No, Cato, Welfare Doesn't Pay More Than Minimum Wage

Aug 21 2013 Published by under Uncategorized

It's been a while since I've posted anything, but the intellectual dishonesty of a recent, and in the news, Cato Institute report got the juices flowing.

The gravamen (yes, I'm still in law school) of the Cato report in question is that welfare "pays" more in most states than a minimum wage job. From the report:

Far from condemning welfare recipients to a life of poverty, welfare actually exceeds the FPL [Federal Poverty Level] in 42 states and the District of Columbia (as show [sic] in Table 5). In fact, in the District of Columbia, Hawaii, and Massachusetts, welfare pays more than twice the poverty level.

I don't mind that the Cato Institute is opposed to welfare. I do mind that they lie to try to influence policy on welfare, particularly when the Republicans in the House are about to push for additional budget cuts.

The truth of the matter, of course, is that even a minimum wage job is likely to leave a family better off than no job at all. This is true in part because many assistance programs do not automatically cut off the moment that you start to work. The programs have income-based eligibility requirements, and many people who work minimum wage jobs will continue to qualify for these programs.

This does not show up in the Cato report, because the Cato report did not bother to include continued eligibility for benefits when they compared "welfare" with a minimum wage job. Their comparison assumes that welfare "pays" better than a minimum wage job based on the assumption that the welfare recipient collects from every major assistance program, and that the minimum wage earner collects only pay + the Earned Income Tax Credit (which they condescendingly point out is actually a form of welfare).

It doesn't take very long to identify most of the sources of intellectual dishonesty in the Cato report. I'm going to hit the high points there, and provide a few examples of how things look in a more realistic (but still very favorable to Cato) scenario.

We'll start by looking at some of the most basic lies in the report.

First, their "typical welfare family" is nothing of the kind. They base their calculations entirely on families that are eligible for Temporary Assistance to Needy Families (TANF). However, most of the programs that they include in the welfare income have a much broader reach than nonworking families. Here's a quick breakdown:

Nationwide, in Fiscal Year 2010, there were a total of 1,847,155 households with active TANF cases. In the same fiscal year, 18,618,436 households received SNAP (food stamp) benefits, and another 65,989,147 individuals (~25,577,188 households based on the census 2.58 individuals/household) received medicaid benefits. According to the Cato report's own definitions, households on both of those programs should be "welfare families." With less than 10% of SNAP households also receiving TANF, and less than 3% of Medicaid households receiving SNAP, it's easy to see that Cato's "typical welfare family" is actually based on an extreme case, not on anything that any of us would consider to be an "average."

But let's drill down further.

In order to determine what welfare "pays," the authors of the Cato report based their calculations on the assumption that the "typical welfare family" consists of "a single mother with two children." Cato provides no citation (naturally) for this assumption.

It should also be noted that while Cato does not explicitly state this anywhere, Cato's "typical welfare family" actually assumes that both the children in the family are under age 5 - they include WIC benefits for both children in their calculation of what welfare "pays." Less than 20% of single mother families have 2 children under age 18 - let alone age 5. Here, again, the "typical welfare family" is anything but.

Cato also assumes that the "typical welfare family" receives housing benefits. This is the big assumption, given that housing benefits are the single largest contributor to Cato's calculation for the majority of states. Yet, according to Cato's own numbers, less than 15% of households receiving TANF receive housing assistance. Cato excluded housing from their calculation where less than 10% of TANF families receive housing assistance, but included it for all other states despite the fact that there are only 5 states where even a quarter of households on TANF receive housing benefits.

Cato also includes Medicaid from their calculations of what welfare recipients get, but excluded it from their calculation of what minimum-wage workers receive. Medicaid, unsurprisingly, is another large dollar component in Cato's calculation of what a welfare recipient gets. However, the same Cato hypothetical family would retain Medicaid eligibility even if the single mother worked 40 hours at minimum wage in all 52 weeks of the year.

Cato includes utilities assistance in their calculation in many states. However, in many states there is not actually a monthly benefit available for utilities. Assistance is need based, and much of it goes to deal with crisis situations, or for one-time payments. Similarly, states vary eligibility for the TEFAP program quite a bit.

So let's break down where things really stand if we take a more realistic - but still generous to Cato - view. This is made easy by a table that Cato buried at the bottom of the report, where they calculate the total based on the benefits that are received by an actual majority of "typical welfare families" (in other words, what Cato's actually typical "typical welfare family" would receive). We'll compare this to what a minimum wage employee would receive based on a 40*52*minimum wage salary, less 7.65% withholding ($14,887 in states that use the federal minimum wage), plus the medicaid value for the state as calculated by Cato. (If the same family qualified while on TANF, they'd still qualify at the $14,887 income, which is far below the federal poverty line for a family of 3.) To this, we will add another $5,000 in refundable tax credits. Most of the Cato "typical" one-parent, two-child families will actually get more than that, but we'll cut the figure for ease of calculation and to account for state taxes. This gives us a total of $19,887 in pre-medicaid income for those families.

