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4 How the Labor Market, Family Structure, and Government Programs Affect Child Poverty I n response to the second element of the committeeâs statement of task and to provide guidance for the committeeâs deliberations on new ini- tiatives that can reduce child poverty, in this chapter, we discuss how demographic factors, the labor market and economy, and major govern- ment assistance programs affect all child poverty in the United States. We begin with a brief review of the role that demographic factors, particularly single-parent family structure, play in child poverty, followed by an analy- sis of employment-related factors. We then focus on a key element of our statement of task: the structure and role of current federal government assistance programs as they affect child poverty. We close the chapter with a comparison of the poverty-reducing impact of assistance programs in the United States and in the four English-speaking countries whose selection was discussed in Chapter 2: Australia, Canada, Ireland, and the United Kingdom. FORCES THAT SHAPE CHILD POVERTY Three broad sets of forces affect child poverty: demographics, the economy and its labor markets, and government policy. Demographic factors include parental age, education, race, and ethnicity; number of children in the family; and family structure, such as single or married parent. For example, older and more educated parents generally command higher wages, leading to lower levels of family poverty. The presence of two parents in the household would be expected to reduce poverty because of higher earnings and the possibility of specialization as one partner focuses 97
98 A ROADMAP TO REDUCING CHILD POVERTY on work and the other on family responsibilities (Becker, 1981). Addition- ally, whether it is headed by two parents or one, a household with fewer children is likely to experience less poverty because of the higher ratio of potential adult earners to children as well as the fact that the poverty line is lower for a smaller family. The patterns of child poverty across demo- graphic groups shown in Chapter 2 are consistent with these expectations. Labor market factors include the amount of parental work and the wages earned for every hour worked. Employment and earnings are influ- enced by secular forces such as macroeconomic growth, labor market forces such as technological change and globalization, and labor market factors such as minimum wage levels and unionization, as well as by cyclical forces such as unemployment. The third factor is the primary focus of this chapter: government pol- icies, such as tax and transfer programs. These three broad sets of factors are not independent of one another. A change in tax or transfer policy, for example, can affect work patterns and decisions about family structure. To frame the discussion of the role of these three broad factors, Fig- ure 4-1 illustrates how child poverty rates have evolved over the last five decades (1967 to 2016). The lower line in the figure reproduces the Supplemental Poverty Measure (SPM)-based poverty trend data shown in Figure 2-8. Periods of economic downturn are shown as shaded columns.1 As discussed in Chapter 2, because some Transfer Income Model, Version 3 (TRIM3) adjustments are unavailable for this entire historical period, the SPM trend in Figure 4-1 (and throughout this chapter) is not adjusted for underreporting of government programs.2 The upper trend line in Figure 4-1 illustrates what SPM-based child poverty would have been if market income (but no other source of income) were counted as family resources.3 Market income includes only earnings and income from savings and investments; it does not include any of the government tax and transfers that are included in the SPM resource mea- sure. Importantly, these are âall else equalâ poverty rate estimates; these 1 Recession dates are from the National Bureau of Economic Research at http://www.nber. org/cycles.html. 2 Consistent underreporting adjustments are not possible because TRIM3 data are available only for years 2012, 2014, and 2015. Consequently, the rates reported here are somewhat higher than they would be after such adjustments. The figures are drawn from original anal- yses commissioned by the committee and conducted by Christopher Wimer (2017, October). The SPM threshold is anchored in 2012 living standards and adjusted back to 1967 using the Consumer Price Index. The Census SPM threshold is not available for years prior to 2009. 3 Market income was calculated by taking total SPM resources and removing total taxes (tax credits and taxes paid), SNAP, WIC, School Lunch, LIHEAP, housing subsidies, TANF, SSI, S Â ocial Security, Unemployment Insurance, and a few smaller government insurance payments such as veteransâ assistance. For more on definitions of income, see Gornick and Smeeding (2018).
FIGURE 4 -1: Child poverty rates, before and after taxes and transfers, 1967â2016 LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 99 40 SPM market income-based poverty rate 30 28.4 27.4 25.1 Percentage 20 SPM-based poverty rate 15.6 10 0 1960 1970 1980 1990 2000 2010 2020 Year FIGURE 4-1â Child poverty rates, before and after taxes and transfers, 1967â2016. NOTES: The SPM poverty measure is anchored in 2012 living standards, adjusted back to 1967 using the CPI, and does not adjust for underreporting. Shaded areas indicate recession periods as determined by the NBER Business Cycles Dating Committee. SPM market income-based poverty rate includes labor market income but no other sources of income in its measure of family resources. SPM = Supple- mental Poverty Measure, CPI = Consumer Price Index, NBER = National Bureau of Economic Research. SOURCE: Original analyses commissioned by the committee from Christopher Wimer (2017). NOTE: The SPM poverty measure is anchored in 2012 living standards, adjusted back to 1967 using the CPI, and does not dataadjust for underreporting. Shaded areaspoverty rate includes labor as(e.g., no the NBER Businessof income inmarket assume no change in indicate recession periods market incomeby change in labor its Committee. SPM market income-based market income determined but no other sources Cycles Dating behavior)ofin response to the unavailability of tax and transfer income. As measure family resources. we discuss in greater detail by the committee from Christopher Wimer (2017). government pol- SOURCE: Original analyses commissioned below, eliminating pro-work icies such as the Earned Income Tax Credit (EITC) could reduce market income and thereby increase market-based income poverty, while elimi- nating means-tested transfers such as food stamps (SNAP) could have the opposite effect. Figure 4-1 shows that poverty is strongly related to the economy and business cycles, falling during periods of economic growth and rising during recessions and often for another year or two after the official end of a downturn. Many studies document this inverse relationship between
100 A ROADMAP TO REDUCING CHILD POVERTY unemployment rates and poverty.4 It is clear from the trends shown in Figure 4-1 that market-income poverty is more cyclical than SPM poverty.5 Indeed, Figure 4-1 reveals that the Great Recession led to a 3.4 percentage point increase in market-income poverty (between 2008 and 2010), while SPM poverty fell slightly (by 0.2 percentage points). As discussed later in this chapter, this suggests that the tax and transfer programs included in SPM calculations were very successful at mitigating the negative impacts of the economic cycle on child poverty (Bitler and Hoynes, 2010; Bitler, Hoynes and Kuka, 2017; Blank, 1989; Blank and Blinder, 1986; Cutler and Katz, 1991; Freeman, 2001; Gunderson and Ziliak, 2004; Hoynes, Page, and Stevens, 2006; Meyer and Sullivan, 2011). More generally, Figure 4-1 shows that there is no clear secular, long- term trend in market-income-based child poverty: Child poverty rates based solely on market income have improved only slightly over the 50-year period, falling from 27.4 percent in 1967 to 25.1 percent in 2016. This lack of improvement is particularly notable given that general living standards, as indicated by per-capita Gross Domestic Produce (GDP), more than dou- bled between the late 1960s and today.6 Holding other factors constant, market-income-based poverty rates should have fallen substantially if the improved economy had indeed boosted the financial situation of people living in poverty. The lack of long-term declines in market-based poverty also implies that policy changes since the 1990s that were aimed at reducing poverty by increasing work and earningsâincluding the welfare reform of the 1990s, the EITC, and expanded access to child care, to name three changesâhave not reduced child poverty rates, on net and in combination with changes in the economy. Disentangling the effects of these policy changes from changes in the economy over the period is difficult. To take one of these policy changes as an example, what evidence we have on 1990s welfare reform shows that it did have some short-term effects in reducing poverty rates and thus made a contribution to the decline in market-based poverty in the second half of the 1990s, as shown in Figure 4-1 (see Chapter 7 for a discussion of this evidence). However, the lower SPM child poverty rate in 2015 compared to that in 1996, for example, is almost entirely due to an increase in tax credits and transfers, not due to an increase in work and earnings. 4 Bitler and Hoynes (2010, 2015); Bitler, Hoynes, and Kuka (2017); Blank (1989, 1993); Blank and Blinder (1986); Blank and Card (1993); Cutler and Katz (1991); Freeman (2001); Gunderson and Ziliak (2004); Hoynes, Page, and Stevens (2006); Meyer and Sullivan (2011). 5 Recent work by Bitler, Hoynes, and Kuka (2017) documents this using data from 2000 to 2014. 6 See data provided by the Federal Reserve Bank of St. Louis, at https://fred.stlouisfed.org/ tags/series?t=gdp%3Bper+capita.
LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 101 CONCLUSION 4-1: Despite economic growth over the past half cen- tury, child poverty rates calculated using only labor market income have remained highâranging between 22 and 32 percent. Many aspects of childrenâs demographic circumstances have under- gone dramatic changes in the past four or five decades (Social Capital Project, 2017). For example, among children whose mothers had lower levels of education, the share of those living with a married parent has declined sharply (see Figure 4-2). Trends in womenâs educational attainment (Appendix D, Figure D4-2) and fertility (Appendix D, Figure D4-3) show that there has been a steady increase in attainment since 1962 as well as a steady decrease in fertility among women overall since 1976. Linking FIGURE 4 -2: someShare of children with married parents, 1975â2015 we would expect the of these demographic changes to child poverty, increasing incidence of single parenthood to push up rates of child poverty, 100 Mothers with college degrees 90 Percentage 80 70 Mothers without college degrees 60 50 1975 1980 1985 1990 1995 2000 2005 2010 2015 Year FIGURE 4-2â Share of children with married parents, 1975â2015. NOTES: Calculations based on Current Population Survey Annual Social and Eco- nomic Supplement 1976â2016. Data are restricted to mothers ages 25â54.â SOURCE: Adapted from Hoynes and Schanzenbach (2018).
102 A ROADMAP TO REDUCING CHILD POVERTY while the increase in maternal education and the reduction in the number of children should lower them.7 There have also been important changes in the parental connections to the labor market. Large numbers of both single and married mothers have joined the workforce since 1975 (see Figure 4-3). The increase in employ- ment among single mothers was particularly dramatic in the 1990s, and was accompanied by a rise in the amount of the EITC and in other work sup- ports in the wake of welfare reform.8 Male employment, on the other hand, trended downward over this period (Appendix D, Figure D4-1). The increase in employment among single parents, particularly between the early 1990s and 2000, would also be expected to reduce child poverty over that period. A number of studies have used a âwhat-ifâ approach to distinguish between the roles of demographic factors and the labor market in explain- ing trends in the Official Poverty Measure (OPM). Using poverty rates across different subgroups, such as married/single-parent families or work- ing/nonworking parents, these decomposition studies calculate how overall child poverty rates would have changed if each group had experienced the observed poverty trend but the overall composition of the population (e.g., the share of children living with a single parent) had not changed. This approach is distinct from asking âdoes family structure matterâ at any given point in time, and instead seeks to understand which factors explain changes in poverty over time. Decomposition studies based on data from before the mid-1990s gener- ally find that changes in family structure, most notably the increase in single parenthood, explain a large share of the observed increase in child (official) poverty between the 1970s and the mid-1990s (Danziger and Gottschalk, 1995; Lerman, 1996). After the employment of single mothers began to rise in the early 1990s, however, their familiesâ exposure to labor market fluctuations began to increase. The decomposition studies applied to poverty trends beginning in the 1990s have found that changes in employment, rather than in family structure, are the most important factor in explaining recent (official) poverty trends (Cancian and Reed, 2009; Chen and Corak, 2008; Lichter and Crowley, 2004; Nichols, 2013). This does not mean that family structure has no influence on child poverty, but rather that changes in family structure do not explain changes in child poverty during this later time period. The shifting influence of family structure versus employment is evi- dent in Nicholsâ (2013) analyses of data spanning the period from 1975 7 Because of rising educational attainment among women (Appendix D, Figure 4-2) the composition of women in lower-education groups is changing over time. This should be kept in mind when examining trends for various low-education groups over time as in Figure 4-2. 8 Since 2000, the labor force participation of single mothers has been nearly identical to that of childless women (Black, Schanzenbach, and Breitwieser, 2017; not shown in Figure 4-3).
Share of children with a working mother, 1975â2015 LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 103 100 90 80 Percentage Single 70 60 Married 50 40 30 1975 1980 1985 1990 1995 2000 2005 2010 2015 Year FIGURE 4-3â Share of children with a working mother, 1975â2015. NOTES: Calculations based on the Current Population Survey Annual Social and Economic Supplement 1976-2016. Data are restricted to mothers ages 25 to 54. SOURCE: Adapted from Hoynes and Schanzenbach (2018). to 2011. Nichols (2013) finds that a large fraction of the trend in child (official) poverty between 1975 and 1993 is explained by changes in family structure (single parenthood, number of family members, multigenerational households) and age, while trends in child poverty between 1993 and 2011 are largely explained by increases in employment. This finding holds true for different subgroups of children, including White, Black, and Hispanic children (Appendix on Current Population Survey Annual Social and Economic Nichols (2013) shows NOTE: Calculations based D, Figure D4-4). For example, Supplement 1976-2016. Restricted to mothers ages 25â54. that for White children, changes in family structure (and age of children) SOURCE: Adapted from Hoynes and Schanzenbach (2018). account for 85 percent of the actual change in child poverty between 1975 and 1993, and that changes in employment account for over 70 percent of the change between 1993 and 2011. Among Black children, the role of fam- ily structure was particularly important in the early period, explaining more than all of the actual increase in child poverty between 1975 and 1993.9 9 Baker (2015) reaches a similar conclusion using a different approach, one that focuses on the changing associations between work, marriage, and poverty over time. Her work shows that the magnitude of the negative association between marriage and child poverty has de- clined, while the positive association between work and child poverty has increased.
104 A ROADMAP TO REDUCING CHILD POVERTY CONCLUSION 4-2: The decline in two-parent family structure is the single biggest factor associated with the increase in child (official) poverty between the mid-1970s and the early 1990s. However, child poverty has fallen since the early 1990s, despite continuing increases in single parenthood.Â This more recent decline in child poverty is most strongly associated with increases in maternal employment. To further explore the role of the labor market, the economy, and employment in explaining trends in poverty, Chen and Corak (2008) under- take a decomposition to examine the comparative roles of employment and earnings. They find that between 1991 and 2000, labor market factors reduced poverty. More than one-half of that reduction stemmed from the motherâs annual earnings (conditional on work), with the remainder of the effect split between the employment status of the father (20%), the employ- ment status of the mother (17%), and the annual earnings of the father (less than 10%). That is, almost 70 percent of the reduction in poverty owing to labor market effects during the 1991â2000 period resulted from the increased employment and earnings of mothers. Figure 4-4 provides a summary of the broader trends in earnings, plot- ting real median weekly wages between 1963 and 2012 for women working full time throughout the year, by education level (Autor, 2014). The 1963 earnings of each group serve as the baseline as the graph tracks the ratio of earnings in a given year relative to 1963 earnings. Women with no more than a high school education experienced much slower wage growth than women with more schooling. (The inflation-adjusted earnings of men with low levels of schooling, as shown in Appendix D, Figure D4-5, were actu- ally lower at the end of the period than at the beginning.) Beginning in the early 1980s, the wage patterns fan out and reflect increasing wage inequality across education levels.10 In the 5 years follow- ing 2012 (after the end of the series in Figure 4-4), inflation-adjusted wages started to increase, showing real gains for the lowest quintile of workers. This growth resulted from both continued recovery from the recession and increases in state minimum wages (Shambaugh et al., 2017). The main forces in the economy that have contributed to wage stagnation for low-skilled workers and higher wages as skills increase include skill-biased technological change (Juhn, Murphy, and Pierce, 1993; Katz and Murphy, 1992), globalization (Autor, Dorn, and Hanson, 2013), the decline in 10 This fanning out is even more dramatic if we include weekly wages for those with educa- tion beyond a college degree (Autor, 2014). Note, however, that the share of workers with a high school degree or less has declined over this time period, which may affect the composition of the group with low levels of education over time.
