Welfare: Goals and Conflicts

Most welfare plans combine two elements: a basic benefit, B, and a benefit-reduction rate, t. The amount of aid a family receives, A, is equal to the basic benefit reduced by the benefit-reduction rate times earned income, I: A = B - tI.

The "break-even income," I_b is the income level at which aid is reduced to zero. This is easily found by solving for I_b in the formula above. A = 0 = B - tI_b, which implies I_b = B/t. For example, a plan with a basic benefit of $8,000 and a benefit-loss rate of 50%, or ½, implies a breakeven level of income of $8000/(½) = $16,000.

Notice that I_b is directly related to B but inversely related to t. That is, an increase in the basic benefit (which helps reduce poverty) or a reduction in the benefit-loss rate (which improves work incentives) also have the undesirable effect of increasing program costs by raising the break-even level of income.