The Benefits Cliff:
Why some people can’t
afford to get a raise

Minimum wage hikes may not benefit families

if they lose more in public benefits

By Amber Wright, Development and Marketing

At the Foodbank, we often see people come through our Drive Thru for food while still dressed in work attire. They are employed, but still struggling to put food on the table after paying the bills. For many, paychecks just aren’t stretching far enough.

One solution that could alleviate this problem is to raise the federal minimum wage, which does provide a boost in income for workers earning the minimum wage. However, the issue is more complicated than it may first appear due to the way many public benefit programs are structured.

One issue, known as the “benefit cliff,” hurts most the workers making the least. This is where a person gains a small increase in income, which then causes them to lose some benefits from programs such as the Supplemental Nutrition Assistance Program (SNAP), Section 8 housing vouchers, or other programs.  Employees can feel trapped by the system because wage increases do not actually improve their financial situation.

While there isn’t significant growth in their paycheck, they can suddenly find themselves with substantial bills for things such as housing, childcare, medical bills, grocery bills and more. They may now bring home less money overall because their paycheck is taxed, whereas their benefits were not. This financial predicament can be triggered by a pay increase as small as 25 cents an hour.

For example, imagine a working family is receiving SNAP benefits as well as Section 8 housing assistance. The head of household barely qualifies for SNAP assistance, and their employer offers them a $1.50 hourly raise, which would make them ineligible for SNAP and Section 8. If this household loses their Section 8 status, they will have to reapply to the program — which has average wait times up to 8 years depending on the city, according to the Center on Budget and Policy Priorities – if their wages or hours are cut in the future.

At 40 hours a week, a $1.50 raise would only add $240 to the total monthly income before taxes. The Dayton Housing Authority last reported an average pay out for section 8 housing assistance in the area at $588 per month. That is $348 more than the increase in wages, even without factoring in taxes or the dollar amount lost with SNAP benefits.

Single parent families can be hit the hardest. Not only do they struggle with rent and basic utilities, but they are also confronted with rising childcare costs, school fees and extra mouths to feed – all on a single income. In cases like this, they often rely on public assistance to survive.

It’s not surprising that many people will turn down a raise, promotion, or extra hours/overtime to avoid this financial nightmare. It may seem like a paradox, but many people find that they can’t afford to get a raise.

Legislators and advocates are discussing solutions to this cliff effect. One idea that is already practiced in a few sectors is to taper benefits gradually instead of cutting off all assistance at once. Benefits would decrease at the same rate as wages increase, or even a little less as an added incentive to excel at work. This would provide a smoother transition to self-sufficiency in smaller, more manageable steps.

Another idea is combining the various benefit programs into a combined filing process, which would not only make applying quicker and easier for applicants, but also allow better insight into how these benefits work together in relation to recipient’s wage and other circumstances.

Currently, most public assistance programs are granted with their own separate requirements, such as documents proving eligibility, employment, or ongoing employment applications. Some programs may also require regular appointments with a case manager, attending job training or other classes. For someone needing or receiving multiple benefits, this can be difficult to juggle along with work, children, and household responsibilities.

The benefit cliff is already a problem many people face without changes to minimum wage, but we must consider how raising it might further exacerbate the issue. Each state implementing its own standard complicates things further.

The federal minimum wage is set at $7.25/hour, but on January 1st Ohio’s jumped 50 cents to $9.30/hour, which is higher than all but one adjacent state. Michigan also raised theirs with the New Year to $9.87/hour, while Kentucky, Indiana and Pennsylvania remain at the federal minimum $7.25/hour. West Virginia kept theirs the same at $8.75/hour.

Some funding programs have already gone several years without considering factors such as these into the equation. According to the Congressional Research Service, the Temporary Assistance for Needy Families (TANF) is a basic block grant providing public assistance that has not been adjusted for changes such as population increase, inflation, or minimum wage hikes since it began 25 years ago. Adjusted for inflation, in fiscal year 2021, the TANF basic block grant was worth 40% less than its value in fiscal year 1997.

However, there are existing practices that do provide earning incentives. SNAP is one of the programs structured to ease the transition off public assistance. A “benefits phase-out” slowly decreases benefits as income grows so that the financial support doesn’t disappear all at once. The current rate allows recipients to bring home a higher total income even as their benefits decrease.

The SNAP program also shows preferential treatment to earned income over unearned income, such as social security or cash assistance. A family whose net income from employment matches that of a family only on assistance will be granted greater funds as an incentive to work.

Raising the federal minimum wage has the potential to aid many families in the United States, but it is not a simple fix. We also must ensure our public benefits programs are structured to support growth, incentivize work, and help families meet their basic needs as incomes increase.

2022 Minimum Wage by State

Source: Minimum Wage Rates by State 2022 (minimum-wage.org)