Public benefits ‘cliffs’ can trap low-wage workers, study finds

New research from Washington University in St. Louis argues that policymakers should enact gradual cutoffs for public benefits such as food assistance or healthcare. The change could help both families and employers by allowing low-wage workers to earn more without losing critical support systems.

Millions of low-wage Americans using public assistance limit their earnings or savings, according to the study from the Center for Social Development (CSD) at the WashU Brown School.

The findings suggest that so-called “benefits cliffs” can discourage work, career advancement and financial security for families already struggling to make ends meet.

In the research brief, Stephen Roll, an assistant professor and research director at the CSD, and co-author Mathieu Despard, of the University of North Carolina at Chapel Hill, examined responses from a nationally representative sample of U.S. workers with incomes below 250% of the federal poverty level, which amounts to $82,500 for a family of four. They developed a survey tool to measure how public benefit rules influence workers’ employment and savings decisions.

The researchers found that nearly 22% of low-wage workers participating in at least one public benefits program, such as SNAP or Medicaid, reported acting to preserve their eligibility. That equals roughly 4 million workers nationwide. The most common response was declining additional work hours, though many respondents also reported keeping savings below program limits, turning down raises or promotions or declining job offers altogether.

Why would workers reject a pay raise?

“Because of the way our benefits system is structured, a single mother of two living in St. Louis enrolled in a set of common public benefits could increase her earnings from $34,000 to $80,000 and experience no positive financial impact for her family,” Roll said. “That’s because the loss of benefits over that range fully offsets any increased earnings she gets. 

“At some points, this loss is especially severe. If that same mother went from $31 an hour to $33 an hour at her full-time job (a salary bump of $4,160), that $2-per-hour raise would result in her losing nearly $15,000 in childcare benefits, leaving her family much worse off. This illustrates the fundamental problem with a benefits cliff: A worker can do exactly what the system encourages — work more and earn more — and still fall behind financially.”

Workers who limited their earnings reported giving up hundreds of hours of work and thousands of dollars in wages each year, reducing opportunities to build savings and improve their long-term financial stability. 

These constraints also can affect employers and local economies, making it harder for employers to cover shifts when a qualified employee turns them down, Roll and Despard found.

How can policymakers support families’ well-being?

The study also found that earnings and savings penalties often occur alongside administrative burdens associated with public assistance programs. Workers who reported limiting earnings or savings were substantially more likely to experience challenges understanding program rules, complying with requirements and coping with the stress and stigma of receiving benefits. Among participants enrolled in SNAP or Medicaid, those discouraged from work and saving were roughly 2.5 times more likely to report psychological burdens related to public benefits.

Roll and Despard recommended a number of ways that policymakers can better support economic mobility and families’ well-being: reduce benefits cliffs through more gradual phaseouts; raise, or even eliminate, asset limits; and simplify eligibility and enrollment processes.

Such changes, they said, would help public benefits programs fulfill their dual purpose of protecting families from hardship while also encouraging work, savings and long-term financial independence.

“There is growing momentum around benefits-cliff reform at the state level, and we are already sharing these findings with state agency leaders, advocacy organizations, philanthropies and other researchers,” Roll said. “We also plan to bring the findings more directly to legislators and other policymakers as this work develops.

“Our next step is to use larger-scale survey and economic data to estimate how much these policies cost workers in forgone wages and employers in lost hours, advancement and retention. The basic idea behind our research is that families should not have to turn down a raise to protect the childcare, health coverage or food assistance that makes work possible.”