- Benefits Cliffs Research
- Reinventing Our Communities Conference
- Report on Minority-Owned Small Businesses
- National Interagency Community Reinvestment Conference
Research on Understanding and Overcoming Benefits Cliffs
Note: The author has revised this Partners Update article with updated calculations, which show the worker has a small negative disincentive to advance from the CNA to the LPN. Analysis in the earlier version underestimated annual out-of-pocket childcare expenses in Florida. In the earlier version, the worker is about $3,500 better off in the medium term when advancing from the CNA to the LPN. In the revised version, the worker has a small negative disincentive to advance from the CNA to the LPN. No other substantive findings are changed.
Leia, a mother of two children, lives in Miami. She currently works a near minimum wage job as a concessions worker at a theater. Leia receives a variety of public benefits because her employment income alone is not enough to meet basic family expenses such as food, housing, childcare, and health insurance. And without these public supports for even a short period of time, Leia risks becoming homeless, losing health care insurance, and being unable to afford the necessary childcare to pursue her education or work. She wants to earn more money to support her family, and she knows she could be a good nurse. When she begins researching careers in health care, she asks herself: "Will this higher-paying job actually make me and my family better off financially?"
In some cases, the answer may be no. Benefits cliffs, which occur when earnings gains are offset by the loss of public benefits, have long been recognized to create financial disincentives for low-income individuals to earn more income. A recent discussion paper—cowritten by David Altig, Elias Ilin, Alexander Ruder, and Ellyn Terry—develops a methodology to study benefits cliffs in the context of career advancement.
The paper uses the case of a hypothetical parent, Leia, described above. The paper asks, "What is the all-in financial benefit of transitioning from a near minimum wage occupation to higher-paying occupations in the health care industry for a specific case of a single mother of two children currently receiving a full complement of public benefits?" To answer this question, the paper illustrates the change in net financial resources for Leia if she pursues the health care services career pathway from certified nursing assistant (CNA) to licensed practical nurse (LPN) to registered nurse (RN). The benefits cliff analysis reveals a complex set of financial incentives for career advancement:
- Without accounting for tax increases or benefits loss, Leia has a clear financial incentive for career advancement from both short-term and long-term perspectives.
- Tax increases and benefit losses change these incentives. In the short term, Leia is worse off financially when advancing from the entry-level CNA position to the midlevel LPN position, and has no positive incentive to advance from the LPN position to the more advanced RN position.
- In the medium term, Leia faces a small financial disincentive to advance from the CNA to the LPN and a larger disincentive to advance from the LPN to the RN. In the long term, she is significantly better off financially advancing up any step in the career pathway.
To summarize these results visually, the chart shows the short-term (ages 25 to 27), medium-term (ages 25 to 33), and long-term (lifetime) incremental gains in annual net resources for each career path transition. The short-term and medium-term perspectives do not offer a large financial incentive for career advancement—particularly for the CNA to LPN transition or the LPN to RN transition. The short-term CNA to LPN transition, the medium-term CNA to LPN transition, and the medium-term LPN to RN transition result in a loss of net resources. Despite these shorter-term losses, there are large advantages to career advancement when calculated over a lifetime. The CNA occupation allows Leia to earn $39,000 more in annual net resources over her life. If she continues on to become an LPN and then an RN, she gains an additional $144,000 (present value) in annual lifetime net resources.1
The paper also finds a large lifetime net public savings if Leia advances to the RN position. Lifetime net public savings for federal and state governments combined are significant for all steps in the career pathway. Assuming she receives a variety of public benefits, including childcare subsidies and housing vouchers, we calculate that the public saves (in present value) approximately $409,000 over the lifetime if Leia advances up the full career pathway.
The paper's analysis illustrates how benefit cliffs might discourage investments in skill acquisition that promote career advancement, despite substantial long-term gains to both individuals and the public. A key policy challenge is how to improve the short- to medium-run trade-offs for individuals along a chosen career pathway. Thus, the paper applies the methodology to illustrate two policy interventions that may help to mitigate benefits cliffs and promote career advancement. The first is a gradual childcare subsidy phaseout based on a pilot workforce development program in Florida. The second is an application of transitional public benefits, which temporarily extend the period of benefits receipt after an individual's income exceeds eligibility thresholds, together with an asset mapping of financial resources, which helps individuals identify alternative public resources to help them address certain financial needs as they manage their career advancement.
The workforce development–based methodology to study benefits cliffs described in this paper is part of a larger Federal Reserve Bank of Atlanta initiative to study low-income families' financial incentives for career advancement. A major part of this initiative is the development of an interactive tool, still in beta-testing, designed to educate individuals on the financial returns to education and career advancement. The tool, called CLIFF (Career Ladder Identifier and Financial Forecaster), will provide a fuller financial picture of career choice, including possible short-term declines in resources while in school due to loss of employment income or a sudden loss of benefits (benefits cliffs) that may come with higher employment income. Information about this initiative for policymakers, practitioners, and employers can be found at www.frbatlanta.org/advancing-careers.
By Alexander Ruder, principal adviser in Community and Economic Development
1 The $144,000 figure represents the incremental long-term gain of transitioning to the LPN and RN from the CNA. It is calculated by summing the long-term bar at the CNA to LPN transition and the long-term bar at the LPN to RN transition.