Play It Again: The cliff effect – "Sorry, I can't afford that raise"

Last week, the Department of Human Services announced new co-payment and eligibility rules for the child care subsidy program, which we discussed in this post. By lowering the eligibility threshold for subsidies, the new rules will worsen the “cliff effect” whereby workers with the opportunity to move up the income ladder are penalized by losing work support benefits. Here we rerun a blog post on this subject that first appeared in June 2009; we have also discussed how health care reform promises to significantly improve the situation.

In recent years, whenever I’ve participated in forums on poverty and barriers to self-sufficiency, the single barrier raised most often and most fervently by those who work with low-income individuals and by low-income individuals themselves is the “cliff effect”. A 2007 report prepared for the Women’s Foundation of Colorado and the Women and Family action Network Coalition defined the cliff effect as follows:

Eligibility for work support benefits is typically based on income, so as their earnings increase, families lose eligibility for supports. A benefit cliff occurs when just a small increase in income leads to the complete termination of a benefit. The result is that parents can work and earn more, while their families end up worse off than they were before.

The cliff effect is most dramatic for Medicaid health insurance coverage, which tends to be an all-or-nothing benefit. Children in Oklahoma are eligible for Medicaid up to 185 percent of the federal poverty level, while adults lose eligibility when they make less than 50 percent of the poverty level. Other work support programs, including the earned income tax credit, the food stamp program, and child care subsidies, minimize the cliff effect by phasing out the amount of benefits at higher incomes, or in the case of child care subsidies, requiring higher co-payments. The cumulative effect, however, is that for most low-income workers who are attempting to move up the income ladder, additional earnings can be largely or fully offset by higher taxes and the loss of benefits. At a certain threshold, workers find themselves in a situation where the rational response to an offer of a raise or a better job is to respond, “Sorry, but I just can’t afford it.”

Concern about the cliff effect has been expressed by researchers and policy experts from both the liberal and conservative ends of the ideological spectrum. The Women’s Foundation of Colorado has even filmed a video on the cliff effect, which you can watch on You Tube. At this past year’s Fall Forum of the Oklahoma Institute for Child Advocacy identified the cliff effect as one of their top advocacy priorities for the 2009 session:

The 2009 Children’s Agenda supports efforts to reduce the “cliff effect” that results in an abrupt loss of all work-support benefits when a low-income family earns a small increase in wages by increasing the income eligibility limits for child care subsidies and phasing out benefits more gradually.

OICA and others have been working with the child care division of the Oklahoma Department of Human Services to modify the income eligibility limits for subsidized care to reduce the cliff effect. This would involve raising the eligibility threshold but having higher-income recipients contribute a larger co-payment. DHS proposed new eligibility standards that they estimate would provide subsidized care for an additional 1,600 children in higher-income households (those with incomes up to roughly $29,000 for families with one child in care and $43,500 for families with multiple children in care) at a cost of $3.5 million. The proposal is still under review.

Ultimately, though, any solution to the cliff  effect must begin by filling the chasm between Medicaid eligibility and unsubsidized private insurance. There are reasons to be optimistic. The Insure Oklahoma program already offers subsidized health insurance for adults up to 200 percent of the poverty level, who are required to contribute 15 percent of the cost of the premium up to a maximum of 5 percent of family income. Efforts to expand eligibility for Insure Oklahoma up to 250 percent of poverty for adults and 300 percent for children await federal approval. However, the program currently serves only 20,000 Oklahomans and may run out of funding once it reaches 35,000 to 40,000 people.

Federal health care reform efforts may provide a more comprehensive solution. Most variations of the proposals being developed in Congress involve a “Health Insurance Exchange” that would offer subsidies for those who earn too much to qualify for Medicaid but who are not offered or cannot afford the full cost of employer-based coverage. The Senate Finance Committee recently released a paper that proposed refundable tax credits on a sliding scale for taxpayers with incomes between 100 percent and 400 percent of the federal poverty level (which would exceed $80,000 for a family of four) for those who purchase coverage on the Exchange.

If national health care reform becomes a reality with mechanisms to help low- and moderate-income families with the costs of coverage, the sad refrain of “sorry, I can’t afford that raise” may be heard far less often.

ABOUT THE AUTHOR

Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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