Is It Possible to Eliminate the Welfare ‘Trap’?

The multitude of welfare/safety net programs leads to ‘dependence’ and creates barriers to productive work.  In other words it is a massive two edged sword.  One side creates an ever greater burden on ‘productive’ tax payers who are asked to support those who are dependent upon the system.  The other discourages those ‘dependents’ from becoming more productive and thus reduces our overall wealth.

The following chart illustrates this perversion:

http://danieljmitchell.files.wordpress.com/2012/07/welfare-trap.jpg

I’m not sure what all the acronyms stand for, but the key point is that these programs actually discourage recipients from additional productivity.

What is the incentive to being more productive (earning more) when there is such a big gap?  In the cited example, that single mom would have to jump from her $29,000 job to one paying $69,000 to maintain the same standard of living.  Note that earning just $1 more would cost her over $7,000 in benefits.

Let’s say that she is ambitious and responsible and willing to take that cut.  She would do relatively well as her productivity and earnings grew up to about $42,000, but then she reaches another cliff!  This time that additional $1 of earnings will cost here over $13,000.  There are not many who could manage to lose that much in one fell swoop!

It’s pretty obvious that the current system, with its mandatory cut offs, create economic cliffs that discourage increased productivity.

It’s even more startling to see (if I’m reading the chart right) that there is very little incentive to even earn that first $1 of wages.  It appears that the various programs available to a single mom with 2 children provide a living standard equivalent to a $52,000 a year job without earning a single $1 of wages!

You would have to be an idiot to work!

This is wrong!  The system drives up costs to the tax payer while discouraging the recipients from becoming tax payers.

We, Americans, apparently believe that as the richest country in the world, we should provide a ‘safety net’ to those in ‘need’.  It also appears that we feel a strong need to protect the ‘innocent children’, frequently born out of wedlock and to relatively unskilled women.  Note that a large portion of the welfare shown in the chart is due to ‘child care’ and ‘CHIP’ (Children’s Health Insurance Program).

The problem is not necessarily the ‘intent’ of the programs but rather with the ‘disincentive’ created by the way the programs are structured and administered.

Just making the payments unaffected by earnings would not be viable.  We couldn’t sustain the cost even though doing so would increase the incentive to work and ultimately provide more tax revenue it would not equate to the cost.

Payments need to be reduced but they cannot be eliminated.

Should payments be reduced?  The poverty level in 2013 for a family of 3 (mother and 2 children) is calculated by the government to be $19,530.  The chart above shows the payments this family qualifies for to be something more than $45,000.  Why are the taxpayers on the hook to provide a living so much greater than the so-called ‘poverty level’?

I don’t particularly believe the poverty level numbers calculated by the government, but by their standards an ‘individual’ earning $11,490 is at the poverty level.  Each additional family member costs (according to their formula) $4,020.

What if we accepted those values?  Let’s pay every man and woman over the age of 21 $10,000 and every child $4,000 with no strings attached.

Let’s also eliminate the minimum wage.

With every man, woman, and child protected from ‘poverty’ they are free to supplement that level of earnings with any job they can get.

‘Productivity’ would soar as ‘everyone’ would be seeking work and work would be available for everyone.  With no minimum wage there would be plenty of work and with that work would come the opportunity to obtain more skills qualifying those workers for higher paying jobs.

Combine this with the ‘Fair Tax’ where only expenditures for new products and services are taxed and where everyone receives a ‘pre-bate’ for taxes up to the ‘poverty level’ and there is really no ‘disincentive’ to work.  At the same time we have provided a ‘safety net’ for every man, woman and child.

Approximately 26% of the total population is under 21 (last data is from 2000 census when they reported 26% below 18 years of age) meaning that there are about 82 million childeren and 233 million adults.  This proposal would cost $2.7 trillion or about 16% of GDP ($16.6 trillion) which is about twice what S.S. and Medicare payments are ($1.4 trillion).

If this system of direct payments also replaced current S.S. and Medicare it becomes economically viable.  Why?  Subtracting S.S. and Medicare ($1.4 trillion) and the current welfare cost ($.5 trillion in 2012) leaves $.8 trillion additional cost.  This would be offset by a productivity gain of 4.9% the typical target of GDP growth projections which is never met, but would be with the incentive to work provided by this type of ‘direct payment’ safety net.

And we haven’t even considered the savings in administration costs provided by eliminating all the ‘agencies’ administering and the virtual elimination of ‘fraud’ built into the massive and unmanageable current system.  Most of these programs are ‘means’ tested in an attempt to hold down costs, but this increases the cost of administration and encourages fraud.

But what about ‘health care’?  I can’t answer this question satisfactorily.  I just don’t know enough details, but I do believe that the government should not be dictating what insurance we must buy.  I would suggest that just as with natural and other ‘disasters’, the government has a responsibility to provide protection against catastrophic health costs.  Many have suggested that insurance against ‘catastrophic’ health costs would be relatively cheap.  What is cheap?  I don’t know, but that is the insurance that I could support being paid for via taxation.

What would that cost in terms of every man, woman and child?  If it were $1,000 it would add about $.3 trillion to the direct payment cost and represent about 2% of GDP.  I think this might be a tolerable solution to the problem.  I also believe that if every man, woman and child were responsible for their non-catastrophic health care we would see the ‘free market’ come into play and health care cost would come down rather than constantly increasing at very high rates.

 

 

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1 Comment on “Is It Possible to Eliminate the Welfare ‘Trap’?

  1. Here’s some additional information. I didn’t realize there are 69 ‘means tested’ welfare programs!

    The government spends more on these programs than public education and defense spending. From a Heritage Foundation report:

    The 69 means-tested programs operated by the federal government provide a wide variety of benefits. They include:

    12 programs providing food aid;

    10 housing assistance programs;

    10 programs funding social services;

    9 educational assistance programs;

    8 programs providing cash assistance;

    8 vocational training programs;

    7 medical assistance programs;

    3 energy and utility assistance programs; and,

    2 child care and child development programs.

    Programs such as Social Security, unemployment insurance, workers compensation, and veterans benefits are not considered to be “means tested,” so recipients of those benefits are not included in the 108,592,000 figure.

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