Empowerment Accounts: 21st Century Safety-Net Reform

Frankie Johnson, a college-educated single mother from Washington, D.C., moved to Atlanta to distance herself and daughter from an abusive husband. Without a job or place to live, she sought government assistance for childcare and transitional housing. While she waited for this assistance, she was offered a job paying $70,000.
She turned it down.

Why? Because as much as Frankie needed work, she didn’t want to lose the benefits of housing and childcare when she took the job.

Too often government safety-net programs don’t lift people out of poverty for long because they provide specific resources without growth opportunities or flexibility for recipients. In many cases, individuals struggle without the dignity and stable income of work and the cost of “benefit cliffs,” whereby recipients lose more in assistance than they do in income gained from work, due to varying income thresholds across existing safety-net programs.

Unfortunately, Frankie’s story is all too common. Many people choose to keep the guaranteed payments from taxpayers over the uncertainty of working and losing those payments.

But this tradeoff isn’t the only problem with the current safety-net system.

Safety-net recipients often lack the financial literacy necessary to get out—and stay out—of poverty. Additionally, while many recipients are enrolled in multiple safety-net programs, each program is managed separately, burdening the taxpayer with costly administrative costs. And for a recipient, it can seem like a full-time job keeping up with the paperwork to remain enrolled.

Making matters worse, too many people in poverty, and working families, are struggling from the highest inflation in 40 years. And the handouts of taxpayer funds by the federal government over the last two years artificially drove up savings and kept people not working longer than necessary thereby changing the calculus of whether to work or stay on safety nets.

This is evident in the latest U.S. jobs report for August 2022 which showed that the reported unemployment rate rose slightly to 3.7%, which remains low, but it’s actually much higher as the labor-force participation rate remains well below the pandemic-related shutdowns in 2020. Considering the same pre-shutdown labor-force participation rate, America’s labor force is missing approximately three million workers. Many aren’t looking for work because of generous handouts contributing to the labor shortage problem and reducing their gains from the dignity of work.

With these challenges in the labor market and the effects that the current recession will have on people over time, we must improve our safety-net system for recipients and taxpayers alike.

Americans have already spent about $25 trillion (adjusted for inflation) on more than 80 federal safety-net programs since 1965. While there have been some successes in helping people out of poverty, there is a need for a more effective program that doesn’t just give people fish but teaches them to fish. This is what our new, holistic approach called empowerment accounts (EAs) would do.

EAs would condense and replace overstretched, wasteful safety-net programs (excluding Social Security, Medicare, and Medicaid, for now) into one consolidated, effective program with funding provided monthly via a debit card tied to a financial app and time-limited to a maximum of one year. To qualify, people would work at least part-time while meeting regularly with a community navigator.

The program also helps teach the Success Sequence, whereby 97% of people aren’t in poverty if they graduate high school, get a full-time job, and marry before having kids. And savings are incentivized by the recipient being able to keep extra funds after the limited program period, which will help to reduce the benefits cliff.

By helping reduce bureaucratic bloat and streamlining payments to recipients instead of waste and other programs, EA recipients would have more flexibility to spend the money on approved items across the current safety-net items and foster financial independence. When implemented, EAs will provide a crucial 21st century reform to our troubled safety-net system and help rein in governmental budgets as people have less need for safety nets because they find a well-paid job and ways to provide for their families.

The improvements to recipients using EAs—incentivizing financial literacy, finding dignity through work, building social capital, and mitigating benefits cliffs—will help Frankie Johnson and others achieve long-term self-sufficiency.

Originally posted at TPPF