Weighing the Costs of Welfare Removal

By Ben Hinshaw - Welfare has long been the subject of heated debate. On November 6, 2015, Manasi Deshpande continued that debate at a seminar hosted by the Center for Poverty Research. Focusing on Supplemental Security Income (SSI), Deshpande, an assistant professor of economics at the University of Chicago, presented her recent paper "Does Welfare Inhibit Success? The Long-Term Effects of Removing Low-Income Youth from Disability Insurance."

SSI is the largest cash welfare program in the US. Its effects are particularly consequential for young people with behavioral and mental conditions such as ADHD and autism. The income stability it purports to provide is especially relevant for low-income families with highly volatile earnings. (Deshpande explained that parents of children in the SSI program are earning an average of $9000 per year when those children reach 18 years of age. She also noted that low-income families typically have limited access to credit, which compounds that volatility.)

Deshpande’s research addresses two specific questions. First, how much does SSI inhibit success and self-sufficiency in youth? Second, how much insurance against volatile earnings does SSI actually provide?

Lost income

Using administrative data from the Social Security Administration, Deshpande implemented a regression discontinuity design (RDD) based on a change in the probability of SSI removal at age 18 created by the welfare reform law of 1996. Those reforms dictated that, upon turning 18, youth receiving SSI must “requalify” based on adult criteria for employability, or face removal from the program.

She found that removed SSI youth enjoyed an increase in earnings that covered only one-third of the $7,700 they lost in annual SSI income. Overall, over the 16 years following removal, removed SSI youth made up only 20 percent of their lost SSI income.

Deshpande further found that individual income volatility increased fourfold as a result of removal from SSI. Also, that one quarter of recipient welfare loss was caused by an increase in income volatility, rather than in actual earnings. This led her to conclude that around one quarter of SSI’s value resides in income stabilization, not supplementation.

Costly mistakes?

The policy implications of Deshpande’s research can be interpreted in two distinct ways. On one hand, if we accept that SSI is beneficial for children who will later struggle to secure gainful employment, an argument for the expansion of the program is difficult to dispute. On the other hand, if we regard SSI as providing eligible youth with perverse incentives that may in fact diminish their capacity to work in later life, limitation of the program may make more sense.

Deshpande concluded that ignoring the income stabilization effects of welfare and disability programs like SSI could lead to their value being severely underestimated. That, she said, could be a costly mistake.

Learn more about Manasi Deshpande at her University of Chicago webpage.

For more events like this, visit the UC Davis Center for Poverty Research website.