC benefit. In addition, the family’s payroll and income tax liability grows substantially, while the increase in the state child care tax credit is comparatively small.