Is the welfare state growing or declining?

Yonatan Ben-Shalom, Robert Moffitt, John Karl Scholz 27 June 2011

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The level of governmental expenditures on welfare state and safety-net programmes in the US is once again a subject of intense controversy. Conservative commentators and legislators argue that those expenditures have grown too much and need to be cut back in the face of growing deficits (Rector et al. 2009). Some continue to argue that the US has seen a growing rate of welfare dependency and a decline in work by the poor because of welfare programmes (see Mead 2000 for an older statement of this position), following up on original argument that welfare programmes may have actually increased poverty (Murray 1986). Liberals argue that the government has retrenched drastically over the last 15 years, leaving many poor without a safety net (Edelman 2003; Blank and Kovak 2009).

The facts about trends in welfare state expenditures

In recent research (Ben-Shalom et al. 2011), we show that US welfare state expenditures have been growing, even in the last two decades when many have assumed that there has been a retrenchment. Accounting for social insurance programmes and means-tested transfer programmes (including the Earned Income Tax Credit), real annual per-capita expenditure grew from $3,618 in 1990 to $5,584 in 2008 (2007 dollars), a growth rate of 54%. Considering only means-tested transfer programmes, which are more directly aimed at low-income families, expenditure grew even faster, at 78%, but this was largely because of the explosion of Medicaid expenditures. Excluding Medicaid, means-tested expenditure grew by 26%. Expenditure in every programme except two – the Temporary Assistance for Needy Families programme and Workers Compensation – had positive growth from 1990 to 2008.

The growth of expenditures has been particularly strong among “in-kind” programmes, i.e. those that provide benefits for specific consumption expenditure, such as medical care, food, and housing. In fact, there are only two major means-tested cash transfer programmes left in the US. These are the Supplemental Security Income programme, which provides cash to poor people who are age 65 or older or have a disability, and the Earned Income Tax Credit, which provides cash tax credits to those with low or moderate earnings (up to approximately $44,000 for those with three or more children). The US provides few open-ended cash payments to the poor, but only benefits for specific, “deserving” categories of expenditure, and only to specific groups that have a favoured status (older people, people with disabilities, and workers).

In contrast to the view of Murray (1986) and others, these expenditures had a major effect in reducing poverty (Figure 1). The poverty rate among US families in 2004 based on their non-transfer, private income alone was 29%; the transfers reduced it to 13.5% (this excludes Medicaid and Medicare from the transfers). About 21% of families had pre-transfer incomes below half the poverty line; that number was reduced to 6.6% by transfer-programme expenditures. Many of the programmes paid benefits to families above the poverty line as well.

Figure 1. Percent of U.S. Families in Different Poverty Strata, Pre- and Post-Transfers, 2004

Disincentive effects are modest

An important issue is whether the programmes reduce work effort and increase the rate of single motherhood. There has been a large amount of research on these issues on most major social insurance and means-tested programmes (see Ben-Shalom et al. 2011). The research shows that most programmes do indeed reduce labour supply, hours of work, and/or employment rates. However, the overall, aggregate effects (i.e., taking all programmes together) are quite modest in magnitude, and the reduction in earnings is only a tiny fraction of the transfer programme benefits that individuals and households receive. As a consequence, the estimated effects on poverty mentioned above are virtually unchanged after adjusting for work disincentives. Effects on single-motherhood are even smaller. Indeed, several studies of the effects of the major US 1996 welfare reform, which greatly reduced the generosity of the Temporary Assistance for Needy Families programme, had essentially no detectable effect on family structure (Grogger and Karoly 2005).

Sharing the benefits

Whether the level of welfare state expenditures, and its concomitant major effect in reducing poverty among US families, is too large or too small is a question for the political process to resolve. However, a pattern that is hidden by the aggregate trends and their effects on poverty is how transfers have been distributed across different types of US families. Indeed, that distribution has markedly changed. Table 1 reveals the key patterns, showing average monthly expenditure from transfer programmes (2007 dollars) in 1984 and 2004 for different types of families (again excluding Medicare and Medicaid). For example, elderly families with pre-transfer income less than 50% of the poverty line received $1,106 per month in 1984 and $1,254 in 2004. Elderly families with pre-transfer incomes between 50% and 100% of the poverty line also saw increasing transfer expenditures over time. Families with a disabled member, likewise, received more support in 2004 than in 1984 regardless of their pre-transfer poverty status.

