Cliff Effect

One Step Forward, Two (or more) steps back

You may have heard of the Cliff Effect in relation to those living in poverty. It happens to workers near the poverty line who are eligible for a variety of public benefit programs and is most often the single greatest barrier to self-sufficiency for low-income individuals. An unintended outcome of public benefit eligibility policies based on income levels (Supplemental Nutrition Assistance Program (SNAP), Child Care Development Fund (CCDF). health care coverage, subsidized housing, and the Earned Income Tax Credit (EITC)), its impact can discourage people from demonstrating their initiative, furthering the erroneous perception that low-income people are lazy.

Benefit programs that help low income families meet their basic needs – food, housing, childcare and health care – are typically administered based on a family’s overall income level. The so-called cliff effect comes into play when a family begins to earn above the limits set by state and federal agencies and becomes ineligible for subsidies for food, housing, and child care. A small well-deserved hourly wage increase or promotion pushes a family’s income above the eligibility threshold for one or more benefits, triggering a reduction in or a complete loss of benefits. Too often, the value of the lost or reduced benefits exceeds the increase in wages, leaving the family in a worse position financially and still well below economic self-sufficiency income levels, having the added adverse effect on initiative and self-worth.

The exact tipping point varies by state, family size, and specific benefits programs. But scenarios prepared by many organizations demonstrate the cliff effect in practice.

In the illustrative example prepared by the Iowa Policy Project below, a single fulltime working mother with one child earning a poverty wage of $7.66/hour makes $15,933 per year and is eligible for $12,432 in benefits for a total annual income of $28.365.

That same single mother is eligible for as much as $5,245 in child care assistance if her wages reach as high as $11.10/hour. But if she earns just a nickel an hour more, she is no longer eligible.

The bottom line is that as her hourly wage increases, she is subject to a decline in benefits until such time as she reaches ineligibility altogether. In this example, ineligibility occurs at an hourly rate of $11.15/hour or $23,192 in annual income, the result being a $5,173 income reduction overall.

It is not difficult to understand why some families living in poverty turn down raises or shy away from opportunities that would put their benefits at risk.

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