Transcript

Gerena: My name is Charles Gerena and I'm online editor in the Research Department at the Federal Reserve Bank of Richmond.

Today we'll be talking about the benefits cliff, which can occur when workers who receive public assistance from the government earn a raise and then discover they make too much money to continue receiving help. We'll find out more about this challenge and how the Richmond Fed is addressing it from two members of our Community Development team, Tiffany Hollin-Wright and Erika Bell.

Tiffany manages the Richmond Fed's community development programs in Virginia and West Virginia, while Erika focuses on North Carolina and South Carolina. Both moderated webinars on the benefits cliff in July and November 2020.

Thanks for being here, Tiffany and Erika.

Tiffany Hollin-Wright: Thanks so much for having us. Good to be with you again.

Erika Bell: Yes, thanks for the opportunity.

Gerena: It seems like common sense for recipients of public assistance to have their benefits reduced if they get a promotion that puts their income above a certain threshold. Why has this, in fact, been an issue?

Bell: Yeah, I'll take that one.

The best way to describe the impact of the benefits cliff is to put it in human terms.

Imagine that you go to school to get the additional education required to move from a Certified Nursing Assistant position to being a licensed practical nurse. Upon this certification, you land a full-time job as an LPN and you receive a pay increase of, let's say, $10,000 a year. However, upon receiving this bump in salary, due to income limits you suddenly lose a portion of your child care subsidy and a portion of your benefits from the Supplemental Nutrition Assistance Program or SNAP. These losses might amount to $12,000 a year. You would end up making less money even though you earned a promotion.

This demonstrates how climbing the career ladder may result in a net loss in income for recipients of public assistance in the short term and medium term, even though such progress will likely result in higher income over the long term. It's a challenge for those who are currently receiving public benefits but want to become self-sufficient.

Gerena: Erika, you mentioned that a loss in child care subsidies results in a hit to a family's expenses. How else does this factor into a worker's ability to remain on and complete their career path?

Bell: Great question.

According to a study by the National Association for the Education of Young Children, pre-pandemic, 67 percent of children under age 6 in the U.S. had all available parents in the labor force. So, one can see how the sudden loss of child care, or the sudden loss or decrease in a child care subsidy, could create a barrier for someone moving along a career path.

Keep in mind that child care subsidies are managed by states with various policies for qualification. Many states have long waiting lists despite families qualifying for the benefit.

I want to mention another potential barrier for families on the path to self-sufficiency, and that is the use of asset limits in qualifying for public assistance. For example, to be eligible for SNAP benefits, a household may have no more than $2,250 in countable resources, such as cash or money in a bank account, or $3,500 in countable resources if at least one member of the household is age 60 or older, or is disabled.

Some argue that these limits are intended to ensure that only families without significant savings or other assets receive help. Others argue that such limits run counter to the goal of supporting recipients as they become employed and begin to advance economically. Without a financial cushion, such as money in a savings account, a short-term job loss or an unexpected car repair could result in a downward spiral that sets families back.

Gerena: Interesting.

Tiffany, in a previous episode, you discussed the COVID-19 pandemic through an equity lens. Who is the most impacted by the benefits cliff?

Holin-Wright: Sure, Charles.

According to the United Way organizations, they have done a study and across the country they have identified what they call ALICE households: these are asset limited, income constrained and employed houesholds. These working families have earnings that exceed the federal poverty level, but they fall short of meeting just a basic cost of living. According to United Way's analysis, ALICE households are more likely to be Black, Hispanic, under 25 years old and headed by single females with children.

So, the answer is not everyone is impacted the same way by the benefits cliff. We see more disparities by race, by gender and by age.

Gerena: Have these differences worsened during the pandemic?

Holin-Wright: While the most recent ALICE reports are from 2018 and don't reflect the current impact of the COVID-19 environment, they do provide the backstory for why the pandemic has had such a devastating and disproportionate impact. It's important for us to keep this in mind as communities attempt to rebuild.

The safety net system was challenged before COVID-19. So, as a result of the pandemic, we see that female workers who are earning lower incomes are more likely to experience employment disruptions like layoffs and reduced work hours.

