The United States is a land of opportunity – a country that prides itself on the promise that if you educate yourself and work hard, you’ll achieve prosperity. Yet what happens when policies and systems impede progress and blunt the promise for people most in need? According to analysis and insights from across the nation, this impediment to social and economic mobility is pervasive, and it’s called the “Cliff Effect.”
This cliff effect, or “benefits cliff” as some call it, refers to the sudden drop in public benefits that occurs for individuals or families when they achieve a small wage increase. For low-income families, the cliff effect is a barrier to trying to move up the economic ladder, and for many, the threat of a loss of benefits is a deterrent to working additional hours, overtime, pursuing education or even landing a new job that could lead to upward economic mobility and financial independence.
The scope of the challenge is illuminated by the numbers. According to the most recent data from the U.S. Census Bureau, 21.3 percent of the U.S. population participates in government assistance programs each month, equating to approximately 52.2 million people. Of those receiving means-tested benefits, 33.5 percent were unemployed, and 43 percent stayed in assistance programs between 37 and 48 months. These numbers represent a vast number of people in the United States who are struggling to gain financial independence while navigating policies, rules, and systems that often hold them back.
To take the challenge of reforming the cliff effect, a panel at Leadership for a Networked World’s Health and Human Services Summit shared their assessments of the benefits cliff, their vision for changes in policy and practice going forward and some of the challenges they experience or anticipate along the way. Moderated by Mishaela Duran from the U.S. Administration for Children and Families, the discussion began with a case-based view of the cliff effect problem from the perspective of David Altig, the Executive Vice President and Director of Research for the U.S. Federal Reserve Bank, Atlanta. Following Altig’s presentation, Kelly Harder, presenting in the role as a systems thought leader, and who is currently a human services senior program officer with The Kresge Foundation, advocated for radical policy and practice solutions through unconventional partnerships. Finally, Jennifer James, the Undersecretary for Workforce Development for the Commonwealth of Massachusetts, and Amy Kershaw, the Associate Commissioner for Economic Assistance and Employment at the Massachusetts Department of Transitional Assistance, used work being done in the New England states, specifically in Massachusetts, as an example for how to incentivize work in other states.
The section that follows synthesizes three of the most important themes from the presentations to guide leaders in eliminating or at least reducing the cliff effect.
Our goal is that every single person in the United States of limited means has access to exactly the same financial planning resource as every person of ample means.
While in the long run, it might make financial sense for participants in public assistance programs to pursue steadier, higher income jobs, in the short term, many lose big. Panelists noted that key coaching, financial planning resources and information sharing were essential to helping people make better choices in the long run. Kershaw said: “[Participants] are actually making pretty good economic decisions to park themselves at a place that maximizes income for their family. It doesn’t get them economic stability in the long run, but it does maximize for right now”.
At its core, explained Altig, this is a tax problem. He shared the case of “Leia”, a movie theater concessions worker who refused overtime as well as a move to an “opportunity occupation”, that is, a job that pays higher than the median wage locally and does not require a four-year bachelor’s degree (Altig gave the example of a registered nurse). If Leia accepted overtime or took a job as a certified nursing assistant on track to become an RN, she stood to lose benefits and income in the short term. In this case, Altig explained, marginal tax rates are key, and these, he explained, are not just the taxes people pay to the government, but what the government takes away from people that it was previously giving. Altig shared his office’s goal: that “every single person in the United States of limited means has access to exactly the same financial planning resources as every person of ample means”. People need to be provided, he said, with information that allows them to make more informed choices. Non-profits, workforce development practitioners and employers should have assistance in identifying when and how supportive services and financial resources could help move people to skill acquisition and a more stable future. Additionally, policymakers should be made aware of the need for these services and resources.
Harder also underscored this point, stating that policy and practice solutions include various modes of gathering knowledge including mapping benefits cliffs, aligning eligibility levels, increasing family economic security through asset development, fostering culture and system changes in the public and private sectors through employer engagement, cost-benefit analysis, goal-setting, and career planning and coaching.