FIGURE 4 - 4: Changes in median weekly earnings of full-time, full-year female workers, 1963â2012 LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 105 1.50 1.49 100 Bachelorâs degree 1.40 90 Weekly earnings relative to 1963 1.31 1.30 80 High school graduate Single 70 Percent 1.20 1.16 60 MarriedHigh school dropout 1.10 50 1.00 40 0.90 30 1960 1975 1980 1985 1980 1970 1990 1995 2000 2005 2010 1990 2000 2010 2020 2015 Year FIGURE 4-4âChanges in median weekly earnings of full-time, full-year female workers, 1963â2012. NOTES: Data for other education levels and for men are contained in the chapter appendix. Conversion to real 2012 dollars using CPI-U-Research Series. SOURCE: Autor (2014). unions (Farber et al., 2018), and the decline in the real value of the federal minimum wage (Autor, Manning, and Smith, 2016). CONCLUSION 4-3: The earnings of more highly skilled workers have grown substantially in the past 50 years. By contrast, the earnings of men with a high school education or less have stagnated or declined since the other education levels and for men are contained in the chapter appendix. with a high school NOTE: Data for early 1970s, and the earnings of women education or less have stagnated since 2000. Because the large major- SOURCE: Autor (2014) ity of poor parents have completed less schooling than higher-income parents, this stagnation has meant that market income has not reduced child poverty over this period as much as it might otherwise have. Moreover, the stagnation of annual earnings for lower-skilled mothers has been among the most important factors in slowing the decline in market-based child poverty over the last two decades.
106 A ROADMAP TO REDUCING CHILD POVERTY THE CHANGING ROLE OF GOVERNMENT TAXES AND TRANSFERS The divergence between the 50-year child poverty trend based on a market-income measure and that based on the SPM measure, which is illus- trated in Figure 4-1, underscores the increasing importance of government taxes and transfers in reducing child poverty. In this section, we detail the changing role of such taxes and transfers in reducing poverty. The section begins with a brief description of trends in federal spending on children and a review of major changes in policy during this period. This is followed by an analysis of the effects of government tax and transfer policy, based on an examination of the difference between trends in market-income child poverty rates and SPM child poverty rates. Drawing on Isaacs et al. (2018), Figure 4-5 shows the trend between 1960 and 2017 in inflation-adjusted federal spending on programs that ben- efit children, most of which are counted as income in the SPM-based pov- erty measure (see also Appendix D, Table 4-1).11 The eight-fold growth in real spending between 1960 and 2010 is striking, and it is many times larger than the 15 percent increase in the number of children in the population. It is little wonder that the trend in child SPM poverty, which is based on a conception of resources that subtracts taxes paid, adds tax credits such as the EITC and includes income from transfer programs such as the Supplemental Nutrition Assistance Program (SNAP) depicted in Figure 4-1, diverges steadily from the market-income-only poverty trend, especially after 1980. In 1960, spending was largely limited to cash assistance from the Aid to Families with Dependent Children (AFDC) and Social Security programs. The next five decades saw the introduction or expansion of major programs benefiting children. Food stamps (now called SNAP) and Med- icaidâtwo major in-kind benefit programs serving children in low-income familiesâwere rolled out in the 1960s and 1970s. Supplemental Security Income (SSI) was also introduced during this period; originally, the program provided cash benefits for low-income disabled and elderly individuals. Now the program also serves children meeting disability requirements. Transfer programs changed markedly in the 1990s with the expansion of the EITC as well as federal welfare reform (in 1996), which eliminated the entitlement of cash welfare. The Child Tax Credit was introduced in 11 This includes cash transfers, nutrition programs (SNAP, WIC, and child nutrition pro- grams), public housing benefits, tax credits, and other child-related tax benefits. Medicaid spending on children is also included in Figure 4-5 but is not counted in calculating SPM- based poverty.
FIGURE 4 -5: Total federal expenditures on children, 1960â2017 LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 107 600 516.4 500 481.5 Billions of 2017 dollars 400 303.2 300 200 151.5 100 60.5 0 1960 1980 2000 2010 2017 Year FIGURE 4-5â Total federal expenditures on children, 1960â2017. NOTE: In billions of 2017 dollars. SOURCE: Isaacs et al. (2018, Table 3). 1997 and then expanded in the first decade of the 2000s.12 The spending decline between 2010 and 2016 was largely due to the decrease in transfers during the economic recovery that followed the Great Recession, coupled with the fact that no major new program initiatives directed at children were introduced or expanded during this period. A comparison of Figure 4-1 and Figure 4-5 reveals that secular SPM poverty trends track expenditure patterns quite closely. In the late 1960s, the net effect of government transfers and the tax system was to increase povertyâon balance, the poor paid more in taxes than they received in benefits. In later decades, however, the benefits paid through the tax system have continued to grow; for example, between 1980 and 2000 there was a 10-fold increase in the inflation-adjusted value of refundable tax credits (see NOTE: In billions of 2017 dollars. Appendix D, Table 4-1). Those benefits, combined with benefits received SOURCE: Isaacs et al., (2018), Table 3, pg. 45 12 Spending on Medicaid (for children) and the State Child Health Insurance Program expanded dramatically between 1980 and 2000 as a result of federal and state legislation (Gruber, 2003). But these expansions affect SPM poverty only through their effects on out- of-pocket medical expenses. In Chapter 7 we discuss possible changes to the SPM to better capture the resources provided through public insurance.
108 A ROADMAP TO REDUCING CHILD POVERTY through income-tested programs, have been the major factor driving rates of SPM-based poverty as low as they are today. While market-income poverty rates fell by 8 percentage points between 1993 and 2000, it is also apparent that the booming economy during that period played a substantial role in the 10-percentage point decline in SPM poverty rates over this period. But government policy changes during this period, which included the expansion of the EITC (1994â1996) and federal welfare reform (passed in 1996), also mattered. Indeed, it is the combination of the EITC expansion, welfare reform, and a strong labor market that contributed to a dramatic increase in employment for single mothers (Blank, 2006; Blank and Haskins, 2001; Grogger, 2003; Meyer and Rosenbaum, 2001; refer to Figure 4-3) and a consequent reduction in market-income and SPM poverty. The role of policy in reducing poverty over and above labor-market earnings began to grow again in 2000, owing mainly to the introduction and expansion of the Child Tax Credit (Hoynes and Rothstein, 2017) and the expansion in eligibility for SNAP (Ganong and Liebman, 2013). Figure 4-1 also shows that government benefits effectively cushioned families from the effects of the Great Recession, since market-income-based poverty rates increased sharply between 2008 and 2010 but SPM-based poverty, which includes transfers, actually fell slightly. SNAP figured prominently as a source of countercyclical income protection during this period, as did tem- porary measures contained in the 2008 and 2009 stimulus packages (Bitler and Hoynes, 2016; Bitler, Hoynes, and Kuka, 2017). In the final stage of this historical periodâfrom 2011 to 2016âthe combination of expanding employment and added work hours for those already employed pushed market-income-based poverty down sharply for families with children. The effects of refundable tax credits and SNAP were also substantial; for most low-income families with children, work alone was not enough to lift them out of poverty (Hardy, Smeeding, and Ziliak, 2018). Children in all three of the largest racial/ethnic groups (Whites, Blacks, and Hispanics) have experienced declines in market-income poverty rates over the past 50 years.13 This is evident in Appendix D, Figures D4-6, D4-7, and D4-8, taken from Wimer (2017), which show market-income and SPM-income child poverty rates from 1967 to 2016. Children in all three groups have also experienced larger declines in SPM poverty rates than 13 These declines are larger than the overall decline in market child poverty rates shown in Figure 4-1 because the demographic composition of American children has changed; the share of White children has decreased and the share of those at greater risk for poverty has grown. Put another way, the changing racial/ethnic composition of American children obscures long- term progress within all three racial/ethnic groups.
LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 109 in market-income poverty rates, and this difference has become especially large in the past 15 years. Similarly, poverty rates have declined over this period for children regardless of family composition. Appendix D, in Figures D4-9, D4-10, and D4-11, also taken from Wimer (2017), shows market-income and SPM child poverty rates from 1967 to 2016, separately for single, cohabiting, and married parents. Although both market-income and SPM poverty rates are quite different for these three groupsâhighest for single parents and lowest for married parentsâall three groups show similar trends, with a particularly large decline in SPM poverty for single-parent families. In short, from 1993 onwards the tax and transfer system was increasingly effective at reducing child poverty rates for all racial/ethnic groups and all family types, with especially large effects during the 2000â2016 period. CONCLUSION 4-4: Government tax and transfer programs reduced the child poverty rate, defined by the Supplemental Poverty Measure (SPM), modestly between 1967 and 1993, but became increasingly important after 1993 because of increases in government benefits tar- geted at the poor and near poor. Between 1993 and 2016, SPM poverty fell by 12.3 percentage points, from 27.9 to 15.6 percent, more than twice as much as market-income-based poverty. Figure 4-6 depicts the trends in deep child poverty (below 50 percent of the poverty line) based on market-income poverty and on SPM poverty. Like market-income poverty drawn at the 100 percent SPM line, market-Â income-based deep poverty is cyclical, rising in economic downturns and falling when the economy expands. Although there was a dramatic decline in SPM poverty (refer to Figure 4-1), less progress was made in reducing SPM deep poverty over this period.14 In 1967, 8.2 percent of children were in deep SPM poverty, compared with 4.5 percent in 2016.15 A large reduction was observed between 1967 and 1974, when AFDC benefits were increased and the Food Stamp Program was introduced, and again in the late 1990s because of a strong labor market, welfare reform, and the expansion of the EITC. There has been almost no net change in the deep poverty rate since that time. The impact of government programs on deep poverty (as measured by the difference between market-income deep poverty and SPM deep poverty) declined substantially in the 1990s, 14 Some of this lack of progress fighting SPM poverty may reflect the rising rates of underÂ reporting in the Current Population Survey (Meyer and Mittag, 2015; Meyer, Mok, and Sullivan 2009). 15 The 5.0 percent rate of deep poverty differs from the 2.9 percent rate presented in Chapter 2 because it does not reflect adjustments for underreporting. It has proved impossible to make a consistent set of underreporting adjustments across the entire 1967â2016 period.
FIGURE 4 - 6: Rates of deep child poverty (< 50% SPM) before and after taxes and transfers, 1967â2016 110 A ROADMAP TO REDUCING CHILD POVERTY 25 SPM market income-based poverty rate 20 Deep child poverty rate 15 (percentage) 12.7 12.9 10 8.2 5 Supplemental Poverty Measure (SPM) 4.5 0 1960 1970 1980 1990 2000 2010 2020 Year FIGURE 4-6â Rates of deep child poverty (< 50% SPM) before and after taxes and transfers, 1967â2016. NOTE: The SPM poverty measure is anchored in 2012 living standards, adjusted back to 1967 using the Consumer Price Index, and does not adjust for underreport- ing. SPM market income-based poverty rate includes labor market income but no other sources of income in its measure of family resources. SOURCE: Original analyses commissioned by the committee from Christopher Wimer (2017).Â following welfare reform and the drop in cash assistance. In 1993, the tax and transfer system reduced deep poverty by 12 percentage points (from 19% for market-income deep poverty to 7% after taxes and benefits), and in 2000 it lowered deep poverty rates by only 7 percentage points. During the NOTE: The SPM poverty measure is anchored in 2012 living standards,child back to 1967 using the Consumer Price but Great Recession, market-income deep adjusted poverty rose sharply, the Index, and does not adjust for underreporting. SPM market income-based poverty rate includes labor market income but safety net fully offset that increase. no other sources of income in its measure of family resources. A major shift occurred in the 1990s, as cash assistance declined (because SOURCE: Original analyses commissioned by the committee from Christopher Wimer (2017) of welfare reform) and work-dependent assistance (the EITC and, later, the Child Tax Credit) increased. Since about 2000, federal spending on the non- working poor and the deep poor has remained stable or increased modestly; in contrast, spending on the working poor and those above the level of deep poverty has increased more substantially. Overall, then, spending has shifted away from the nonworking/deep poor and toward the working poor (Hoynes and Schanzenbach, 2018; Moffitt, 2015; Moffitt and Pauley, 2018).
LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 111 Moreover, since the Great Recession the poorest individuals have expe- rienced a sharp drop in support as temporary expansions of programs like SNAP expired, returning almost to pre-recession levels. The trend toward spending more on the working poor and proportionately less on the non- working/deep poor has therefore continued to widen since the Great Reces- sion (Moffitt and Pauley, 2018). An examination of near poverty among childrenâdrawing the poverty line at 150 percent of the SPM poverty lineâshows a remarkable decline in SPM near poverty over the period in question. As shown in Figure 4-7, SPM near poverty fell from nearly 60 percent in 1967 to 36 percent in 2016. However, a comparison of market-income near poverty and SPM near poverty-7: FIGURE 4 reveals a very different picture of the impacts of the tax andRates of child near-poverty (< 150% SPM) before and after taxes and transfer system. Taxes (net of transfers) on the near poor exceeded transfers, 1967â2016 government benefits during most of the past 50 years, and this pushed the rates of SPM-based near poverty for children above the near-poverty rates 70 60 57.1 Supplemental Poverty Measure (SPM) Child Near Poverty Rate 50 49.7 40 (percentage) 37.3 SPM market income-based poverty rate 35.8 30 20 10 0 1960 1970 1980 1990 2000 2010 2020 Year FIGURE 4-7â Rates of child near poverty (< 150% SPM) before and after taxes and transfers, 1967â2016. NOTE: The SPM poverty measure is anchored in 2012 living standards, adjusted back to 1967 using the Consumer Price Index, and does not adjust for underreport- ing. SPM market income-based poverty rate includes labor market income but no other sources of income in its measure of family resources. SOURCE: Original analyses commissioned by the committee from Christopher Wimer (2017, October).
112 A ROADMAP TO REDUCING CHILD POVERTY based solely on market income. The gap between the two rates narrows in the mid-1990s with the expansion of the EITC, and again in 1997 and 2000 with the introduction and expansion of the Child Tax Credit. During the Great Recession, market-income near poverty increased sharply, and the safety net partially offset this increase. By the end of the period, the fraction of children with total family resources below 150 percent of SPM poverty was nearly identical to rates based solely on market income, which suggests that, on balance, taxes and transfers had little net impact on the near-poverty thresholds among children. CONCLUSION 4-5: Increasingly, anti-poverty programs have been geared toward working families. Increased government benefits have been less effective at reducing deep poverty (below 50% of the Sup- plemental Poverty Measure [SPM]) than at reducing poverty (100% of SPM), because fewer employment-based program benefits reach very low-income families with children. In the case of near poverty (income less than 150% of SPM), the net impact of government taxes and transfers on market income is now neutral, rather than negative, thanks to the expansion of work-based benefits for families above the 100 percent poverty line. CHILD-RELATED INCOME TRANSFERS AND TAX BENEFITS In this section, the committee addresses a key element of the statement of task: to provide an analysis of the poverty-reducing effects of the cur- rent set of major assistance programs directed at children and families in the United States. We begin with an overview of these programs and then analyze how child poverty rates in 2015 would have changed in the absence of each of these programs. Although programs like SNAP and Temporary Assistance to Needy Families (TANF) may be among the most visible federal programs for children in low-income families, they are not the largest child-focused pro- grams. The most comprehensive recent accounting of federal expenditures on all children is provided by Isaacs et al. (2018) and summarized in Fig- ure 4-8 for 2017.16 It includes programs supported by federal budget expen- ditures as well as âspendingâ programs that take the form of tax reductions benefiting families with children. Some of the programs, most notably the dependent tax exemption, the deduction for employer-sponsored health 16 Only benefits or services provided either entirely or in some portion directly to children were counted. For benefits such as Medicaid and SSI that serve different age groups, the authors calculated the percentage of expenditures that goes to children (Isaacs et al., 2018).
