Everyone wants poor families to work their way off welfare and ascend the income ladder. Yet an increasing number remain trapped on government benefits, struggling to support themselves. Some blame the recipients, politicians, the economy, racism, or even capitalism. But few focus on perhaps the most obvious factor – government programs themselves, which actively discourage recipients from working more through “benefit cliffs,” trapping them and their families in poverty.

That’s the conclusion of a new report titled “Stranded by the Safety Net: How to Fix the Benefit Cliff Problem” published by a group of authors affiliated with the American Enterprise Institute and the Alliance for Opportunity. Inspired and drafted by a team of experts in state and federal benefit programs, the report describes how and why benefit cliffs arise, and more importantly, offers fiscally responsible ways to fix them. 

What are benefit cliffs? In short, they stem from a fundamental feature of welfare programs – benefits are targeted to low-income households, which means they decline as work and earnings rise. But due to program design flaws, families that earn more can receive only marginally more overall income due to losses in their government benefits. In other words, getting a raise, accepting a promotion, or working more hours can trigger an abrupt reduction or complete loss of benefits – that is, falling off a benefit cliff. In some instances, the loss in benefits can outweigh the additional earnings, leaving the household financially worse off than before. Many adults logically ask why bother working more when faced with this scenario.

How big is the problem? Research from the Atlanta Federal Reserve Bank found that when receiving a package of available government benefits “a hypothetical single adult, one child (aged three) family living in DC would receive no financial gain from a wage increase between $11,000 and $65,000 of earned income.” In Illinois, a 2022 study from the University of Chicago and Atlanta Fed showed a mere $1,000 annual wage increase, from $54,000 to $55,000, would result in a family losing over $25,000 in childcare benefits. What rational parent would forgo almost half of their earnings in lost childcare benefits in order to work a little more?

How many people do benefit cliffs affect? The US Department of Health and Human Services reports that 99 million people (about 30 percent of the total population) received at least one means-tested government benefit (that is, based on their income level) before the pandemic. Benefit receipt has grown since then, and families with children are especially likely to collect one and often two or more safety-net benefits. Federal spending on major safety net benefits, including Medicaid, food stamps, the earned income tax credit, and child tax credits, has nearly doubled since 1995, as the reach of these programs increases across the population.

Granted, not all welfare recipients experience a benefit cliff, but the core problem is that those who want to work and earn more are exposed to the possibility of them. Is it any wonder that, according to a 2024 Pew Research Center survey, only 39 percent of poor Americans believe the American Dream is within their reach?

Our report proposes a two-pronged strategy to address benefit cliffs in a fiscally responsible way. First, we spotlight immediate reforms that program administrators and policymakers can implement within the existing system to offer relief to families facing benefit cliffs. Often, that doesn’t require legislation, just administrative action by federal or state agencies. Second, we outline comprehensive reforms to reconfigure the entire safety net to better support work, increase efficiency, and encourage two-parent, working families. That will require legislation, and substantial effort, which takes time, as anyone who monitors Congress will recognize.

We believe that a comprehensive fix is ultimately required, and that the federal government must lead it because most programs are created, designed, and funded from Washington, DC. Importantly, this requires promoting work and marriage as fundamental goals of government programs. But poor families can’t wait for a complete overhaul. States can and should take first steps by using current program flexibility to minimize benefit cliffs, and Congress should legislate individual program fixes, creating momentum for additional changes. Smaller initial benefit amounts and more frequent check-ins must be part of the near-term solutions. 

Many understand that government programs should not financially penalize someone who works and earns more. Some propose to simply provide even more benefits at higher income levels, so that benefits can nominally smooth out to zero. But that approach expands government dependence higher up the income scale at substantial cost to taxpayers. Ironically, that promises to only increase the number threatened by declining benefits and adds to the perception that working less and relying on government benefits will leave families better off. With $2 trillion annual deficits including $1 trillion in interest payments alone, Washington can’t afford that, and neither can families in need.

Benefit cliffs are created by poor program design and misplaced priorities, which means they can be fixed by better policies. Policymakers need to focus on this problem and fix it. That will help those capable of working get the help they need, without preventing them from working their way up the income ladder.

Angela Rachidi and Matt Weidinger are both Rowe Scholars and senior fellows in poverty and opportunity studies at the American Enterprise Institute. Authors of the report “Stranded by the Safety Net: How to Fix the Benefit Cliff Problem” include Joshua Bandoch, Nic Dunn, Leslie Ford, Angela Rachidi, Erik Randolph, and Matt Weidinger.