Shown below are welfare examples of three families. Each of the families represents a married couple with two children. The only difference in the families is their outside income from wages. One family makes zero wages yearly, one makes $15,000 a year, and one makes $35,000 a year. The poverty threshold for a family of four is $27,740. Therefore, Families 1 and 2 are “in poverty.” This page shows what each family would get in benefits from the top three welfare programs, EITC, SNAP, and Housing Assistance.
Conclusions from the Welfare Examples
Three conclusions stem from the welfare examples:
- The poorest families don’t always get the most benefits. As shown below, the family making $15,000 annually gets slightly higher benefits than the family with no income. Therefore, the focus of the welfare system is weak.
- The welfare system can boost moderate-income families to well above the Poverty Threshold. The family making $15,000 in wages is raised to an income level after welfare benefits of $38,974 annually.
- The welfare system discourages work for families and individuals with modest income levels. This occurs because the loss in benefits is disproportionate to the gain from working. If the breadwinner in the family making $15,000 can add $20,000 in wages from working, they will only net $1.87 an hour after the loss of welfare benefits. See also the work penalty on the Welfare Issues Page.
The data
The following table presents the welfare payments the three families would receive from the three most extensive welfare programs – EITC, SNAP, and Housing Assistance.
The Analysis
Family 1, with zero income from wages, would receive benefits from SNAP, EITC, and Housing Assistance, totaling $23,268. Family 2, with $15,000 in income from wages, would receive benefits of $23,974, slightly higher than Family 1 due to the impact of EITC. Income plus benefits for Family 2 totals $38,974, well above the poverty threshold of $27,740. Family 1 is still $4,472 below the Poverty Threshold even after welfare benefits, while Family 2 is $11,234 above the Poverty Threshold.
Family 3 has an income of $35,000, which is $20,000 higher than family 2. But they lose $16,119 in benefits because they don’t qualify for Housing Assistance, and SNAP and EITC are much lower. They come to $42,855 in income plus benefits, which is only $3,881 higher than family 2, even though they make $20,000 more in wages. Analyzed another way, if a spouse in Family 2 can go to work and earn $20,000 a year, they would only come out $3,540 ahead, or the equivalent of $1.87 an hour [iv]. The gain is even less after payroll taxes. The family could also lose other benefits such as Child Nutrition, Head Start, LIHEAP, Lifeline, and state-level welfare. The dramatic loss in benefits is a disincentive to work.
Work Penalty
The welfare examples above show the poor economics resulting from low-income families obtaining additional wages. Their benefits drop significantly as income rises modestly. These “benefit cliffs” can be very dramatic. It is simply not worth it for an individual to go to work full-time for a marginal increase in income. Therefore, the welfare system does not “make work pay.”
Marriage Penalty
The welfare examples above demonstrate why our welfare system discourages marriage. If a single parent marries an individual with a job that takes the couple to an income level above the Poverty Threshold, they will lose most of the welfare benefits. By remaining single, they can come out ahead economically. Many critics argue that this contributes to the high incidence of unmarried mothers on welfare.
Footnotes
[i] Calculated using the State of Illinois SNAP screening tool [Internet]. Data retrieved May 15, 2023. Data for a family living in Illinois, wages as stated above, a married couple with two dependent children, $1,000 in monthly rent, and no assets and no other sources of income or expense. Available here.
[ii] Calculated using the IRS EITC Assistant for the tax year 2022 [Internet]. Data retrieved May 15, 2023. Data for a married couple filing a joint return with two dependent children, wages as stated above, and no other items of income, expenses, or assets. Available here.
[iii] Assumed Families 1 and 2 qualified for Rent Voucher, and Family 3 did not. The Voucher equaled a rental expense of $1,000 per month, less 30% of the family’s income from wages. The rent expense of $1,000 per month approximates the average HUD rent expense for a family of four in the U.S. (see Housing Assistance Program).
[iv] Assumes the spouse worked a standard work year of 2,080 hours to earn $20,000 in wages for the year.