Some working families experience financial barriers to economic mobility. One significant barrier occurs when career advancement puts a family above the income eligibility threshold for public assistance programs. Due to the loss of these programs, career advancement opportunities can result in the family being financially worse off (a benefits cliff) or no better off (a benefits plateau) than before the wage increase.
This loss of means-tested public assistance is an effective marginal tax rate on income gains. High effective marginal tax rates mean that some workers have a financial disincentive to invest in their own human capital and advance from lower-wage work to jobs that lead to economic self-sufficiency.
The chart below demonstrates an example of benefits cliffs for a hypothetical single mother with two children who lives in Miami, Florida. As employment income increases (left to right on the horizontal axis), benefits phase out then disappear completely at income eligibility thresholds. Sometimes phaseouts are not gradual; they can result in a large drop in net resources (income plus benefits minus taxes and expenses).
Source: Atlanta Fed’s Policy Rules Database Dashboard
Use the PRD Dashboard to see benefits cliff examples in other cities across the United States and visit the Policy Rules Database page to learn about the calculations behind this chart.
Benefits Cliffs in the Context of Career Advancement
A key part of our mission is to understand how benefits cliffs interact with workforce development career pathways. Where on that path will the individual face financial barriers? Will the employment income in the higher-paying career outweigh the loss of public assistance in the short term, medium term, or long term?
The following story helps illustrate the answer to these questions for a hypothetical individual:
Leia, a mother of two children, lives in Miami, Florida. She currently works a near-minimum-wage job as a concessions worker at a theater. Leia receives a variety of public assistance because her employment income alone is not enough to meet basic family expenses such as food, housing, childcare, and health insurance. She wants to earn more money to support her family without having to rely on public assistance. 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?”
Watch the video below to learn more about Leia's story and benefits cliffs.
She is considering a health care career path that starts as a certified nursing assistant (CNA), progresses to a licensed practical nurse (LPN), and then to a registered nurse (RN). The chart below shows the short-term, medium-term, and long-term 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, Leia would gain a significant financial return to career advancement when resources are 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.
Working toward a Solution
The mission of our Advancing Careers initiative is to conduct research on benefits cliffs, develop information tools to help the community of stakeholders understand the issue better, and partner on efforts to analyze and develop solutions. Our work consists of four key areas of focus:
- Conducting research to understand benefits cliffs
- Engaging with local and state partners to find solutions
- Developing information tools for low- and moderate-income populations
- Raising issue awareness
1. Conducting research to understand benefits cliffs
Our research involves qualitative and quantitative studies, understanding program rules, and writing policy briefs and research reports. The research we are conducting is the foundation of all the products we develop.
Read more about our research, including focus groups, case study analysis, and research papers.
Central to our research is a database of public assistance program rules. The rules of such programs frequently vary by state, family size, family structure, and other factors. These rules are often difficult to find, extract into a usable form, and interpret. The database is a repository that allows for various research on public assistance programs, including the modeling of benefits cliffs with various career pathways.
Learn about the Policy Rules Database and read this article
for an example of how to use the PRD and the PRD Dashboard.
2. Engaging with state and local partners to find solutions
We partner with policymakers, business leaders, education and workforce training providers, and other nonprofit organizations. Together, we are analyzing changes in practices and policies that improve opportunities for economic mobility through career pathways. This work supports community and state efforts to improve economic security for families and meet the talent needs of businesses.
Each partnership results in insight on how specific policy solutions or organizational changes can mitigate the disincentives created by benefits cliffs.
For example, our partnerships around the country have led us to create informational dashboards that inform how benefits cliffs intersect with career advancement in specific geographies and local in-demand career paths. These dashboards show the financial tradeoffs associated with career advancement and the net gains to the taxpayer when workers advance, and simulate policy and programmatic solutions.
Read about informational dashboards we have developed.
3. Developing information tools for low- and moderate-income workers
The complexity of public assistance programs means that many workers may struggle to understand the timing and magnitude of benefits loss. Coupled with economic insecurity, this uncertainty can prevent individuals from actively seeking opportunities for career advancement. Further, individuals who do advance without knowledge of when assistance will end can find themselves in situations where their standard of living doesn’t improve, or even declines.
Core to this Advancing Careers initiative is the development of an interactive financial planning tool designed to inform individuals about benefits cliffs along a career path. The tool enables users to design a customized career path involving multiple steps of education and career advancement. The tool also provides analytical capabilities for workforce and human service professionals, employers, nonprofits, and policymakers working to mitigate benefits cliffs through changes in practices, policies, and system alignment.
Learn about CLIFF (Career Ladder Identifier and Financial Forecaster).
4. Raising awareness through conversations with community and national leaders
Career advancement can be a net win for both the individual and the taxpayer. As individuals earn more, they contribute more in employment taxes and pay more in consumer taxes as they spend more. At the same time, governments spend less on public assistance programs as individuals move towards economic self-sufficiency. To raise awareness about the potential gains, we engage with policymakers, employers, and other community and economic development organizations.
This engagement includes participating in meetings, hosting policy summits, writing short briefs, and developing information tools that communicate the financial gains for workers and the taxpayer.