FIGURE 4 - 8: Value of federal spending outlays and tax reductions with the highest expenditures on children, 2017 (in billions of dollars) LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 113 Outlays Tax reductions Medicaid 89.9 EITC 53.1 7.0 Child tax credit 19.4 29.9 Dependent exemption 37.8 SNAP 30.6 Child nutrition 22.3 Employer-sponsored â¨ 22.9 insurance Social Security 20.8 Title I 16.2 CHIP 15.4 Special education 12.7 TANF 12.8 SSI 10.5 Other programs â¨ 35.7 5.3 and tax provisions 0 20 40 60 80 100 Dollars (in billions) FIGURE 4-8â Value of federal spending outlays and tax reductions with the highest expenditures on children, 2017 (in billions of dollars). NOTES: Amounts in 2017 dollars. EITC = Earned Income Tax Credit, SNAP = Supplemental Nutrition Assistance Program, CHIP = Childrenâs Health Insurance Program, TANF = Temporary Assistance for Needy Families, SSI = Supplemental Security Income. SOURCE: of 2017 dollars.al. (2018). NOTE: Billions Isaacs et SOURCE: Isaacs et al., (2018) insurance, and (to a lesser extent) the Child Tax Credit, provide consider- ably more benefits to middle- and high-income families with children than to poor families. Accordingly, they are less likely than benefits targeted toward the low-income population to reduce child poverty. Indeed, Isaacs et al. (2018) estimates that more than one-third (37%) of federal expen- ditures directed at children go to programs such as the Child Tax Credit
114 A ROADMAP TO REDUCING CHILD POVERTY and income tax exemption for children, which do not restrict benefits to families with low incomes. The Medicaid program, with expenditures of nearly $90 billion directed at children, is the federal program that spends the most on chil- dren. In 2017, low-income children received not only $90 billion in federal Medicaid payments, but also $15 billion from the government through the Childrenâs Health Insurance Program (CHIP), which provides health insur- ance to children through Medicaid as well as separate programs negotiated by states with the federal government. Total federal spending for health insurance for all children (including the $23 billion in tax expenditures for the deductibility of employer-provided health insurance, most of which benefits children in middle- and higher-income families) amounts to $128 billion. This amount represents 23 percent of all federal expenditures on children. Despite the crucial importance of health care spending for the future development of poor children, this spending has virtually no impact on SPM-based poverty because of the ways in which SPM-based poverty is defined (see Chapters 2 and 7).17 The second-, third-, and fourth-largest expenditures on children relate to provisions in the federal income tax: the EITC, the Child Tax Credit, and tax exemptions for dependent children living in a household (Isaacs et al., 2018). At $60 billion, the EITC is the largest of the three. Although avail- able only to families with earned income, the EITC is refundable, so when a familyâs income is too low to generate tax obligations, the family receives a refund from the IRS. In 2017, a single mother with two children who earned between $14,040 and $18,340 (a range that includes the earnings of a full-time, full-year minimum wage worker) would receive the maximum credit of $5,616.18 For the 2016 tax year, the average EITC for a family with children was $3,176.19 The EITC is not without flaws, however; Box 4-1 describes issues pertaining to noncompliance and overpayments. The Child Tax Credit ($49 billion; refer to Figure 4-8) is a partially refundable tax credit for each child a working family is allowed to claim. Prior to the 2018 tax reform, the credit amounted to $1,000 per child; the 2018 reforms doubled that amount.20 The Child Tax Credit provides important benefits to some low-income families with children, but a sub- stantial share of its federal funding goes to families much higher in the 17 See Chapter 9 for recommendations for incorporating public health insurance expendi- tures into the poverty measure. 18 See https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-Â income-limits-maximum-credit-amounts for 2017 EITC limits. 19 See https://www.cbpp.org/research/federal-tax/policy-basics-the-earned-income-tax-credit. 20 For more information about the 2018 reforms, see https://www.irs.gov/newsroom/ whats-new-with-the-child-tax-credit-after-tax-reform.
LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 115 BOX 4-1 The Earned Income Tax Credit (EITC): Reducing Noncompliance and Overpayments Administered through the tax system, the EITC provides low- and m Â oderate-income workers with a cash benefit designed to incentivize work, in- crease income, and reduce poverty. Despite its success and low administrative cost, there are ongoing problems with compliance and enforcement, which stem from overclaiming for the benefit. Based on audited tax returns from the 2006â2008 period, a recent Internal Revenue Service (IRS) study found that between 43 and 50 percent of tax returns with an EITC claim and between 28.4 and 39.1 percent of all claimed EITC dollars were overclaims (Internal Revenue Service, 2014). This form of noncompliance generally falls into two categories: misclaiming children and misreporting income on tax returns. Opinions vary as to why noncompliance occurs and whether it is a matter of taxpayer error or fraud. The rules governing the EITC are complicated, particularly with regard to its residency requirement. In light of the complexity of family living situations (divorced or separated parents, multigenerational families living in the same household, moves from one home to another, etc.), there can be confusion as to who has the right to claim a child and misreporting of qualifying children (Greenstein, Warwick, and Marr, 2017; Hoynes and Rothstein, 2017). Misreporting of incomeâalthough it is more common than the misclaiming of childrenâaccounts for a smaller share of overpayment dollars. Most incorrect income reporting can be traced to self-employed taxpayers, suggesting that some filers may be reporting higher incomes than they actually earned in order to max- imize the credit (Chetty, Friedman, and Saez, 2013; Rector, 2016; Saez, 2010). The IRS lacks enforcement authority to address most of the noncompliance and overpayment problems. While it has the authority to audit the EITC, since the benefit is refundable the IRS pays out millions of dollars each year before it has a chance to verify the accuracy of the income reported on returns with EITC claims (Rector, 2016). And despite efforts to equip the IRS with more tools to reduce EITC overpayment, its limited authority to correct erroneous claims when tax returns are processed remains a major barrier to reducing improper pay- ments. Owing to limited resources, the IRS is also unable to address erroneous claims despite having devised methods for reducing overpayments (Greenstein, W Â arwick, and Marr, 2017). income distribution.21 In the case of the tax exemption for dependent 21 The refundable portion of the Child Tax Credit (CTC), known as the Additional Child Tax Credit (ACTC), is limited to 15 percent of earned income above $3,000. Here we refer to the combined CTC and ACTC simply as the CTC. In 2017, the $1,000 credit was phased out, starting at incomes of about $80,000 and $120,000 for single- and married-couple families, respectively. The credit was fully phased out at incomes of about $100,000 ($130,000) for single-parent (married-couple) families. Hoynes and Schanzenbach (2018) estimate that as of 2017, 40 percent of CTC spending goes to families with incomes above 200 percent of poverty.
116 A ROADMAP TO REDUCING CHILD POVERTY children, little of the $38 billion in benefits from the dependent exemption goes to the families of poor children because of their low levels of taxable income. As shown below, both the EITC and Child Tax Credit target low-income families and play an important role in reducing child poverty. Spending on nutrition-related programs (SNAP, school breakfast and lunch, food for children attending child care) totaled $58 billion in 2017 (Isaacs et al., 2018). Eligibility for SNAP ($31 billion; Isaacs et al., 2018), which provides vouchers for food assistance, is generally limited to those with gross monthly incomes below 130 percent of the federal poverty line. In 2018, the average monthly SNAP benefit was $125 per person.22 Social insurance spending, consisting of Survivors Insurance (part of Social Security) and benefits for child dependents of Disability Insurance beneficiaries, was next in size, at $21 billion (Isaacs et al., 2018). Neither is explicitly targeted at the poor or low-income families, but both benefit chil- dren who suffer the loss of a wage earner, thereby reducing the economic insecurity of children from all income classes. Because disability and death are more common among families in the bottom half than in the top half of the income distribution, however, these two forms of social insurance prevent a substantial number of children from falling into poverty. Expenditures on each of the other programs listed in Figure 4-8 amounted to less than $17 billion. It is noteworthy that federal spending on the key cash assistance program that emerged from the 1996 welfare reforms (the TANF program) totaled only $13 billion in 2017 (Isaacs et al., 2018). SSI is a federal cash assistance program that provides benefits to low-income disabled and elderly persons. Following a court decision in 1990, the definition of disability was expanded to allow more children to receive SSI (Duggan, Kearney, and Rennane, 2016); in 2017 those expen- ditures totaled $11 billion. EFFECTS OF INCOME TRANSFERS AND TAX BENEFITS ON CHILD POVERTY IN 2015 The degree to which federal programs reduce child poverty is a func- tion of whether program benefits are counted as resources in the SPM poverty measure and, if they are counted, their overall size and the extent to which their benefits are targeted at the families of poor children.23 We use the TRIM3 microsimulation model to estimate how much rates of child 22See https://fns-prod.azureedge.net/sites/default/files/pd/SNAPsummary.pdf. 23The largest transfer program omitted from SPM resources is Medicaid, which as we saw above is the child program with the highest federal expenditures. Given the expansions to Medicaid in recent decades, the reductions in SPM poverty shown below would be greater if Medicaid were included. See Chapter 7 for a discussion of incorporating public health insur- ance expenditures into the poverty measure.
LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 117 poverty (at 100%, 50%, and 150% of the TRIM3 SPM poverty line) would increase if benefits from each major support program were eliminated. As with the poverty estimates discussed in Chapter 2, these TRIM3 estimates adjust for the underreporting of transfers and apply to 2015. Importantly, though, our estimates of the poverty-reducing impact of current programs do not account for the extent to which eliminating a given program might also affect work and other decisions that would in turn affect a familyâs market incomes. As discussed in Chapter 5, these behavioral effects could either push the estimates of child poverty rates up (if the elimination of the EITC and its work incentives caused earnings to fall) or down (if the elimination of an important income source, such as SNAP, led to more work and earnings). The two refundable tax creditsâthe EITC and the refundable portion of the Child Tax Creditâare the most successful at alleviating poverty, as shown in Figure 4-9.24 Starting from the 13.0 percent TRIM3 SPM child poverty rate in 2015, we estimate that the elimination of these tax credits would raise SPM child poverty to 18.9 percent, an increase of 5.9 percentage points, or 4.4 million children. Benefits from SNAP are next largest: In the absence of SNAP benefits, the SPM poverty rate is estimated to rise to 18.2 percent. Without the SSI program, it would rise from 13.0 to 14.8 percent. In the absence of Social Security, it is estimated to rise to 15.3 percent. The importance of Social Security in lowering child poverty stems mainly from the numbers of low-income children living in households with retired or disabled members. An examination of the effects of program elimination on deep pov- erty reveals a different pattern of effects (see Figure 4-10). In contrast to their effects on 100 percent SPM poverty, tax credits play only a minor role in reducing deep poverty. This is consistent with the fact that families with incomes below 50 percent of the poverty line lack substantial earned income. SNAP is by far the single most important tax and transfer program for reducing deep poverty; our simulations indicate that eliminating SNAP would nearly double the fraction of children in deep SPM poverty (from 2.9 to 5.7%). Social Security has the next largest effect in reducing deep poverty; eliminating it would increase deep poverty from 2.9 to 4.3 percent. Finally, an analysis of near poverty (150% of the SPM) shows that tax credits are by far the most important component in reducing near poverty among children (see Figure 4-11). The most disadvantaged demographic groupsâBlacks and Hispanics, single parents, and young and poorly educated parentsâbenefit dispro- portionately from both SNAP (Appendix D, Figure D4-12) and tax benefit programs (Appendix D, Figure D4-13). However, children who are not 24 See Appendix D, Table 4-2 for more information.
FIGURE 4 -9: programs, using if current programs were eliminated 118 A ROADMAP TO REDUCING CHILD POVERTY Current programs are associated 13.0 with a child poverty rate of 13.0% All programs Federal EITC, CTC +5.9 SNAP +5.2 SSI +1.8 Social Security +2.3 UC, WC, and other â¨ +0.7 social insurance Housing subsidies +1.8 Other beneï¬ts +4.1 0 5 10 15 20 25 Child Poverty Rate (percentage) FIGURE 4-9â âWhat-ifâ child poverty rates with the elimination of selected federal programs. NOTES: Poverty defined as below 100 percent of the TRIM3 SPM poverty line. Estimates are for 2015 and adjust for underreporting but not for behavioral effects. Other benefits include Temporary Assistance for Needy Families, solely state-funded assistance, means-tested veterans benefits, means-tested education assistance, the Low Income Home Energy Assistance Program, the National School Lunch Pro- gram, and the Special Supplemental Nutrition Program for Women, Infants, and Children. EITC = Earned Income Tax Credit, CTC = Child Tax Credit, SNAP = Supplemental Nutrition Assistance Program,Estimates are for 2015 and adjust Security Income, NOTE: Poverty deï¬ned as below 100% of the TRIM3 SPM poverty line. SSI = Supplemental for underreporting UC = Unemployment Compensation, WC = Workersâ Compensation. assistance, means-tested veteranâs beneï¬ts, means-tested education assistance, the Low Income Home Energy Assistance SOURCE:National School Lunch Program, and thecommissioned Nutrition Program for Women, Infants, and Program, the Estimates from TRIM3 Special Supplemental by the committee.Â Children. UC = Unemployment Compensation, WC = Workersâ Compensation. SOURCE: Estimates from TRIM3 commissioned by the committee citizens benefit less from both programs, and children who live in families with no workers do not benefit at all from tax-related benefit programs. CONCLUSION 4-6: The Earned Income Tax Credit, the Child Tax Credit, the Supplemental Nutrition Assistance Program (SNAP), and to a lesser extent Social Security are the most important programs for reducing Supplemental Poverty Measure (SPM)-based child poverty.
âWhat-ifâ child deep-poverty rates with the elimination of selected federal programs LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 119 2.9 Current programs are associated with a child deep-poverty rate of 2.9% All programs Federal EITC, CTC +0.8 SNAP +2.8 SSI +1.0 Social Security +1.5 UC, WC, and otherâ¨ +0.3 social insurance Housing subsidies +0.4 Other beneï¬ts +5.3 0 2 4 6 8 10 Child Poverty Rate (percentage) FIGURE 4-10â âWhat-ifâ child deep poverty rates with the elimination of selected federal programs. NOTES: Deep poverty defined as below 50% of the TRIM3 SPM poverty line. Estimates are for 2015 and adjust for underreporting but not for behavioral effects. Other benefits: See note to Figure 4-9. EITC = Earned Income Tax Credit, CTC = Child Tax Credit, SNAP = Supplemental Nutrition Assistance Program, SSI = Sup- plemental Security Income, UC = Unemployment Compensation, WC = Workersâ Compensation. SOURCE: Estimates from TRIM3 commissioned by the committee.Â adjust for NOTE: Deep poverty deï¬ned as below 50% of the TRIM3 SPM poverty line. Estimates are for 2015 and Other beneï¬ts: See note to Figure 4-9. UC = Unemployment Compensation, WC = Workersâ Compensation. SOURCE: Estimates from TRIM3 commissioned by the committee SNAP and Social Security are the most important programs for reduc- ing deep poverty among children. Tax credits are the most important means of keeping children above near poverty (150% of SPM poverty). Health care programs account for more than one-third of total federal expenditures on children but are not properly accounted for in the SPM poverty measure.
