Welfare Reform: The US Experience

Welfare Reform: The US Experience The reform of the cash-based welfare program for single mothers in the US which occurred in the 1990s was the most important since its inception in 1935. The reforms imposed credible and enforceable work requirements into the program for the first time, as well as establishing time limits on lifetime receipt. Research on the effects of the reform have shown it to have reduced the program caseload and governmental expenditures on the program. In addition, the reform has had generally positive average effects on employment, earnings, and income, and generally negative effects on poverty rates, although the gains are not evenly distributed across groups. A fraction of the affected group appears to have been made worse off by the reform. The most well-known transfer program for the poor in the United States is that which provides low-income families with children, mostly headed by a single mother, with cash support. Denoted by the Aid to Families with Dependent Children (AFDC) program prior to 1996 and by the Temporary Assistance to Needy Families (TANF) program thereafter, it underwent a major structural reform in that year. This unprecedented reform imposed credible and enforceable work requirements for the first time in the history of the program, requirements which were extended to a large fraction of the caseload and were enforced by the use of sanctions that reduced or eliminated benefits for noncompliance. The reform also imposed lifetime time limits on the receipt of benefits. Following the reform, the caseload in the program fell dramatically and several other indices changed as well: employment rates of single mothers rose, as did average earnings and family income among the single mother population. Poverty rates of single mothers fell. The often dire warnings of large-scale deprivation which were made at the time of the reform did not materialize, although there is some evidence that a small fraction of the single mother population was made worse off by the reform. This paper will review the US experience and assess the causes and effects of the 1996 reform. The first section of the paper puts the AFDC-TANF program in perspective relative to the larger US system of transfers to the poor. The second section reviews the elements of the 1996 reform and how they altered the program that existed previously, and discusses the rationales for the reform. A review of the research literature on the effects of the reform is 2 presented in the third section, followed by a review of some of the issues currently under discussion in the US on what to do next. Context: The US System of Means-Tested Transfers The TANF program is only a small component in the larger system of means-tested transfer programs in the US today. Table 1 shows the expenditures and caseloads for the nine largest such programs in 2004. The largest by far is the Medicaid program, which provides health care to low-income families (it is separate from the Medicare program, the social insurance program that provides medical care to the elderly regardless of income level). The Medicaid program provides medical care not only to poor families, including those single mothers who are on TANF, but also to the poor elderly and the disabled, who account for a much larger fraction of program expenditures than single mothers. The Supplemental Security Income program, which provides cash benefits to the low-income aged, blind, and disabled adults and children, is much smaller but still quite sizable in terms of expenditure. The Earned Income Tax Credit (EITC) program, an earning subsidy program which provides tax credits to families with earnings and which is discussed by Meyer in this volume, is third largest. The Food Stamp program, which provides food coupons to the poor, and programs for subsidized housing for the poor are fourth and fifth, respectively. The TANF program is, as the table shows, only the sixth largest program in the US in terms of expenditure, and only half as much is spent on it as the next largest program. Its caseload is also small, although because it provides a cash benefit for