Economic Effects of Means-Tested Transfers in the U.S

The system of means-tested transfers in the U.S. has evolved in important ways over the last decade, with significant expansions of Medicaid , the Earned Income Tax Credit, and the Supplemental Security Income program, and with significant contraction in Aid to Families with Dependent Children, now titled the Temporary Assistance for Needy Families program. To determine where we are in our understanding of each of these programs, as well as the other major programs in the system of means-tested transfers, a volume is under preparation by the National Bureau of Economic Research that surveys the current structure and historical evolution of each of these programs and that synthesizes the results of the research that has been conducted on their economic effects. In addition to the AFDC-TANF, Medicaid, EITC, and SSI programs, reviews have been conducted for the Food Stamp program and for housing, child care, job training, and child support programs. This paper summarizes the results of those reviews and highlights the large number of important findings from existing research. Reform of the system of means-tested transfers in the U.S. continues to be an important topic for public policy as well as an area of continued research by economists. Policy and research interest have been kept particularly high by significant transformations in the meanstested transfers system over the last decade. The most important structural changes have taken place in three programs. One is the Aid to Families with Dependent Children (AFDC) program-now named the Temporary Assistance for Needy Families (TANF) program--whose generosity has been significantly reduced and whose eligibility conditions have been restricted to those who can and are willing to comply with work requirements and other new rules. A second is the Medicaid program, which has been significantly expanded to cover more families and children off the AFDC-TANF program. The third is the Earned Income Tax Credit (EITC), whose benefits have greatly expanded and whose expenditures now exceed those in the traditional AFDC-TANF program. A fourth program which has undergone significant expenditure and caseload expansion, although without major structural change, is the Supplemental Security Income (SSI) program. To determine where we stand in our understanding of each of these programs, as well as the other major programs in the system of means-tested transfers, a volume is under preparation by the National Bureau of Economic Research that surveys the current structure and historical evolution of each of these programs and that synthesizes the results of the research that has been conducted on their economic effects (Moffitt, forthcoming). In addition to the AFDC-TANF, Medicaid, EITC, and SSI programs, reviews have been conducted for the Food Stamp program 2 and for housing, child care, job training, and child support programs. This paper summarizes the results of those reviews. The paper first provides a brief background discussion of trends in expenditures on means-tested transfers as a whole. It then goes on to discuss each of the major programs individually. Overall Trends in Expenditures in Means-Tested Transfer Programs Figure 1 shows trends since 1968 in per capita expenditures in the eighty largest meanstested transfer programs in the country. The figure reveals that there have been four phases of spending growth: an expansionary phase beginning in the 1960s and running through the early or mid-1970s; a contractionary (or stationary) phase beginning in the mid-1970s and running until the mid-1980s; another expansionary phase running from the late 1980s to the mid 1990s; and another contractionary (or stationary) phase beginning in the mid-1990s. The first phase saw an increase in AFDC benefits; enactment of a major piece of welfare legislation--the 1967 Social Security Amendments--which raised earnings disregards in the program (i.e., lowered the tax rate on earnings); and witnessed the creation of the Food Stamp and Medicaid programs and, later in the period, the Supplemental Security Income program. Caseloads grew rapidly in all four of these programs. This period was later termed the era of the “welfare explosion” and set the modern framework of means-tested transfers. The second phase saw a steady decline in real AFDC benefits; enactment of a major piece of AFDC legislation--the 1981 Omnibus Budget Reconciliation Act--which effectively