Child Poverty

Tackling the Benefits Cliff: Smoothing Benefits Phase-outs to Drive Economic Security for Ohio’s Children

March 5, 2021 | Ohio

Dad holding his son.

Tackling the Benefits Cliff: Smoothing Benefits Phase-outs to Drive Economic Security for Ohio’s Children

March 4, 2021

By Alex F. Coccia, D.Phil., Policy Consultant

Working Hard and Not Getting Ahead

Meet Ana, a mom of two outgoing, school-aged children who live in a small town outside of Dayton, Ohio. Ana works in retail and struggles to make ends meet, earning $11.50/hour. Due to low wages, she qualifies for and receives food assistance, Medicaid, and child care support. These lifelines mean that Ana and her children get the support they need to be healthy, fed, and housed. Recently, Ana has been offered a promotion at her work. The $3 increase in hourly pay is appreciated; however, there’s a problem. This increase means that Ana loses her benefits for food assistance, Medicaid, and now has a co-pay for child care. Prior to the raise, Ana was able to save $192 per month, but after the raise, she would only save $94 per month. Though this story is not real, the experience of our fictional character is too often an everyday reality. This situation is called: the benefits cliff.

Benefits Cliff

The benefits cliff occurs when benefits phase-out at too fast a rate with each dollar increase in earned income, resulting in an individual like Ana losing benefits and being worse off financially. In other words, as an individual is increasing their earnings, they lose benefits that may be more valuable than the slight increase in earned income, meaning that higher wages do not automatically equate with higher incomes. This disincentive keeps individuals and families from improving their economic circumstances and achieving financial stability. It especially harms parents of color, who are disproportionately concentrated in low-wage jobs, and more likely to face these higher marginal tax rates.

Increased Wages Will Decrease Child Poverty

The House recently passed the American Rescue Plan, proposed by the Biden Administration, which includes a $15 per hour minimum wage by 2024 and ends tipped minimum wages and sub-minimum wages for people with disabilities. However, in the Senate, the parliamentarian ruled that the minimum wage is not permitted through the budget reconciliation process, throwing the fate of an increase into greater uncertainty. In 2019, Children Defense Fund highlighted the importance of a $15 minimum wage in combatting child poverty. In addition to ensuring that working families and their children move out of poverty, a higher minimum wage is linked to lower rates of infant mortality and lower birth weight, problems that also disproportionately affect families of color.

As a result of low wages and increased cost of living, the number of families who are working and experiencing poverty has increased greatly. The Congressional Research Service finds that 68.1 percent of poor children live with at least one adult who works.

A federal minimum wage increase is undoubtedly good and necessary for Ohio’s families and children. However, policymakers must take special precaution to ensure that as families’ wages go up and benefits start to phase-out, families are not worse off financially than they would have been without the wage increase.

Benefits Cliffs Harm Families & Economic Growth

Many families experiencing poverty try to combine employment income, public benefits, and community supportive services. Workers in Ohio have long required public benefits to make ends meet. In 2006, a study of Walmart, McDonalds, and thirty-eight other companies in Ohio found that 104,652 employees received Medicaid, 73,110 used food stamps, and 7,253 received Ohio Works First cash assistance checks (Julie Carr Smyth, “Ohio Workers depend on public benefits,” Plain Dealer, 25 February 2006). In 2018, more than a decade later, the situation was nearly the same.

Working parents often have to choose what is best for their families in terms of income, and given their knowledge of their finances, may make the decision to forego a pay-raise or promotion in order to maintain benefits which put them further ahead. A study by the Ohio Chamber of Commerce Research Foundation estimated that 1 in 5 businesses experienced issues with hiring, promoting, or increasing wages because employees were worried extra income would result in drops in public assistance.

Benefit cliffs are the result of a low-wage-low-benefit combination, compounded with quick phase-out rates of benefits. Typically, state child care programs, Medicaid, and programs for young adults with disabilities have some of the steepest benefit cliffs. In Ohio, publicly funded childcare is limited to applicants under 130 percent FPL (the 2022/23 budget proposes to change this to 138 percent), but families can continue to receive it with a co-pay up to 300 percent FPL, which has effectively helped to address a potentially steep cliff.

Promising Approaches to Smoothing the Cliff Effect

Some states have made strides in addressing long-standing and likely benefits cliff issues. In 2016, The Colorado Cliff Effect Pilot Program aimed to develop a revenue neutral approach on a family-by-family basis as income rose, a plan mostly focused on an individual case-management level. Ohio’s efforts have followed this mold. Ohio Department of Jobs and Family Services (ODJFS) has been piloting a program focused on mitigating the benefits cliffs in a number of programs. For those enrolled in the Prevention, Retention, and Contingency Program (PRC), individuals working full-time, making less than $16 per hour, with a child, and already involved with the OhioMeansJobs Program will receive an additional $2,500 over an 18 month-period. Individuals would also have a job coach to help with budgeting.

Other approaches have focused more holistically on supportive services and policy changes. In 2017, Maryland directed the Two-Generation Family and Economic Security Commission and Pilot Program to focus on transitional services to allow parents a smoother transition off of benefits.  In 2020, Connecticut’s Governor’s Workforce Council recommended that the state aid caseworkers in understanding the benefits cliff situations for each family; extend the phase-out of SNAP, TANF, Medicaid, and housing subsidy benefits; increase the EITC; utilize earned income disregards to mitigate benefits cliffs; and increase asset limits on various programs. Expanding on this, Connecticut Voices for Children recently recommended increasing the time for reporting requirements, increasing access to affordable healthcare and early child care (by reducing co-payments and increasing eligibility; and offering universal access to early child care), expanding SNAP eligibility, and offering a fully-refundable state Child Tax Credit and otherwise addressing a regressive tax system.

Looking Forward & Planning for Ohio’s Recovery

As Ohio plans for recovery, policymakers would be wise to address the benefits cliff and help the hundreds of thousands of Ohioans who will re-enter the workforce by smoothing the cliff’s negative impacts. Following the work in Connecticut, recommendations to smooth out the benefits cliff in Ohio include:

  • Add a 10% refundable option to the current state EITC policy to benefit 758,800 Ohio families and target the states’ poorest workers;
  • Expand statewide access to affordable healthcare;
  • Focus efforts on expanding SNAP eligibility, rather than the limitations set forth in the recent SB17;
  • Expand initial eligibility for publicly funded child care from 130% FPL to 200% FPL by supporting legislative passage of recently introduced HB 145 to help parents afford child care and ensure more at risk children have access to high-quality care; and,
  • Make reporting/redetermination requirements less frequent.

All parents want to make sure they can provide for their children; however, not all jobs provide families with the earned incomed needed to accomplish some level of economic stability. Further, Ohio wants to be a state that incentivizes and encourages work. To accomplish this, we must have a safety net in place that encourages individuals in meeting their goals and does not punish them and their children when they seek additional hours at work or receive modest increases in pay.  Smoothing the benefits cliff means that we can encourage and reward work and simultaneously make sure that the economic rug is not ripped out from under them.