According to the Federal Reserve's Survey of Household Economics and Decisionmaking, or SHED, 39 percent of the households that were earning less than $40,000 per year in February 2020 reported that they were laid off by April. Some of these households were stabilized by financial assistance through the CARES Act and will hopefully remain resilient, especially when they receive the additional relief that was recently passed by Congress.

Gerena: There has been a lot of discussion, particularly in Virginia, about the economic impact of increasing the minimum wage to $15 an hour. How might incremental increases in the minimum wage impact recipients of public assistance?

Hollin-Wright: This is a particularly interesting question, Charles, as we consider the differences in minimum wage in states across the Fifth District.

Human service providers are asking whether the income eligibility criteria for public benefits will adjust to match increases in minimum wages in their states. Or, will people suddenly face benefits cliffs? This would occur if workers near the federal poverty threshold get a wage increase, as Erika mentioned, that causes them to earn just enough to be ineligible for safety net programs like SNAP, childcare or subsidized housing. This will likely result in an increase in their household expenses, which a modest wage increase will not cover.

If the income eligibility criteria is not adjusted, some workers that receive a higher minimum wage may actually end up worse off. They may have to pick up a second job just to make ends meet.

Gerena: It sounds like the benefits cliff could become a concern for low-income workers in Maryland, Virginia and the District of Columbia where minimum wages will be increasing.

Hollin-Wright: Yes [but] one thing to keep in mind is that minimum wage legislation varies from state to state, and sometimes even from one locality to the next. So, incremental increases in the minimum wage affects workers differently based on where they live and which sector they work in.

In general, minimum wage requirements aren't applied to all employers in the same way. Some states exempt companies with a threshold number of employees. Eligibility for higher minimum wages may also vary by one's ability, their age, their job sector, job type and even job tenure. One example: workers in some of the most vulnerable sectors like home health care, domestic service and agriculture, as well as people in on-the-job training programs, may not be eligible to earn the higher minimum wage.

All of these variances make it really difficult for me to draw, or anyone else to draw, a reliable conclusion on the actual effects of incremental minimum wage increases on workers who receive public assistance, as well as the impact on their employers. This is why we are working with the Atlanta Fed, who has developed a financial planning tool to help simulate the potential impact of this type of policy change on workers in particular career pathways. The tool is called CLIFF, which stands for Career Ladder Identifier and Financial Forecaster.

Gerena: Tell me more about CLIFF and how it can be used.

Hollin-Wright: CLIFF models a person's net financial resources at a point in time and over time. Net financial resources translates into a person's earned income plus any public assistance they receive minus the taxes a person incurs and the household expenses they pay.

CLIFF is a tax planning tool that is typically accessible to more affluent individuals. Those who are better off would use a tool like this to help them manage their personal finances. But now, thanks to CLIFF, workers who earn lower incomes can access a similar tool.

Working with Dr. Alex Ruder of the Atlanta Fed to leverage CLIFF to benefit workers in our district, we are starting to establish memorandums of understanding with organizations that support these workers. They will adopt the CLIFF framework to strengthen their workforce programs. They can also simulate the impact of policy changes on the workforce ecosystem as a whole.

We are also seeing commitments from human service providers, philanthropic groups and policymakers. We hope to see more adoption of CLIFF by educational institutions, particularly high schools, career and technical education programs, community colleges and even universities.

We are really excited, Charles, about employers who are looking at incorporating the tool in their labor force. This could help workers stay on their career pathways and reach their goals.

Bell: Charles, I have a story about that, if I may.

Gerena: Sure thing.

Bell: At a recent CLIFF webinar we held, one panelist talked about how a North Carolina company helps employees who earn a lower wage and receive public assistance. Of course, the company wants to help them move along the pathway and these workers get counseling to explore their benefits and how they may be affected as they climb the career ladder.

For example, the company offers a scholarship program which funds additional training to move lower wage employees along the career path to higher wage positions. They encourage program participants to personally explore how the scholarship and eventual increase in pay would affect their benefits and the timing of a change in public benefits. In this situation, all those selected for the scholarship opted to receive it and subsequent training, but with their eyes wide open to the benefits cliff they may face. This is another great example where a CLIFF tool could be helpful for employers.

