Volume CXXXI, Number 23 April 26, 2002 f

Economic update: welfare reform
JOHN FITZGERALD
FACULTY CONTRIBUTOR

In his campaign Bill Clinton promised to "end welfare as we know it." His plans and Republican plans and resulted in the compromise known as the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, or welfare reform for short. This Act comes up for congressional reauthorization in September of 2002. It has dramatically altered the welfare landscape. Has welfare reform been a success?

There are many programs for low income families, including food stamps, energy assistance, housing assistance, and Medicaid and the Earned Income Tax Credit. When we say "welfare" most people are thinking of the Aid to Families with Dependent Children program, AFDC), the largest cash welfare program, which was renamed the Temporary Aid to Needy Families program (TANF) in the 1996 Act. This program provides cash aid to low income families, largely families headed by unmarried mothers. Married couples are eligible under special circumstances (unemployed or disabled primary earner) but ninety percent of the caseload consists of families headed by unmarried mothers.

Welfare reform changed the AFDC system in several ways. First, the program gave greater emphasis to work. The idea of "welfare-to-work" and workfare predates welfare reform and was the main thrust of previous reforms in 1988 that emphasized job training and child care support. But the 1996 law imposed harsher penalties for non-compliance and required work activities (which can include training) for families with young children who were formerly exempt. (One state requires work when the youngest child reaches the age of 12 weeks.) Second, the responsibility for the program was devolved to states. States were allowed greater latitude in making rules and the funding was provided in a block grant to states instead of by a matching formula.

A consequence is that welfare is no longer an entitlement. Under AFDC, a family was guaranteed to receive benefits (entitled) as long as they were eligible. Under TANF, there is no such guarantee; a state may discontinue benefits if it spends all of its block grant. Third, states must impose a five-year lifetime limit on benefits for a person. States can exempt up to twenty percent of their caseload from this limit. The time limit is the most controversial component. We are just now seeing the first cohort of recipients come up to the time limit and it is not yet clear how states will respond.

To decide whether the reforms are a success, we first have to define success. Does success mean greater well-being of recipients or does it mean reduced cost of the program? Since 1996, the welfare caseload has fallen dramatically. The proportion of recipients who work has risen and many of those leaving welfare did so by increasing their earnings. By this measure, the reform was a success. Since the economy was booming during this time period, however, many recipients would have left welfare without the welfare rule changes. There is debate about the proportion of the caseload drop that is due to the good economy and to welfare reform, with estimates indicating a substantial part due the economy. For example, the caseload began to drop in 1994, two years prior to the 1996 reforms.

There is little debate that the combination of greater work requirements and greater work opportunity had a larger impact than either separately. A recession will make it much more difficult for recipients to move off the program.

How did welfare reform affect the well-being of the poor? Some argue that simply by forcing recipients into the job market, one raises their job experience and in ways that will pay off in the future and raise their self-esteem and well being. The evidence to date paints a less rosy picture.

Recipients who left welfare by taking a job have incomes roughly similar to the low incomes that they had while on welfare. Recipients are low wage workers. Further, there is little evidence to date of wage growth among this group. Moreover, working recipients have higher child care and work expenses than before, even though child-care is subsidized to a greater degree under TANF. Ongoing studies are assessing the impact on welfare children with preliminary results showing detrimental effects of the reforms.

In short, based on current evidence, while reform was successful at reducing caseloads, it did not improve the well-being of recipients.

From a political point of view, the focus on work is here to stay. The reauthorization should improve the program by eliminating the five year lifetime limit to add greater flexibility in times of economic downturn, as well as limit some of the harsher work requirements. Further, greater support for work through child-care subsidy and wage subsidy would help. George Bush's latest welfare plan calls for even more work requirements, yet cuts grants for housing and child care for workers leaving welfare. Governors and welfare directors in 39 states have come out against these proposals. If Bush wants us to believe he is a "compassionate conservative," he should show some compassion on this issue.