Northwestern Journal of Law and Social Policy

I.    Introduction

¶ 1         Benefits that support labor market participation by lower-income workers have been among the most important workforce policies during the past decade. These benefits help workers in two ways: making work possible by providing access to services essential to employability (e.g., child care and health care) and making work pay by either supplementing income or offsetting the cost of necessary goods or services. Some of the benefits, which in many states are a crucial support for the lowest-income workers, provide cash; these include refundable federal and state earned income tax credits (EITC), other tax credits, and Temporary Assistance for Needy Families (TANF).¹ Other benefits are in-kind or involve payments to service providers on behalf of workers; these include child care subsidies, health insurance, housing subsidies, and food and nutrition assistance.²

¶ 2         Neither the federal government nor the states, however, have approached these benefits in a coordinated way or as a comprehensive workforce strategy. The EITC and child care programs were designed primarily as work supports, but these programs have evolved separately rather than as components of a unified strategy.³ Programs such as food stamps and health insurance were not designed primarily as work supports, although their operation as such has been part of the policy case for their expansion. The essential purposes of the Food Stamp Program are to promote nutrition and combat hunger, as well as to support agricultural markets.⁴ Medicaid, which has expanded gradually since it began in the 1960s, and the State Children's Health Insurance Program (SCHIP), which began in the late 1990s, are health care and insurance programs.⁵ Nor was TANF designed principally as a work support program; rather it was infused with the caseload reduction policies that dominated the conservative welfare reform agenda of the Personal Responsibility and Work Opportunities Reconciliation Act of 1996.⁶ A good deal of congressional rhetoric about work accompanied TANF's creation, but the primary policy direction of TANF was to eliminate cash assistance, whether or not the people leaving the program were working.⁷

¶ 3         As a result of this disjointed history, these work support programs do not always help working parents meet their families' needs.⁸ Many who need work supports are not eligible for them, and many workers who are eligible nevertheless do not receive key work supports.⁹ Part of the reason for low take-up¹⁰ of work support programs is a lack of consistent eligibility rules on what counts as income, asset limits, co-payments, family composition, and hours of work.¹¹ A program's response to a recipient's increase in income can actually defeat the goal of workforce advancement when, due to eligibility "cliffs," a marginal increase in earnings causes a loss of benefits far in excess of the increased earnings, so that the family's total resources drop precipitously.¹²

¶ 4         In Illinois, as in many other states, a major expansion of most of these "work support" benefits during the last decade fueled and supported increased work activity.¹³ This relatively successful environment is a good context for examining policies on work supports. Ongoing problems with the Illinois system should be understood not as a critique of the effort to date, but as a road map for next steps. The Illinois work support system, while helpful to low-income workers, falls short of being a coordinated strategy that produces the maximum favorable impact on work activity and economic mobility.¹⁴ Describing the system's operation, successes, and shortfalls will, we hope, further the efforts of advocates in other states who are working to improve their own systems.

¶ 5         A web-based policy tool, the Family Resource Simulator, developed by the National Center for Children in Poverty (NCCP), is demonstrably useful.¹⁵ The simulator illustrates how work support policies respond to increased family income and sometimes reduce total family resources.¹⁶ The simulator can be used for modeling how policy alternatives, such as new investments or changed program rules, would improve the system by resolving benefit "cliffs" or other problems. Using the Family Resource Simulator, we model specific suggestions to improve the Illinois system. This Article uses recent experience in Illinois to illustrate how the simulator can map the landscape of work support programs and how they affect working families as income rises. The simulator shows the benefits of the Illinois work supports programs and also spotlights where the programs leave gaps or policy problems. Finally, the Article shows how the simulator can be used to model policy solutions to the problems it has revealed.

