The Distribution of Income: Major Programs of Cash Assistance

Major Programs of Cash Assistance There are two major programs of cash assistance (or transfers) to the poor in the United States: Aid to Families with Dependent Children (AFDC) and Supplemental Security Income (SSI). There were 11 million people, representing one third of the country's poor, receiving benefits under the AFDC program, and 4.6 million people receiving SSI aid in the late 1980s. AFDC is designed mainly to aid families headed by one parent, usually a female, that have dependent children. The program is jointly run and funded by the federal and state governments. On average the federal government bears about 54 percent of the cost of AFDC payments. Eligibility requirements and the actual amount of cash assistance under this program vary from state to state. Under the AFDC program, there's a maximum benefit in each state for people who have no earnings. As a recipient earns income, welfare payments decline. In 1990 the maximum cash benefit for a family of four ranged from $118 per month in Alabama to $846 per month in Alaska. You should observe that these AFDC benefits are modest compared to the poverty income level. For example, a family consisting of a mother and two dependent children receiving the maximum average benefit under AFDC would have had a cash income of $4,368 in 1990, which was less than half of the 1990 poverty income threshold of approximately $10,000 for a family of three. Supplemental Security Income is federally funded and benefits the aged, the blind, and the disabled. In 1990 the maximum SSI benefit paid to a single person with zero earnings was $386 per month, while a married couple received $479 per month. Major Programs of In-Kind Assistance Government in the United States each year pays out more to eligible poor people in the form of in-kind assistance or transfers than in cash benefits. For example, total cash assistance to the poor in 1987 through the AFDC and SSI programs amounted to slightly more than $20 billion. In that same year, in-kind assistance, chiefly in the form of programs to help the poor acquire medical services, food, and housing, totaled $54 billion. The three major government programs of in-kind assistance to the poor in the United States are: 1. Medicaid. This program pays for medical services to eligible poor people under age 65 who pass a means test. Everyone who receives cash benefits from AFDC and SSI is automatically eligible for Medicaid. This is the single most expensive of all government programs to aid the poor in the United States. In 1987 outlays by federal and state governments to pay for Medicaid amounted to nearly $28 billion. 2. Food stamps. This federally financed program, administered by state governments, provides the poor with stamps that can be redeemed for food and related items. The cash value of the stamps varies with the eligible recipient's earned income. In 1987 federal outlays for food stamps were $12.5 billion. 3. Housing assistance. A number of federally financed programs provide subsidies to help the poor pay for housing. The programs include government-provided housing at subsidized rents and payments to assist people who rent private housing. These programs provided $13 billion worth of housing assistance to the poor in 1987. However, this level of expenditure wasn't sufficient to provide benefits to all eligible people. Only one eligible person in four actually receives benefits. There are often long waiting lists to obtain government-subsidized public housing. Impact Of Government Assistance On Incentives And Well-Being Cash and in-kind assistance from government or other sources raise the standard of living of the poor people who receive the aid. However, welfare payments can reduce the incentives of recipients to work. The availability of in-kind assistance can distort choices made by the poor in ways that cause losses in efficiency. There are two ways that government assistance programs can decrease work incentives. First, the programs provide income to recipients independent of work. Naturally, this gives some people an incentive to work less and encourages others to refuse offers of work. In the United States, this effect is minimized by limiting welfare payments to those groups that are least likely to be in the labor force— children and their mothers in single-parent families, the elderly, and the disabled. In addition, the actual level of cash assistance received by eligible people is quite low. For those able to work, incentive still exists to earn more to raise their standard of living above the poverty level. Second, because both in-kind and cash benefits are reduced as the earnings of recipients increase, the poor are subjected to a trap that makes it hard for them to get ahead by working. For example, under the AFDC program, welfare mothers are allowed to earn a modest amount of income per month, usually in the range of $100 to $125, without any reduction in their welfare benefits. After more than this amount is earned, the cash benefits received under AFDC are reduced by 67 cents for each $ of earnings for the first four months of employment. After the welfare recipient has been employed for four consecutive months, AFDC benefits are reduced by nearly $1 for each $1 of earnings. The welfare recipient is also subject to some taxes when she works, and in most cases benefits under other programs, such as food stamps, are reduced as her earnings increase. For each dollar of earnings, her net increase in income is often 20 cents or less because of the reduction in welfare payments.