Avoiding The Cliff Effect

West Virginia is nearly a month away from reductions in childcare assistance  eligibility requirements that will ipact over 800 parents and 1,400 children. Families that make between 150-185 percent of the Federal Poverty Level will be dropped from the program on January 1, 2013. The changes in eligibility could not only force parents to quite their jobs because child care would become cost prohibitive, but it could further exacerbate the benefit “cliff effect.”

Often times, the greatest barrier to self-sufficiency for low-income individuals and families occurs when an individual has been receiving financial benefits from support programs such as Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), or child care subsidies, and a small increase in income causes the termination of these benefits and puts that individual in deeper financial strife. 

This is a particular problem for workers in West Virginia, because of the state’s high share of low-wage jobs. A low wage worker in West Virginia may be hesitant to accept a raise or move to a better paying job because an increase in wages could result in the loss of benefits like SNAP, TANF, and child care subsidies. 

For example, for a single parent with two children, a wage increase from $12.00 an hour to $12.50 an hour would result in the loss of SNAP benefits, while a wage increase to $18.50 and hour would result in a loss of child care assistance, even though the family would still earn below 200% of the Federal Poverty level. To put it plainly, if a West Virginia household of three earns an annual income of $23,803, they will lose SNAP and Low Income Energy Assistance Program (LIEAP) benefits. A raise to $27,465 would mean a loss of CHIP and an annual salary of $33,874 will terminate the child care subsidies.

So, while the family would not have enough income to cover basic household and family expenses, the worker would be earning too much to qualify for basic assistance programs. By accepting a raise or a better paying job, the low wage workers can put their families in worse financial situations, due to the loss of benefits the cliff effect creates. A study in Indiana estimates workers in their state can lose over $11,000 in net resources due to the cliff effect.

The Women’s Foundation of Colorado offers this graph below, illustrating the cliff effect:

The “Breakeven Line” is the point in which income is equal to expenses related to the costs of basic necessities. As wages increase and the family begins to just get ahead and pay off bills, the support programs drop off. Low-wage workers continue to strive and earn more money, yet ironically, the result is less financially stable and secure. 

It is no surprise that a low-wage worker would consider refusing a raise in order to keep the benefits he or she needs to provide for the family. This “cliff” phenomenon can be a real deterrent for employment and a barrier to economic security. It would be less detrimental to families if programs like SNAP raised their income limits to 200% of the Federal Poverty Level. This would reduce the initial “cliff.” An individual could be phased out of these programs gradually, rather than immediately terminated due to a tiny wage increase.

It is important that work must pay. Otherwise, individuals are trapped in a cycle of financial insecurity. It is a situation that we simply cannot afford.

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