Why Talks of a ‘Benefits Cliff’ are Permeating Throughout Higher Minimum Wage Discussions
The first question about the benefits cliff is whether to even ask about the benefits cliff.
The term refers to the sudden way that income-based public assistance programs can end as a recipient’s income increases. When a family's net resources — including benefits — is plotted against annual income on a graph, the line can drop off dramatically when income thresholds for benefits are reached.
So dramatically, in fact, that the line resembles a series of, yes, cliffs.
In real life, these graphic displays represent real declines in the resources a family needs to get by and become self-sufficient. If the increases in income are not enough to make up for the decline in benefits — in areas like child care allowances, food assistance and health care subsidies — a family can find itself in real trouble.
Yet talking about such analyses in the context of the push for an increased local minimum often becomes political. That comes largely from the perception that any threat of benefit reductions is being employed as a rationale for not increasing wages of the lowest-paid workers.
During a recent report to the St. Paul City Council on issues surrounding a possible minimum wage increase there, Citizens League executive director Pahoua Yang Hoffman said she heard different perspectives on the subject from workers and employers. “Some were naturally worried about [the benefits cliff],” she said. “Others actually took offense to that question: ‘Don’t dangle that safety net over our heads, we’re trying to get out of [poverty] here.’”
“They interpreted that question as wanting to keep them there,” Hoffman said. “The question they would ask right back is, ‘Is that the right question to ask?’”
It's certainly one of the questions the St. Paul City Council wants to ask as it looks at raising its citywide minimum wage. “Oh my goodness, we’re absolutely looking at that,” Council President Amy Brendmoen said. “If nothing else, we need to know that so that we know how we need to partner with the county and the state so we make sure we don’t unintentionally harm our most vulnerable population.
“I don’t think we want those cliffs to prevent us from making a decision but we certainly do want to be able to navigate that challenge,” she said. “I don’t think we should be afraid of asking.”
Liz Xiong, spokesperson for Mayor Melvin Carter, said “he is being thoughtful and intentional about fully grasping the interplay between managing a minimum wage increase and 'benefits cliffs.' “
On Wednesday, the council likely will approve a second phase of the Citizens League work, which will include economic analysis of St. Paul and the appointment of a committee to consider key questions about implementing a new wage, questions around timing, phasing, and whether a tip credit should be included. According to Hoffman, it will also include analysis of the impacts on public assistance benefits.
What constitutes a benefit cliff?
Allen Bellas is a professor of economics at Metropolitan State University who recently served on a St. Paul Chamber of Commerce-sponsored panel looking at the impacts of a minimum wage. He said state and federal rules phase out benefits as recipients earn more money. Some of those losses are gradual, some are not.
Child care assistance phases out slowly, for example. “The more you make, the more you have to pay for child care,” Bellas noted. “That seems reasonable and the increase isn’t too bad — about 1 to 1-and-a-half percent of the increased income.” Bellas compared such increased out-of-pocket payments to a tax, which means that parents moving above the income threshold for childcare assistance face what amounts to a 1.5 percent tax.
But other programs have sharper — and harsher — drop-offs. Housing assistance programs require recipients to pay a percentage of the income, often 30 percent. In that instance, every additional dollar they earn results in an additional 30 cents in housing payments — or a 30 percent tax in Bellas’ analysis. “That’s roughly what the federal corporate income tax was before tax reform,” he said.
Click to view a larger version. (Courtesy of Olmstead and Dakota Counties)
The cliffs for Temporary Assistance for Needy Families are steeper still: a loss of 50 cents in assistance for every additional dollar earned. And Medicaid has a sharp drop off as well. In fact there are two cliffs facing a family with children – one cliff where the parent loses benefits and another where the children lose benefits.
“The paradox is that the erosion of those benefits as you earn more income probably reduces or eliminates the incentive to take a job; to take a job that’s dangerous; to take a job that’s dirty; to take a job that’s exhausting,” Bellas said.
“Anecdotally, recipients know where the cliffs are, so they know how many hours they can work before their families are in danger of falling off that cliff,” Bellas said.
Bellas didn’t use his analysis to say minimum wages shouldn’t be increased. And there appears little chance that the St. Paul Council won’t follow Minneapolis and enact a local-only minimum wage more generous that the state minimum wage.
But Bellas said recipients should know when cliffs are lurking. “That would let them make informed decisions about how much to work so their home lives remain as stable and as well supported as possible.”
A tool to identify cliffs
In Minnesota, the Children’s Defense Fund has created a calculator it calls the Economic Stability Indicator, which began as a way to help recipients figure out which programs are out there and which they might be eligible for, said Stephanie Hogenson, the outreach director for the CDF-Minnesota. It allowed people to input household size and income in about five minutes.
“That tool is necessary because of the programs — general assistance, medical assistance, school meal programs, child care assistance — they’re all administered by different agencies, they have different applications, different eligibility requirements. They were all created and changed and modified in very complex ways,” Hogenson said.
From left to right: Professor Allen Bellas, Citizens League executive director Pahoua Yang Hoffman and Dr. Steve Hine from the Minnesota Department of Employment and Economic Development. (Photo by Peter Callaghan)
Agencies and non-profit groups also use the tool when they are counseling families who are seeking help, and to show policy makers how proposed policy law changes to one program might impact other programs. “An increase in wages should always be a net increase for the family,” Hogenson said. “But there really wasn’t a way to analyze how all the programs work together, how wages affect your eligibility and benefit amounts and how tax liability and credits work into the equation.”