Hawai‘i, according to Cato, has the most generous benefits. Cato's up front calculation says Hawai‘i "typical welfare recipients" receive $49,175 in welfare benefits. Their "typical typical" calculation drops that to $23,235. Cato's Medicaid calculation for Hawai‘i is $6,776. The minimum wage family is several thousand dollars better off than the "typical welfare family."

In Mississippi, which Cato ranks dead last in welfare generosity, the up front calculation gives welfare families $16,984. Mississippi provides housing assistance to less than 10% of TANF families, so Cato's "typical typical" calculation isn't much different ($15,261). Cato's Medicaid calculation for Mississippi is $6,909, putting the minimum wage family at nearly $26,000 - more than $10,000 better off than most welfare families.

New York often gets labeled as a welfare state. The "typical typical" benefit there is about $24,000, but almost half of that ($10,464) is Medicaid. The minimum wage + Medicaid family will be more than $6,000 better off than the welfare family. You're about that much better off in California, too, before taking the higher minimum wage into account.

Alaska tops the Cato "typical typical" list at $26,560, but even there the minimum wage plus Medicaid family will be ~$2,000 better off annually.

In short - too late - there appears to be NO state where a family in the same situation as the family Cato used for their welfare calculations will be worse off if employed at a minimum wage job. Zero. None. Nada.

To put it another way, Cato's statement that, "The current welfare system provides such a
high level of benefits that it acts as a disincentive for work," is not just a lie in general, it's a lie in all 50 states, and in the District of Columbia.

But none of that will stop this from becoming a Tea Party meme.

8 responses so far

  • becca says:

    TANF families aren't necessarily nonworking. You have to be spending 35 hours per week working or doing community service and job searching to get TANF funds, at least in Michigan. *googles* Work participation is mandatory for 3/5ths of recipients and,~40% of adult recipients do some work. Of the ones that are exempt, some of the circumstances are teen parents attending school, and single parents with infants < 12 months old.
    And, to be honest, the obstacles facing most of these people are... surmountable... but extremely, EXTREMELY formidable. It's very plausible that paying TANF is cheaper than meeting these people where they are at and training them.

    • Yes, people on TANF need to be *working.* What is very crazy is that going to school to enable one to get a better job is typically not considered to be "working." :-( I've known two single mothers (one who was abandoned by her husband after having 6 children, the other who was abused by her husband so she left him) who specifically struggled with that because they were only qualified for entry level work, and found it very difficult to meet the work requirement to receive TANF and go to school.

  • Daniel says:

    Your New York number is a lot lower than theirs, you are going with "typical typical" while they are assuming the person is maximizing their benefits. You also don't account for the working mother needing daycare for two children.

    I'd prefer to see a system that provides matching funds to working families or people in an approved training program. This assistance would diminish over time as the family's income comes up.

    As for surmountable obstacles, we are talking about welfare here, not disability. The disabled need a permanent solution whereas most welfare recipients just need a good job and a financial plan.

    "We should measure welfare's success by how many people leave welfare, not by how many are added." --Ronald Reagan

    • You are right Andy that he didn't take into account the need for daycare, which is a biggie. However, in being "generous" to Cato, he also did not attempt to calculate the food stamps, TANF, housing, WIC, and heating assistance funds that a working parent can still continue collecting...AND daycare assistance funds. These things slide the scale much more in favor of working. Though one does need to consider...is a $2000 per year benefit really enough to motivate someone to work 40 hours per week, FIFTY TWO weeks per year (most entry level salaried employees only work 47 weeks per year--two weeks worth of paid holidays, two weeks of paid vacation, one week of paid sick days).

  • Andy says:

    You're also ignoring the fact that many people on welfare also work part time jobs, attempting to stay under a certain income in order to receive benefits.

    They're also getting paid for literally doing nothing, while (as Daniel mentioned) working families have additional costs. Not just daycare, but transportation and food as well.

    Then take into account many others on welfare who work off the books, or do side jobs such as computer repair/auto repair/scrap collecting etc. And there's even more who sell drugs and services for money.

    Out of 30+ customers I've met on welfare, and a dozen others I've known receiving government aid, I have yet to meet one person who actually deserves it (and have yet to meet one person without another form of income.)

    • sonja says:

      Andy, how is it that you know 30+ customers on welfare? How did you define whether or not they deserved it?

      • Pam says:

        Right Sonja. So many people generalize and assume so much. Also they think people taking money under the table is worst than corporate welfare. A person in poverty is trying to survive. Big difference then corporations getting their tax cuts.