Benefits Cliffs: Effects on Workers and the Role of Employers

In this report, we examine benefits cliffs – the loss of eligibility for public safety-net programs and benefits they provide as income rises above eligibility limits. Benefits cliffs can significantly impact lower-wage workers and their families financially and may act as a disincentive for pursuing modest promotions, incremental raises, and career development. Based on a review of numerous studies, reports, briefs, and expert interviews, we offer the following key perspectives:

1. Some cliffs are more significant than others. Certain public benefits like the Earned Income Tax Credit have a gradual income phaseout, while others like Medicaid result in an abrupt and total loss of the benefit.
2. Workers pay a high “tax” on increased earnings. Effective marginal tax rates (EMTRs) associated with benefits cliffs vary from 17% to 65%. Workers are taking “two steps forward, one step back” when earnings increase.
3. Benefits cliffs can impact families financially. Because eligibility for these programs end and the related benefits are no longer available, families’ total net financial resources (NFR) do not rise at the same rate as earnings.
4. Benefits cliffs have a more severe impact on workers with incomes 100 to 150% and 200 to 250% of the federal poverty level and families with young children.
5. The harshest cliffs involve the loss of childcare and housing subsidies. The loss of these benefits is very difficult for workers and their families because childcare and housing are otherwise quite expensive for many Americans. Even more unfortunate, most workers eligible for these subsidies never receive them due to a lack of funding to meet demand.
6. A coverage gap exists between Medicaid and Affordable Care Act (ACA) marketplace subsidies for workers in states that have not expanded their Medicaid programs. For individuals that are in this coverage gap, it is particularly challenging to access affordable health coverage. Transitioning from Medicaid or ACA subsidies to employer-sponsored health coverage means workers may experience an increase in insurance premiums.
7. For many workers, earnings alone are not enough to achieve financial stability.
8. Research evidence is mixed about the impact that benefits cliffs have on the number of hours affected individuals work. The EITC income phaseout has a negligible effect on hours.