âWhat-ifâ child near-poverty rates with the elimination of selected federal programs 120 A ROADMAP TO REDUCING CHILD POVERTY Current programs 35.6 are associated All programs with a child near- poverty rate of 35.6% Federal EITC, CTC +4.1 SNAP +2.0 SSI +0.9 Social Security +1.8 UC, WC, and otherâ¨ +0.8 social insurance Housing subsidies +0.5 Other beneï¬ts +2.6 0 10 20 30 40 50 Child Poverty Rate (percentage) FIGURE 4-11â âWhat-ifâ child near-poverty rates with the elimination of selected federal programs. NOTES: Near poverty is defined as below 150% of the TRIM3 SPM poverty line. Estimates are for 2015 and adjust for underreporting but not for behavioral effects. Other benefits: See note to Figure 4-9. EITC = Earned Income Tax Credit, CTC = Child Tax Credit, SNAP = Supplemental Nutrition Assistance Program, SSI = Sup- plemental Security Income, UC = Unemployment Compensation, WC = Workersâ Compensation. SOURCE: Estimates from TRIM3 commissioned by the committee.Â NOTE: Near poverty deï¬ned as below 150% of the TRIM3 SPM poverty line. Estimates are for 2015 and adjust for Other beneï¬ts: See note to Figure 4-9. UC = Unemployment Compensation, WC = Workersâ Compensation. SOURCE: Estimates from TRIM3 commissioned by the committee EFFECTS OF GOVERNMENT BENEFITS ON CHILD POVERTY IN THE UNITED STATES AND OTHER ENGLISH-SPEAKING COUNTRIES All nations allocate a portion of their budgets to programs that benefit children. Total family-related spending on financial supports, expressed as a percentage of a countryâs Gross Domestic Product (GDP), is plotted in Figure 4-12 for Australia, Canada, Ireland, the United Kingdom, and the
Public spending on families and children as a percent of GDP, United States, OECD average, and four peer Anglophone countries, 1990â2015 LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 121 4 UK Ireland 3 Spending as a % of GDP Australia OECD 2 Average Canada 1 US 0 1990 1995 2000 2005 2010 2015 Year FIGURE 4-12â Public spending on families and children as a percentage of Gross Domestic Product, United States, OECD average, and four peer anglophone coun- tries, 1990â2015. SOURCE: OECD, Social Expenditure database (see https://data.oecd.org/socialexp/ family-benefits-public-spending.htm); and OECD (2017). United States annually from 1990 through 2015.25 Although government spending on health and housing also assists families, it is not included in the figure. And while some state and even local governments in the United States spend significant amounts on child-specific programs, these amounts, too, are not included = United States NOTE: UK = United Kingdom, US in the following figures. Peer anglophone nations can be divided into those that spend relatively SOURCE: OECD, Social Expenditure database (https://data.oecd.org/socialexp/family-beneï¬ts-public-spending.htm ); largerOECD (2017) and fractions of their national incomes on these family-related pro- grams (Australia, Ireland, and the United Kingdom) and those that spend smaller fractions (Canada and the United States). Increases in spending over the 25-year period show a similar pattern: Spending rose from less than 25 These data come from OECD (2017) and use a spending measure based on the aggregate category of âpublic spending on family benefits, including financial support that is exclusively for families and childrenâ used by OECD. See Appendix D, 4-1 for an explanation of how the OECD defines its spending categories.
122 A ROADMAP TO REDUCING CHILD POVERTY 2 percent of GDP in all countries to nearly 3 percent in Australia and more than 3 percent in Ireland and the United Kingdom. In contrast, spending on families never exceeded 1 percent of GDP in the United States over this period, and it rose to slightly over 1 percent in Canada. Although Canada and the United States have always remained below the OECD average, Canada planned to increase the share of its expenditures on families with children that is targeted specifically to children to 1.25 percent of GDP over the following 2 years (in 2017 and 2018), following the passage of its new Child Benefit26 (see Box 4-2). The United Kingdomâs dramatic increase in spending beginning in the late 1990s was the result of its âWar on Povertyâ (see Box 4-3). The United Kingdom managed to fight child poverty effectively and consistently and was able to cut its poverty rate by one-half under an umbrella of policies designed both to promote work (with high-quality âsure startâ child care readily available) and to make work more attractive than the cash welfare system. The cash welfare system remains available, and its scope was not reduced as much as the TANF system in the United States. However, since 2010 the United Kingdom has been retrenching and implementing cuts in benefits, capping the amount of benefits nonworking families could receive and cutting other benefits (United Kingdom, Department for Work and Pensions, 2015). Government Spending and Its Effect on Child Poverty Rates How has this public spending affected child poverty rates in peer English-speaking countries? To find out, we use an SPM line converted to other currencies using purchasing power parities (PPP). Figure 4-13 shows the effects of the tax and transfer system on child poverty based on the latest Luxembourg Income Study (LIS) data and defined in the same way as the absolute poverty (LIS-SPM-PPP) measure used in Chapter 2. The far-right ends of the bars in Figure 4-13 show that the extent to which familiesâ market income alone is sufficient to raise a child above this poverty threshold varies widely across the five English-speaking OECD nations. With a 23.0 percent child poverty rate based on market income only, the United States is in the middle of the packâwith a poverty rate higher than that in Canada and Australia but much lower than that in the United Kingdom and Ireland. As explained below, the types of transfers used for Figure 4-13 are broken down into two types: social insurance benefits, such as unem- ployment and Social Security benefits, along with universal benefits such 26 Authorsâ calculations are based on https://www.fin.gc.ca/afr-rfa/2017/report-rapport-eng. asp#_Toc492557458.
LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 123 BOX 4-2 The Canada Child Benefit: A Cash Benefit to Families with Children Nearly three decades after the Canadian House of Commons passed an all-party resolution committing the federal government to âseek to eliminate child poverty by the year 2000,âa the government took a major step toward achieving this goal by introducing the Canada Child Benefit in its 2016 budget. This pro- gram took effect in July 2016 and represents a major revamping of cash support to families with children. According to government projections, the Canada Child Benefitâafter just 1 full year of implementationâwill reduce the number of Ca- nadian children living in poverty by nearly half (Corak, 2017; Sherman, 2018).b,c The new Child Benefit represents an increase in benefits over the three programs that it replacesâthe Universal Child Care Benefit, the Canada Child Tax Benefit, and the National Child Benefit Supplement. Eligibility for the benefit, which is distributed monthly and tax free, is determined on the basis of annually reported family income, making annual income tax filing its only eligibility require- ment.d The amount of the benefit distributed to families is determined both by the age of the child/children and net family income. Families earning less than $30,000 per year receive $6,400 per year per child ages 0 to 6 and $5,400 per year per child ages 6 to 17. For families above the $30,000 threshold, the amount of the benefit is phased out at a relatively moderate rate. The Canada Child Ben- efit is expected to increase cash support to families by $4.3 billion in its first full fiscal year of implementation, but that amount will decline to $2.5 billion by 2020 and to current levels of support by 2024âand below current levels thereafterâ since it is not indexed to inflatione (Canada, Office of the Parliamentary Budget Officer, 2016). However, indexing is expected to begin in 2020 (Corak, 2017). a Government of Canada, Hansard, November 24, 1989. b Based on 2013 reported poverty levels, which were the most recently available data at the time of the announcement. The government estimates that there were 755,000 children in poverty during 2013, and it was suggested that the Canada Child Benefit would lower this to 471,000 in 2017. c In addition to the efforts of the federal government, 8 out of Canadaâs 10 provinces have adopted their own poverty-reduction strategies, which include reforms to existing income sup- port programs as well as significant advances in the delivery of cash and non-cash benefits. d This eligibility requirement may be of concern to some First Nations populations, where rates of income tax filing are below the national average and where the need for income supports may be greater. e All dollar figures in this box are in Canadian dollars. as child allowances that are not means tested; and targeted means-tested tax and transfer programs. The combined reduction in poverty they bring about is shown by the gray and blue bars. Poverty rates after accounting for taxes and transfers are represented by the white portion of the bars. After accounting for the tax and transfer system, and as already seen in