II.    Illinois Expands Work Support Policies

¶ 6         Illinois has been a leader in state efforts to expand supports for low-wage workers. Illinois became the first state to offer public health insurance to children at all income levels under its All Kids program, which went into effect in July 2006.¹⁷ At the lowest income levels coverage is free; at higher levels, families pay premiums and co-payments that rise with income.¹⁸ Illinois FamilyCare program offers coverage to the parents of minor children and has substantially increased parents' access to health insurance; FamilyCare's eligibility limit is 185% of the federal poverty level.¹⁹

¶ 7         The Illinois Child Care Assistance Program, another critical work support, subsidizes the cost of care for children in low-income families. In April 2008, the income limit for subsidized care was raised to 200% of the poverty level, or approximately $35,000 for a family of three.²⁰ While a number of states have higher income limits for child care subsidies, many also have long waiting lists for assistance.²¹ Illinois is the largest state to provide subsidies to all eligible applicants.²² Other benefits available to Illinois's low-wage workers include food stamps and the Federal EITC, which the state supplements with a small but refundable state tax credit.²³ Some workers, if they are lucky, can also access subsidized rental housing or rental housing choice vouchers.²⁴

¶ 8         Very low-income families may receive cash assistance through the Illinois TANF program.²⁵ The program is structured in Illinois to function as a wage supplement for the lowest income families with a full-time worker. First, two-thirds of recipients' earnings are disregarded (not counted) in benefit calculations, allowing a worker with low earnings to receive a monthly supplement of cash benefits.²⁶ Second, Illinois pays the wage supplement benefits to those who work "full-time" (defined as at least thirty hours per week) in a way that does not cause those benefits to count towards the TANF 60-month lifetime limit on eligibility.²⁷ Thus, TANF functions as a non-time-limited wage supplement for full-time workers whose wages remain below the phase-out point for TANF benefits.

III.    The Family Resource Simulator Methodology

¶ 9         The Illinois Family Resource Simulator illustrates how Illinois work support policies can help families meet their basic needs when the families apply for and receive the benefits for which they are eligible. We identify and describe structural problems with the design of the work support system, particularly the incongruous eligibility "cliffs" that result in financial penalties when income improves. We consider the bottom of the income spectrum, where workers in deep poverty struggle to make ends meet. The analyses presented in this Article reflect eligibility and benefit rules in effect as of July 2006.²⁸

IV.    Eligibility Cliffs Can Undermine Work supports

¶ 10         Work support benefits in Illinois can close the gap between low wages and basic family expenses. Without such supports, a single parent with two children (one school-aged and the other pre-school-aged) living in Chicago needs about $36,000 a year to cover basic necessities.³⁰ To reach this income level, a full-time worker would have to earn $17 an hour—more than twice Illinois's minimum wage of $7.50. Moreover, this basic-needs budget includes only the most minimal necessities, with no room for entertainment or after-school activities; life or disability insurance; or savings for education, retirement, or a rainy-day fund. The basic-needs budget assumes that the family has access to employer-based health insurance coverage—although in practice most low-wage workers have none—and leaves nothing for out-of-pocket medical expenses such as deductibles and co-payments.³¹

¶ 11         Covering this basic budget takes far more than a low-wage job. For the many Illinois workers at the lower end of the pay scale, work supports can close or nearly close the gap between their wages and their basic needs. For those who receive them, these benefits can make supporting a family possible even when wages are low and employment-related benefits, such as health insurance, are unavailable. But, as is true in most states, the Illinois system has problems. Benefits fall short of filling the whole gap between wages and a basic budget for every worker; not all workers are eligible for necessary benefits; and not all eligible workers receive benefits.

¶ 12         Among the causes and indicators of these problems is the phenomenon of eligibility "cliffs." In Illinois, as in other states, the problem flows from the fact that work supports are generally means-tested and phase out at income levels where people still need them. As we demonstrate with the simulator below, as parents succeed in the workforce and their earnings increase, they lose eligibility for critical supports. In some cases, a small raise can lead to a substantial benefit loss, leaving a family worse off. Such losses can even mean that a family that was making ends meet can no longer do so, despite increased wages. Figure 1 illustrates how this can happen. For a single parent with two children living in Chicago, this figure shows how net family resources—that is, what remains after subtracting the cost of basic family expenses—change as wages increase. The analysis assumes that when eligible, a family receives food stamps, Federal and State EITC, public health insurance, and child care subsidies.³²

