Benefits Cliffs and Financial Stability for the Direct Care Workforce

TL;DR

This study shows that many direct care workers face financial setbacks when they earn more due to benefits cliffs, where increased income leads to reduced public benefits and higher taxes.

Contribution

The paper introduces a method to quantify benefits cliffs using effective marginal tax rates for direct care workers in multiple U.S. states.

Findings

In Virginia, 16.3% of direct care workers would experience at least one benefits cliff after three $5,000 wage increases.

Median effective marginal tax rates for direct care workers range from 35.4% to 36.2% across wage increases.

Benefits cliffs and high EMTRs leave direct care workers with limited financial resources despite wage gains.

Abstract

Our research examined the risk of benefits cliffs among direct care workers (DCWs) in Florida, Kansas, Massachusetts, New Mexico, and Virginia by analyzing effective marginal tax rates (EMTRs), which measure how much of a worker’s additional earnings are lost due to higher taxes and reduced public benefits. A benefits cliff occurs when the EMTR exceeds 100%, meaning workers end up financially worse off despite earning more. Using the American Community Survey (ACS) to identify DCWs, we estimated earnings thresholds for benefits cliffs with the Federal Reserve Bank of Atlanta’s Policy Rules Database (PRD), which calculates benefits and taxes based on family characteristics. We modeled three consecutive $5,000 wage increases and calculated overall resources as take-home family income plus benefits. We find that DCWs face the risk of benefits cliffs. In Virginia, 8.8% of workers would encounter a cliff after a first $5,000 raise, 6.4% after a second, and 5.3% after a third, with 16.3% experiencing at least one cliff across raises. Median EMTRs range from 35.4% to 36.2% across raises. These cliffs and high EMTRs can leave DCWs with few financial resources even after wage increases. Given low wages, unstable work hours, and high poverty rates, policies to improve economic stability for DCWs are critical. To mitigate the effects of benefits cliffs and improve financial stability for DCWs, policymakers can make changes to public benefits programs including adjusting income limits and asset limits, while employers can engage DCWs in strategic discussions about wage increases and scheduling changes.