The same tool can also be used to show current recipients approaching cliffs. “Now we see it as an opportunity to use it with families in order to allow them to budget and plan and understand how all of their resources interplay and bring them to a path to economic stability,” Hogenson said. St. Paul Mayor Carter and his staff were briefed on the stability indicator by the Children's Defense Council, Xiong said.
In Minneapolis, what benefits cliff?
Minneapolis was the first city in the state to take on the local minimum wage. Like St. Paul, it commissioned studies and undertook efforts to hear from the community.
But Minneapolis spent little or no time examining the potential impacts on public assistance recipients. The $147,000 study commissioned by the city from the Roy Wilkins Center at the University of Minnesota looked only at food assistance programs. It concluded the impacts on workers would be small.
“Some argue that because of the reduction or loss in benefits…households may be worse off after the minimum wage increase,” it stated. “However, on the other hand, the increase in the minimum wage could more than offset the loss in benefits.”
The analysis stated that only about 600 families in Hennepin County — out of 42,000 receiving SNAP, WIC and school lunch benefits — would lose support with a higher minimum wage. Yet the analysis does not appear to have looked at benefits such as child care assistance, Medicaid and TANF.
While some who attended listening sessions in Minneapolis during the debate over the policy — most notably Tim Marx, the president of Catholic Charities of St. Paul and Minneapolis — raised the issue of the benefits cliff, neither the city staff report nor the public discussion by Minneapolis city council members ever addressed the possible loss of benefits.
Now that the wage law is in place and the first increase has taken effect for employees in workplaces with more than 100 workers, the city has asked the Federal Reserve Bank of Minneapolis to study the impacts, including benefit cliffs. In a statement, the Fed said this would be the first minimum wage study to use government data to measure impacts of higher wages on programs such as nutrition assistance and the Minnesota Family Investment Program, the state's welfare reform program for low-income families with children. The first report on the Minneapolis ordinance is due this summer with subsequent reports coming in October of each year for the next 10 years.
In St. Paul, looking at the issue while the ordinance is being drafted will provide a chance to manage the impacts from the start. “I just think that some of the council members in St. Paul care more about this than the council members in Minneapolis did,” said the Citizens League's Hoffman.
She said she understood, however, how wage-hike advocates would be leery of the topic. “I can see where they wouldn’t want to mess up the message,” Hoffman said — that talking about benefit cliffs could be seen as a scare tactic used to undermine support for local minimum wage hikes.
In fact, the organization leading the drive for local minimum wage ordinances does have such concerns. “We absolutely disagree with the idea that we shouldn’t raise wages explicitly so that workers are kept in sufficient poverty to receive public assistance,” wrote Celeste Robinson, a spokesperson for Fifteen Now Minnesota. “Nobody who works for a living should live in poverty.”
If there are cliff effects, Robinson said, it is up to the state and federal government to craft programs to lessen the impact.
Opponents of local minimum wages haven't had much success in stopping it from happening, though. They lost in Minneapolis and will likely lose in St. Paul, where a council vote on the issue could come by year’s end. They've also been losing in the courts.
As such, much of the discussion of benefit cliffs come from organizations that advocate for the poor and who support, either implicitly or explicitly, higher minimum wages.
Bidging the cliff
While hoping for federal and state changes to programs to ease the impact of benefits cliffs might be futile, there are moves at the county level to reform public assistance so that it can be managed.
In Minnesota, a typical single parent with two children — one in school and one in child care — is eligible for up to $4,200 in public assistance benefits from multiple programs, all of which have different points where eligibility phases out or ends. Benefits can’t be moved from one program to another.
But a pilot program being developed by Olmsted and Dakota counties in conjunction with the state is trying to create some flexibility around benefits to avoid the cliffs. Under the program, when a family comes in to talk about getting help, their family and financial information is entered into what is called a “self-sufficiency assessment tool” to see where where they need help. That might include not only financial assistance, but help in the areas of health, substance abuse and education.
“Once we know what you are potentially eligible for, you take that net sum dollar and start running simulations,” said Kelly Harder, the community services director for Dakota County. “What if we took your SNAP — food support — and moved it over to child care so that you could get to technical school and get that certification to get that $15 an hour job?”
“If we prove the concept, then we have some legs to go after broader policy for more people,” said Paul Fleissner, the deputy county administrator for health, housing human services of Olmsted County.
A total of 100 families in Olmsted and Dakota counties will be enrolled starting in January 2019. The counties will focus on high-risk families: those with a single parent under the age of 26 with children. In order to have a controlled study, the families chosen would be randomly selected, but will not be able to opt out and use a traditional benefits package instead. The outcomes of the families in the pilot will be compared to families in the existing system.
A vital part of the project is properly calculating each family's benefits cliff, and the two counties are working the Children’s Defense Fund to create what they call a cliff forecaster. Rather than simply identifying lurking cliffs to minimize or manage the impact, the pilot program will use private foundation grants to bridge them.
“We are both really impatient, so we’re not going to wait for the state or the feds to give us the kind of waivers to do what you just said,” Fleissner said of Harder and himself. “They may be facing a cliff, but in our project they won’t fall off the cliff because we’re going to use foundation dollars. If they need child care to go to work and they’re gonna get a raise, we’ll let them get that raise and keep that child care so they can keep going.”
Said Harder: “This is why this stuff doesn’t change very easily because it is complicated. But we feel we have what it takes and the willingness to give it a try.”
Update: This article was undated to show that St. Paul Mayor Melvin Carter is exploring the impacts of benefit cliffs and to clarify Medicaid eligibility rules.