Benefits Cliff Explained

What is the benefits cliff?

The current public benefits system in the United States, composed of various means-tested programs like SNAP, Housing Choice Vouchers, and Medicaid, presents a challenge for many families. While these programs provide essential support, their rigid eligibility requirements can leave workers having to turn down higher paying jobs or working longer hours. For these families, increased earnings trigger an abrupt loss, or steep reduction, of public benefits that outweighs their increase in income, leading to a worse financial situation. This is the benefits cliff. It creates a barrier to upward mobility and disincentive to work, highlighting the need for a more flexible and adaptable system that supports individuals as they strive for financial independence.

Millions of families with low income across the country are potentially impacted by the benefits cliff. This experience is characterized by fear, frustration, and confusion as families are seemingly punished for pursuing economic mobility and security. Many households affected by the benefits cliff are unaware of its existence until the they experience it firsthand, making it difficult to plan for the future and achieve long-term stability.

The graphic below illustrates how a family might experience the benefits cliff. Each drop along the graph represents a point at which the family experiences a benefits cliff that leaves them worse off financially despite increased earnings. Every household’s experience will look somewhat different (due to the unique mix of benefits a family might access and the complex rules associated with each benefit); however, all families' experiences of the benefits cliff will follow these trends.

Note: Assumes that the family lives on a "thrifty budget" which is about a third less than most other cost of living estimates, and that when eligible, the family accesses SNAP, childcare subsidy (CCDF), Medicaid, CHIP, Marketplace subsidies, EITC, CTC, & CDCTC. Sources: Federal Reserve Bank of Atlanta's Policy Rules Database for tax and benefit amounts; and "How many are in need in the US? The poverty rate is the tip of the iceberg" for thrifty budget estimates.

The Federal Reserve Bank of Atlanta created tools for visualizing how a family in one's own community might experience the benefits cliff. (Note that the illustration above uses an extremely thrifty budget to estimate expenses whereas the Federal Reserve's tools use a more moderate estimate.) 

Public benefit programs often present other obstacles to financial stability and economic mobility for many families in our communities. Low asset limits in some programs prevent families from building adequate savings, leaving them vulnerable to financial emergencies. Eligibility criteria based on factors like age can lead to arbitrary losses of assistance, hindering upward mobility. Many families with low-income are unable to access needed public assistance, and even when they do, local services may not be aligned to support upward mobility. In short, the current system fails to provide the support necessary for these families to achieve stability and economic advancement.

What causes benefits cliffs?

The benefits cliff is a direct effect of policy decisions related to two main factors:

  • The design of eligibility rules within each public benefit, particularly (but not limited to) income and asset limits and how benefits are phased out (i.e. tapered) as income increases; and

  • Receipt of multiple public benefits.

Design of Public Benefits Eligibility Rules

Benefits with hard income and/or asset limits create the steepest benefits cliffs. For example, in states with a 130% gross income limit for SNAP, a family of three with two children earning $2,694/month could potentially lose $400+/month in SNAP benefits if they increase their earnings by a single dollar.

While less dramatic than hard eligibility cutoffs, programs that gradually taper assistance can also strain the efforts of families to advance economically. For example, a family with one wage earner and two children will see their SNAP benefits reduced at about 24 cents on the dollar of increased earnings (until the gross income limit is reached), while the Earned Income Tax Credit (EITC) for the same family of 3 will be reduced at about 21 cents on the earned dollar. Additionally, these reductions often occur against the backdrop of increased work-related expenses, such as transportation and childcare.

Receipt of Multiple Public Benefits

Households that participate in more than one benefit are greater risk of experiencing the effects of the benefits cliff. This is due to the siloed administration of public benefits. For example, as noted above, a household receiving SNAP and EITC will see a 50 cent reduction in benefits for each dollar earned, and if this household crosses the SNAP gross income limit, these losses could be even greater.

As noted above, a household that receives SNAP and claims the EITC could see their benefits reduced by nearly 50 cents for each dollar earned. Furthermore, if the household happens to increase earnings above their state’s gross income limit for SNAP, they could potentially lose a greater amount in benefits than their increased earnings. And if they receive non-cash assistance such as Medicaid, losing those benefits could further add to the financial losses that incur from even a small increase in earned income. Such compounded losses of benefits can be a demoralizing and financially impossible situation for families to navigate, particularly as these losses are the result of a family's working to get ahead while still falling far short of the earnings needed to meet minimum basic needs.

Further Reading on the Benefits Cliff

A Note on Terminology

There are many terms used to describe the benefits cliff concept and related experiences—marginal tax rate, benefits plateau, earnings loss rate, earnings deadzone, poverty trap, and others. While each term carries its own nuanced meaning, fundamentally, they all seek to describe the barriers and disincentives to increased earnings that public benefits policy decisions have created.