Table 1. Average Monthly Expenditure per Family by Pre-Transfer Income Level and Family Type, 1984 and 2004 (2007 dollars)

Income Level
Under 50% of Poverty Line
50%-100% of Poverty Line
Year
1984
2004
1984
2004
 
 
 
 
 
Elderly families and individuals        
1,106
1,254
1,264
1,388
Disabled families and individuals
1,333
1,447
1,292
1,590
 
 
 
 
 
Nonelderly, nondisabled
 
 
 
 
Single-parent families
1,231
766
448
832
Two-parent families  
1,118
814
509
872
Childless families and individuals
346
300
260
291
Employed families                                        
516
426
350
493
Nonemployed families
833
495
497
1,052
 
 
 
 
 

However, this was not the case for families that did not have an elderly or a disabled member. Single-parent families with pre-transfer income less than 50% of the poverty line, for example, saw a reduction in transfer receipt, from $1,231 in 1984 to $766 in 2004; while those with pre-transfer income between 50% and 100% of the poverty line saw an increase ($448 to $832). Among non-elderly families who do not have a disabled member, similar patterns occur whether we examine two-parent families, those with an employed member, or those without an employed member, though the reduction in transfers for the poorest of these families are largest for families without an employed member.

Partly as a result of these expenditure reductions, the percentage of these non-elderly families without a disabled member who were in “deep” poverty rose from 1984 to 2004 – at the same time that the percentage of the population below the poverty line fell

Within the overall increase in transfers in the US, therefore, there have been two redistributions. First, transfers have shifted towards the elderly and the disabled, and away from the non-elderly and non-disabled, overall. Second, within the non-elderly, non-disabled groups, there has been redistribution from the lowest-income families to families with greater incomes.

Policy choices

The fact that benefits to “deserving” groups like older people and people with disabilities have increased, presumably reflects the support they generate from policymakers and voters, their political power, or both. Likewise, the desire to reward work by increasing transfers to workers both in traditional poverty programmes as well as by the Earned Income Tax Credit, is widely shared by many in the US It is not widely recognised, however, that the worst-off families, those with the lowest incomes and the lowest employment rates, have been left behind by trends in the system. Their receipt of benefits has fallen not only relative to better-off families, but in absolute terms as well. While there may be many “undeserving” families in this group, the vast majority have low skills, health problems, or other barriers to work which prevent them from having significant employment (Blank 2007). Policymakers need to develop mechanisms to assist these families.

The views expressed here are solely those of the authors.

References

Ben-Shalom, Yonatan, Robert Moffitt, and John Karl Scholz (2011), “An Assessment of the Effectiveness of Anti-Poverty Programs in the US”,  NBER Working Paper 17042.

Blank, Rebecca (2007), “Improving the Safety Net for Single Mothers Who Face Serious Barriers to Work”, The Future of Children, 17:183-197.

Blank, Rebecca and Brian Kovak (2009), “The Growing Problem of Disconnected Single Mothers”, in Carolyn Heinrich and John Karl Scholz (eds.), Making the Work-Based Safety Net Work Better, Russell Sage Foundation.

Edelman, Peter (2003), Searching for America’s Heart: RFK and the Renewal of Hope, Georgetown University Press.

Grogger, Jeffrey and Lynn Karoly (2005), Welfare Reform: Effects of a Decade of Change, Harvard University Press.

Mead, Lawrence M (2000), The New Politics of Poverty: The Nonworking Poor in America, Basic Books.

Murray, Charles (1986), Losing Ground: American Social Policy, 1950-1980, Basic Books.

Rector, Robert, Katherine Bradley, and Rachel Sheffield (2009), “Obama to Spend $10.3 Trillion on Welfare”, Heritage Special Report SR-76, Heritage Foundation.

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Topics:  Welfare state and social Europe

Tags:  US, welfare state