124 A ROADMAP TO REDUCING CHILD POVERTY BOX 4-3 The United Kingdomâs War on Poverty In March 1999, Prime Minister Tony Blair pledged to end child poverty in a generation and to halve child poverty in 10 years (Waldfogel, 2010). When Prime Minister Blair called for this war on child poverty, one in four UK children was living in poverty. Between 2000â2001 and 2007â2008, absolute povertya fell by 50 percent. In 2000â2001, the early years of the policy, absolute child poverty rates were about the same in the United Kingdom and the United States. But while child poverty in the United Kingdom then dropped by one-half, in the United States the official measure of child poverty rose (Smeeding and Waldfogel, 2010). Some of the policies introduced in the United Kingdom were similar to those that the United States implemented, including an emphasis on employment and making work pay; employment-focused welfare reforms; a national minimum wage; and a tax credit for working families that was similar to the EITC but paid throughout the year (Smeeding and Waldfogel, 2010). However, the United Kingdomâs reforms also included policies that were not part of the U.S. reforms, including raising income for families with children regardless of the parentsâ work status (Waldfogel, 2010). The United States made such income support depen- dent on parental employment, while Britainâs reforms provided for a universal Child Benefit. This benefit is paid to the mother on a regular basis, is intended to help families cover the costs of raising children, and provides extra amounts for younger children (Waldfogel, 2010). While spending on these anti-poverty initiatives for children increased over the 10 years of 1999â2009, spending on working-age adults without children did not. Thus, social spending for children in Britain was prioritized. Over time, some spending was shifted to public services for the middle class, but new investments in children increased by 1 percent of GDP by 2009 (Waldfogel, 2010). a Absolute poverty is most comparable to the U.S. SPM measure, as it is based on after-tax and transfer income, but without adjustments for work-related costs or medical expenses, and uses an anchored poverty line that is adjusted for price changes over time (see Chapter 2 and Smeeding and Waldfogel, 2010). Figure 2-12, the United States has the second-highest child poverty rate (12.5%), which is one percentage point below the UK rate of 13.5 percent, a little over a percentage point above Irelandâs rate, and much higher than the rates in Australia and Canada. As a comparison of the combined widths of the gray and blue bars in Figure 4-13 shows, the United States is notable in that its government tax and transfer policies are the least successful at reducing poverty. Canada ranks next lowest in this regard, although its new Child Benefit (refer to Box 4-2) is expected to substantially reduce its child poverty rate; accord- ing to one estimate, it will cut child poverty by one-half (Corak, 2017). If Canadaâs Child Benefit program meets expectations, the countryâs child
Alternative rates of child poverty depending on inclusion of social insurance and means-test transfers, United States and four peer Anglophone countries, 2013/14 LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 125 US 2013 Poverty based on market income + social insurance + means-tested transfers Canada 2013 Poverty based on market income + social insurance Poverty based on Australia 2014 market income UK 2013 Ireland 2010 0 10 20 30 40 50 Child poverty rate (percentage) FIGURE 4-13âAlternative rates of child poverty, depending on the inclusion of s Â ocial insurance and means-tested transfers, United States and four peer anglophone countries, 2013â2014. NOTES: The blue portion represents reductions in child poverty from social insur- ance and universal programs. Additional reductions from means-tested transfers, minus direct taxes (including refundable tax credits) are represented by the gray portion. Data are not adjusted for underreporting. SOURCE: Original Luxembourg Income Study (LIS) analyses commissioned by the committee from the LIS Cross-National Data Center.Â NOTE: The light-blue portion represents reductions in child poverty from social insurance and universal programs. poverty rate will from means-tested transfers, minus direct taxes (including refundable tax credits)among the Additional reductions fall to the neighborhood of 5 to 6 percent, are represented lowest the gray portion.the are not adjusted for underreporting. US = United States,among Kingdom. by rates in Data entire OECD and the lowest UK = United the anglophone nations shown in analyses commissionedMoreover, fromhas been estimated that, if the SOURCE: Original LIS Figure 4-13. by the committee it the LIS Cross-National Data Center Canadian Child Benefit were implemented in the United States as a replace- ment for the Child Tax Credit, U.S. child poverty would fall by more than one-half (Sherman, 2018). According to estimates from the TRIM3 model, a similar Child Benefit in the United States would reduce U.S. (SPM-based) child poverty by more than one-half and deep poverty (<50 percent SPM poverty) by more than two-thirds. Australia has succeeded in reducing poverty more than Canada and the United States, while the United Kingdom and Ireland have achieved the
126 A ROADMAP TO REDUCING CHILD POVERTY highest level of poverty reduction. Not surprisingly, the poverty-reduction rankings are similar to the spending rankings displayed in the previous figure. Looking now at the relative importance of social insurance and uni- versal benefits plus income-tested programs in Figure 4-13, it is evident that both types of programs have significant poverty-reducing effects in all countries. Most notable is the uniquely small role of social insurance programs (shown in blue) in the U.S. anti-poverty package. Social insurance programs in the United States reduce child poverty by only 2.5 percentage points, about one-quarter of the total reduction in U.S. poverty. Australia is at the other end of the continuum; in that country virtually all poverty reduction can be attributed to universal (social insurance) programs. In contrast, the United Kingdom and Ireland rely on both types of programs, and especially on income-tested programs, to reduce poverty in the years observed in this figure. Figure 4-14 is constructed in the same fashion as Figure 4-13 but shows the effects of the safety net on deep child poverty and near child poverty in these same countries, using 50 percent of the same absolute SPM poverty line. Market incomes sufficient to raise family income out of deep pov- erty are more common in the United States than in other countries. In the United States, the 11.5 percent deep-poverty rate based on market income is somewhat lower than the corresponding rates in Canada and Australia and substantially lower than those in Ireland and the United Kingdom. But in the United States, the small relative amount of means-tested and, especially, social insurance transfers that go to children with very low family incomes translate into the highest rate of children in deep poverty (3.6%). After accounting for targeted benefits as well, all other nations have deep poverty rates that are under 2 percent. The U.S. finding is consistent with recent research showing that the U.S. safety net is increasingly likely to help the working poor while it excludes or minimizes spending on the deeply poor (Hoynes and Schanzenbach, 2018; Moffitt and Pauley, 2018). Finally, Australia and Ireland are the only countries whose safety nets have an impact on near poverty (see Figure 4-15). The U.S. near-poverty line is very high relative to the income distributions in the United Kingdom and Ireland but fixed at about the same fraction of median income as in Canada and Australia. At these income levels, taxes paid tend to increase and targeted benefits tend to phase out. In Ireland and Australia, however, social insurance and universal transfers are strong enough to make a sub- stantial impact. CONCLUSION 4-7: The United States spends a somewhat smaller proportion of its Gross Domestic Product on child and family tax and transfer benefits than Canada does, and a much smaller proportion
Alternative rates of child deep poverty depending on inclusion of social insurance and means-test transfers, United States and four peer Anglophone countries, 2013/14 LABOR MARKET, FAMILY STRUCTURE, AND GOVERNMENT PROGRAMS 127 US 2013 Poverty based on market income + social insurance + means-tested transfers Canada 2013 Poverty based on market income + social insurance Poverty based on Australia 2014 market income UK 2013 Ireland 2010 0 5 10 15 20 25 30 Deep child poverty rate (percentage) FIGURE 4-14âAlternative rates of child deep poverty depending on inclusion of social insurance and means-test transfers, United States and four peer anglophone countries, 2013â2014. NOTES: Deep poverty defined as below 50 percent of poverty. The blue portion represents reductions in child poverty from social insurance and universal programs. Additional reductions from means-tested transfers, minus direct taxes (including refundable tax credits), are represented by the gray portion. Data are not adjusted for underreporting. SOURCE: Original Luxembourg Income Study (LIS) analyses commissioned by the committee from the LIS Cross-National Data Center.Â NOTE: Deep poverty deï¬ned as below 50% of poverty. The light blue portion represents reductions in child poverty from social insurance and universal programs. Additional reductions from means-tested transfers, minus direct taxes (including refundable tax credits), are represented by the gray portion. Data are not adjusted for underreporting. US = United States, than United Kingdom. Ireland, and the United Kingdom do. Consequently, UK = Australia, government LIS analyses commissioned by the committee from the LIS Cross-National Data Center SOURCE: Original transfers do less to reduce poverty in the United States than in Canada and much less than in Australia, Ireland, and the United Kingdom. While U.S. benefits targeted at the poor and near poor reduce child poverty substantially, the United States does the least for children through the use of universal benefits like child allowances and social insurance programs such as Unemployment Compensation and Social Security survivors benefits. Such benefits have much bigger effects on child poverty in Australia, Ireland, and (with its new Child Benefit) Canada.
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