¶ 13         Figure 1 demonstrates the value of work support programs. With full-time employment at $8 an hour—just under $17,000 a year—and multiple work support benefits, the family is able to make ends meet. At this wage rate, the family's net resources are just above the "breakeven line"—the point where resources equal expenses. The family has a small surplus beyond the cost of basic daily needs (assuming no unexpected expenses or debts). Figure 1 shows the value of work support programs and of enrolling families in the work support programs for which they are eligible.³³

¶ 14         But Figure 1 shows that, as earnings increase, the family faces a series of financial setbacks. The first "cliff" occurs when wages reach $10.50 an hour and the family loses thousands of dollars annually in food stamps. The family recovers from this loss of income with further increases in earnings, only to face a much bigger cliff when the parent's wages hit $15.00 an hour and income exceeds the eligibility limit for child care subsidies. The loss of child care assistance leaves the family unable to afford basic expenses and significantly worse off—below the breakeven line—than when the parent was earning just $8.00 an hour.

¶ 15         All together, the eligibility rules for work support programs in Illinois can leave workers facing untenable choices, such as between turning down a raise and moving children into cheaper, but potentially lower-quality, care. Workers' inability to get ahead by working and earning more jeopardizes workers' opportunities for advancement and economic mobility. And these disappointing outcomes can lead to negative information spread by word-of-mouth, resulting in suppressed enrollment in valuable work support programs.³⁴

V.    Policy Options Can Surmount Eligibility Cliffs

¶ 16         While Illinois has been a leader in promoting policies that support low-wage workers, there remains significant room for improvement. The Family Resource Simulator can model policy options that would better support Illinois's low-wage workers and their families; several options directly meet the problems described above. For example, to overcome the first cliff, created by loss of food stamps, Illinois could, as federal law permits, opt to extend food stamp benefits to families in which the worker's income is somewhat above the official federal limit.³⁵ Benefits would phase out gradually as earnings increase rather than dropping sharply at the eligibility limit (see Figure 2).

¶ 17         Similarly, Illinois could take several approaches to phase out child care assistance as income rises to ease the cliff that now faces a family whose income exceeds the eligibility limit for subsidies. One option is to extend the subsidy eligibility limit at the upper end of the income scale. Families with subsidies could contribute to the cost of care through a co-payment that increases as earnings rise. Under this option, a family that reaches a higher income limit will already have assumed a larger share of the full cost of care and will have more earnings available to sustain a loss in benefits. Figure 3 shows that extending the eligibility limit for child-care subsidies from 185% to 275% of the federal poverty level would significantly reduce the magnitude of the child care cliff and ensure that the family remains able to meet basic expenses as earnings increase.

¶ 18         Many states provide child care assistance through refundable tax credits. Figure 4 shows how the child care cliff facing Illinois families could be eliminated entirely by combining an increase in the eligibility limit for subsidies with a refundable state child care tax credit for families whose income exceeds the (expanded) limit. This example assumes that, upon loss of the child care subsidy, the family initially receives an annual tax credit of about $1500 per child. The value of this credit gradually declines to $0 as the parent's earnings approach the state's median income—or about $60,000 per year for a family of three.³⁶

¶ 19         Of course, obstacles underlie all of these potential solutions to the problem of eligibility cliffs; cost is primary among the obstacles. Nevertheless, the Family Resource Simulator helps illustrate an ironic truth: the cliffs penalize people for striving to get ahead economically and penalize them even more for succeeding. This truth is antithetical to core American values. Shining a light on how the cliffs harm families can drive the necessary changes. The simulator helps model the extent to which various solutions can actually solve the problem.

VI.    Work Supports Matter at the Lower End of the Income Spectrum

¶ 20         Work supports make a difference at the lower end of the income spectrum, even before a parent takes a job. Assuming a family receives the benefits for which it is eligible (TANF, food stamps, Medicaid), the system can provide the basic support that mitigates the need to focus on mere survival and allows the parent's focus to turn to employment, at which point other supports (TANF earnings disregards, child care subsidies, and the EITC) take effect to nurture that effort. Figure 5 shows how the current array of work supports in Illinois comes into play at the lower end of the income spectrum.