Gerena: It's great to hear how the private sector can help people deal with the benefits cliff. How have state and local governments and nonprofits addressed this issue?

Bell: Again, awareness of the benefits cliff is key.

I mentioned asset limits earlier. Some states have removed these limits for SNAP as well as Temporary Assistance for Needy Families, also known as TANF, while others have maintained the federal standard. So, the involvement of policymakers and their understanding of the benefits cliff is important.

There are also federal, state and local programs that address the benefits cliff and support the goal of self-sufficiency for recipients of public assistance. For example, workforce development boards in each state receive funding through the Workforce Innovation and Opportunity Act. These regional boards, alongside adult education providers, community colleges and community partners, collaborate to create an ecosystem of services that support those who may face a benefits cliff.

Non-profit organizations are also key to advocating for workers who earn low wages and need help to navigate the benefits cliff. Several of these organizations we have heard about recently and have been featured on our Investment Connection website.

For those who may be unfamiliar with the Investment Connection program, it introduces public and private funders in the Fifth District to proposals from community-based organizations and small businesses. The beneficiaries are people who earn low- and moderate-income wages or live in distressed and underserved areas. Small businesses are also potential beneficiaries when funding matches are made.

Gerena: Interesting.

How do governments benefit, from a tax revenue standpoint, when workers complete their education or workforce pathway?

Hollin-Wright: Going back to CLIFF for a minute, the tool actually demonstrates that governments see a return on investment through an increased tax base and a reduction in the public assistance that they pay out.

In an ideal world, your first job would be in a high demand field that pays a livable wage as soon as possible. This type of high demand career path would then, ideally, lead to a gateway job that helps you earn wages beyond the standard of self-sufficiency and beyond cost of living. This would set you on a path to your ultimate job choice.

This is when workers would begin to see a real return on investment for their years of education and training. They are no longer reliant upon publicly funded safety net programs. Their local government begins to see increased revenue from the taxes that this worker now pays. And, this additional revenue can then be reinvested into more workers who also need economic support to help them move out of poverty. The CLIFF tool has features to project when and under what circumstances this return on investment is most likely to occur.

The creator of the tool, Dr. David Altig of the Atlanta Fed, asserts that workers from all income levels could benefit from a tool like this to help them plan for a more prosperous future for themselves and for their families. The more prosperous a worker, the more likely they will have increased purchasing power and contribute to the gross domestic product of their local economy.

It's a classic demonstration of how effective workforce development promotes local economic development.

Gerena: Sounds like a virtuous cycle that the Fed can play a role in supporting. What does the Richmond Fed plan to do in 2021 to address the benefits cliff?

Hollin-Wright: We, including my colleagues Erika and Peter Dolkart, are working with several entities throughout the Fifth District this year. One specific example is the partnership between the Atlanta and Richmond Feds and the Richmond Resilience Initiative in Virginia. The Reserve Banks will use CLIFF to analyze the impact of the initiative's guaranteed income pilot. I'm super-excited about this program.

The Richmond Resilience Initiative was launched last year under the leadership of Tyonka Rimawi of the Robins Foundation and Valaryee Mitchell of the City of Richmond's Office of Community Wealth Building. These organizations worked with Mayors for a Guaranteed Income, the Family Independence Initiative, Virginia Excels, and the Center for Guaranteed Income Research at the University of Pennsylvania.

Thanks to generous donations, the initiative is going to provide $500 of unconditional cash payments monthly for two years to participating families, each who earn less than the cost of living but probably have lost their safety net support. This approach is based on the premise that families deserve the dignity and autonomy to spend their public benefits on their priorities, which are often rent, groceries, transportation and childcare. Also, funding guaranteed income is one way to help close the racial wealth gap and help families be able to afford to complete their higher education or workforce pathways.

We hope, through this pilot, that we uncover and understand promising practices that can stabilize families and promote their economic inclusion. We hope our learnings will inform policy that supports resilience and equitable economic mobility for everyone.

Gerena: Well, you covered quite a bit for us during this discussion. Thank you so much for taking the time to inform our listeners about this important topic.

Hollin-Wright: Thanks, Charles. It was good to work with you again. And, thank you, Erika!

Bell: Thank you. Happy to be part of this conversation.