If participants, policymakers and coaches work together in what Harder calls “unconventional partnerships” to share key information and move policy and practice forward, we will begin to see changes at individual, local, state and federal levels.
Altig pointed out that not only does Leia win in the long run if she moves from the movie theater to becoming a certified nursing assistant, the public sector does too. For example, the federal government would gain $140,000 back if Leia stops participating in public assistance programs. If Leia were to move from being a CNA to becoming an LPN, the federal government would gain back about $200,000. “This”, he explained, “is a half a million-dollar proposition to the government to get Leia to move up the pathway and yet Leia has very little incentive to do it”. The problem is what he called a classic mismatch between public and private return.
To run these numbers, Harder said, is to expose the unseen structural inequalities built by policy despite the best of intentions over the years – and potentially to help shift them. Unfortunately, he explained, there is little incentive for upward mobility if tangible benefits and earnings go down, and so “the challenge is, how can we partner to create a completely different path?” Referring to the methods state use to design local innovations that fix federal rules, Harder said “we cannot waiver our way into the solution. Let’s look at earned and unearned income, and look at what’s livable, and just pay the difference”. This is precisely what Dakota County Minnesota’s (Harder previously led the human services organization there) Economic Stability Indicator (ESI) is designed to do. Through examining situations on a case-by-case basis and rewarding people for earning more, people are incentivized into upward mobility.
James and Kershaw shared that while they don’t believe that we will ever be able to completely eliminate the cliff, there are ways to smooth it out. State-level policy work in Massachusetts provides one example: the state’s Learn to Earn Initiative is grounded in analyzing and mapping existing “safety net” benefits programs and developing policies to shift the focus to an incentive-based and career pathway-focused set of supports that promote employment, wage growth, and permanent exit from health benefits.
The numbers don’t lie, and in fact, they are quite persuasive – it is in everyone’s best interest to smooth the cliff effect through incentivizing work. However, the panelists agreed, the challenge is to create the partnerships and provide the scaffolds that will help both participants and policymakers to realize that this is in their best interest.
Central to ameliorating the cliff effect, panelists agreed, is rewarding people for earning more instead of punishing and disincentivizing them. If we don’t want participants to continue to need public assistance, then people need incentives to become economically self-sufficient. Through the Learn to Earn Initiative, James and Kershaw shared, people in Massachusetts are partnering for reforms that will allow public benefit recipients to keep more of what they earn while they build work experience, seek credentials, and increase their wages. The initiative seeks to establish transition periods and manageable sliding fee scales, to develop an ongoing financial coaching model, and to work across public systems to align and simplify rules as well as to align benefits requirements with labor market demands. “We have to allow public benefit recipients to keep more of what they’re earning while they’re on benefits if we want to see it as an investment in their economic mobility”, said Kershaw.
Harder underscored this point. If this work is done at a local level, he said, people can be rewarded for earning more. Finally, Altig discussed the cliff-smoothing policy in Orlando, Florida, which smooths out the repercussions of the cliff effect over three years and thereby enables people to have a stable path to self-sufficiency. Through taking the financial planning perspective and closely studying localized cases, people can make more informed choices whether in relation to training, providing services, or shaping policy.
The panelists’ ideas for smoothing the cliff effect teach those who work in health and human services that sometimes, even seemingly insurmountable structural problems can be addressed through quantifying and experimenting with solutions in unconventional, multi-tiered partnerships. Panelists’ work provides the field with a reminder that solving some socioeconomic problems does not have to be a zero-sum game: in fact, there are ways that everyone can win through sharing information, realizing a common goal, and collaborating on the means to accomplish it. To make progress on fixing the cliff effect, below are five critical action steps health and human services policymakers and officials can take.
We have to allow public benefit recipients to keep more of what they’re earning while they’re on benefits if we want to see it as an investment in their economic mobility.
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