Mathieu Despard


September 29, 2022


There is often a misconception that those who receive public assistance are unable or unwilling to work. While this is sometimes the case, often recipients do want to work, but their family needs a leg-up to get through hardship (like a job loss), achieve financial stability, and experience economic mobility. The loss of eligibility for public safety-net programs and the benefits they provide as income rises above eligibility limits is called a “benefit cliff.” Benefits cliffs can significantly impact lower-wage workers and their families financially and may act as a disincentive for pursuing modest promotions and incremental raises and career development. More than 70% of non-elderly people who receive public benefits are working or are a member of a working family. Millions of workers depend on a combination of wages, employer benefits, and public benefits to meet their families’ financial needs. Certain public benefits like the Earned Income Tax Credit (EITC) encourage people to work, as the value of this refundable tax credit rises sharply as earnings increase. Others have disincentivized people to work or in some cases decline jobs or higher wages. Meanwhile, subsidies help many workers afford childcare – which is prohibitively expensive for many families – so they can go to work.

A combination of public and private sector resources support many working families. Even workers at all income levels enjoy public benefits through the workplace such as pre-tax health insurance premiums and favorable tax treatment of retirement plan contributions and assets.

Yet public benefits that provide direct or indirect income support are means-tested: once your income reaches a certain amount, you are no longer eligible for the benefit. The intuition is that at a certain level of income, one should be economically self-sufficient.

There are two issues however. First, what the government decides is the income cut-off may not be the income a family needs to afford living expenses, especially in an era of high inflation and unaffordable housing and childcare.

Second, transitioning off of public benefits can be rocky and difficult due to “benefits cliffs” – the loss of public benefits once income limits for programs are exceeded.

In general, benefits cliffs follow a pattern of “2 steps forward, 1 step back” – as earnings rise, public benefits disappear. One dollar in earnings can mean the loss of 50 cents in the value of a public benefit. For a benefit recipient, the loss of these benefits may feel like an extra tax – on top of an increase in actual taxes.

But benefits cliffs are very different across programs. The EITC has a gradual phase-out rate of 21% but once income exceeds the limit for Medicaid, the entire benefit is lost. Childcare is particularly treacherous: once a subsidy is lost, the family must pay the market rate for childcare, which most cannot afford. What’s worse is that most families who are eligible to receive childcare subsidies don’t because of demand that far exceeds supply – a similar situation for rental housing subsidies.

Workers may turn down raises and opportunities to increase work hours for fear of losing certain benefits – especially childcare subsidies. Benefits cliffs also act as a barrier to career advancement for lower-paid workers, such as those who want to move from Certified Nursing Assistant to Licensed Practical Nurse in the healthcare industry.

What can employers do about these challenges? First, they can help workers understand and anticipate benefits cliffs using a “suite” of planning tools created by Federal Reserve Bank of Atlanta. Second, they can advocate for changes in state and federal policies to make it easier for workers to transition off public benefits and afford childcare. Third, they can work with government to consider new strategies to integrate and modernize public and workplace benefits to better support workers.

Read more about this topic from a report I recently authored for the U.S. Chamber of Commerce Foundation.

About the authors

Mathieu Despard