¶ 21         Figure 5 reflects Illinois's relatively low TANF payment level, which is now about twenty-seven percent of the federal poverty level.³⁷ It shows how net family resources change as a parent transitions into full-time work, assuming the family receives TANF cash assistance, food stamps, public health insurance, and a child care subsidy. The low TANF benefit level makes the move into employment more difficult because of the survival distractions that a family so poor inevitably encounters. However, Figure 5 shows the impact of a favorable set of policies that take effect once the parent enters employment. Illinois has a TANF earnings disregard of two-thirds, so that the monthly payment decreases by only one dollar for every three dollars in earnings. Illinois pays a residual TANF benefit (calculated as the maximum benefit minus one-third of earnings) without regard to the TANF time limit if the parent works at least thirty hours a week, so that the TANF payment functions as a non-time-limited earnings supplement while wages remain low.³⁸ The state and federal earned income credits take effect when a parent goes to work. The child care subsidy has a nominal co-payment, and public health insurance stays in place without premiums or co-payments until income is higher. Figure 5 shows the net impact of these policies in helping the family get to the "breakeven" point—the point where resources equal expenses—relatively quickly, at an earnings level equivalent to thirty-five hours of work per week at eight dollars an hour.

¶ 22         Strategies to improve work supports policy for those with the lowest incomes have to involve the TANF program because it is the starting point for those not yet in the labor force. TANF can function as an earnings supplement before the parent's earnings trigger the highest EITC. Relatively modest improvements in the program make a difference in real life for families that start so far below their breakeven point. A few dollars can mean a great deal in the harsh calculations that people in deep poverty must make—rent or food, carfare or shoes, gas bill or light bill—and small improvements in a family's bottom line can make all the difference in whether a transition to employment is successful. Figure 6 shows the impact of two policy improvements in Illinois: increasing the earnings disregard from two-thirds to three-fourths, and increasing the TANF payment levels by fifteen percent.

¶ 23         Figure 6 shows that increasing the earnings disregard moves the family more quickly from pre-employment with no earnings to the breakeven point. It illustrates how, compared to current policies, increasing the earnings disregard becomes incrementally more helpful the higher the family's earnings, and how the disregard phases out with no cliff when the family's income is high enough to exit TANF. This is a productive design that provides incentives and support without imposing inadvertent punishments. Figure 6 illustrates the somewhat obvious proposition that increasing the TANF payment level would help families make the transition to work. Even before employment, a higher grant places a family closer to its breakeven point, providing a stronger platform for the transition to work. And Figure 6 shows how marrying the grant increase to the improved earnings disregard would get a family to the breakeven point more quickly and supplement income higher up the income scale.

¶ 24         To focus more closely on these proposed policy changes, Figure 7 shows the same changes as Figure 6, but starting when the parent is working twenty hours a week rather than having no earnings.

¶ 25         Figure 7 better illustrates the impact of these proposed changes, which can look deceptively small on the larger graph. With the policy changes, the family would break even when earnings are roughly $13,000 a year, while under current policies the family would break even when earnings are roughly $15,000 a year. While the difference may seem small, it is a substantial improvement for a family struggling to survive on such low earnings. Even under current policies, work supports have a large impact on a family's ability to make ends meet, and the public policy value of those policies is clear. The proposed changes would increase the impact and value of these programs.

VII.    Conclusion

¶ 26         A next step in shaping policy is to see all of these work support programs as parts of a coherent whole, to understand how the programs interact, and how together they can most productively affect employment activity and family support. Figure 8 shows the impact of this combined approach by modeling all of the policy proposals discussed here, compared to current Illinois policies.

¶ 27         All the proposed changes, working together, can provide strong incentives for the poorest working families to keep working and increase their earnings. Then, as earnings rise, the combined policies continuously reward greater effort and success and avoid the damaging and counterproductive "cliffs."

¶ 28         Work supports are already highly effective. The more work support programs are improved, the greater their impact will be on workforce policy and the lives of the workers and their families. The Family Resource Simulator is a fine policy-making tool for understanding the positive effects of current policies, identifying the remaining problems, and modeling proposed changes.

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