Benefit Cliffs Can Undermine Workers' Efforts To Get Ahead, Researchers Say

For low-wage workers, earning more money can sometimes mean losing public benefits that help pay for food, housing, health care and child care. These “benefit cliffs” can leave families worse off financially despite working more hours or taking a higher-paying job.

Researchers examining the effects of benefit cliffs say the problem is complicated. Although the most extreme cases, in which workers lose virtually all the gains from additional earnings, may be less common than some estimates suggest, benefit rules and administrative hurdles can still discourage work and undermine families’ financial stability.

“Benefit phase outs do matter for low-income households,” said Matthew Unrath, an assistant professor at the University of Southern California’s Sol Price School of Public Policy, during a recent webinar hosted by the University of Wisconsin-Madison’s Institute for Research on Poverty. “Stacking these benefits on top of each other, even when folks aren’t paying much in the way of federal income taxes, really can serve as a work disincentive.”

Unrath presented research using administrative records to estimate how taxes and public benefits affect the financial gains households receive when their earnings increase. The analysis found that effective marginal tax rates—the share of additional earnings lost through higher taxes or reduced benefits—are generally higher for lower-income households than for those with higher incomes.

For most households, these rates fall between 20% and 30%, his research found. Rates approaching or exceeding 100% are relatively rare, however, and should not be treated as representative of the typical family receiving public assistance.

Still, Unrath cautioned against dismissing the problem. “If we really want to promote work among low-income households, then an effective tax rate of 40% is arguably still fairly high,” he said.

The consequences extend beyond the calculations of economists. Mathieu Despard, a clinical professor at the University of North Carolina at Chapel Hill and a senior researcher at Washington University in St. Louis’ Center for Social Development, presented findings from a longitudinal study of more than 2,000 low-wage workers.

More than one-fifth of respondents reported taking at least one action to avoid losing public benefits. The most common responses included turning down additional work hours and keeping savings low.

Despard noted that some workers might be responding to an actual threat of losing benefits, while others may be acting out of uncertainty about program rules. Either way, the findings suggest that benefit cliffs can shape financial decisions even before a family experiences a loss of assistance.

Despard also found that workers who reported benefit-cliff experiences were more likely to encounter administrative burdens associated with public programs. He argued that the two problems should be considered together because both can make it harder for families to obtain and retain assistance.

Medicaid is a particular concern, he said. Losing coverage because earnings rise—or because a recipient struggles to meet documentation requirements—can threaten access to health care. For workers with chronic conditions, losing that care can make it harder to remain healthy enough to work.

Taryn Morrissey, a professor at American University’s School of Public Affairs, illustrated another dimension of the problem: programs intended to help parents work can themselves create financial uncertainty as families’ earnings rise.

Morrissey presented research examining child care subsidies in Virginia. These subsidies can help parents afford care and participate in the workforce, but eligibility limits and rising family copayments can create new financial pressures as earnings increase.

Her analysis found that subsidy participation was associated with higher earnings and greater employment stability. Yet the gains came in part from workers taking on additional jobs, highlighting the challenges low-wage parents face in increasing their income.

“Child care subsidies are a work support,” Morrissey said, but rising earnings can eventually trigger higher copayments or push families above eligibility thresholds, adding a substantial expense.

The researchers pointed to several potential policy responses, including making benefit phaseouts more gradual, providing transitional benefits as earnings increase, lifting asset limits and simplifying applications and recertification requirements.

The broader challenge, they suggested, is to design assistance programs that help families advance economically without abruptly withdrawing the support that makes employment possible in the first place.