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Welfare Reform - Caspar Weinberger Proposal (2)
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Welfare Reform - Caspar Weinberger Proposal (2)
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The original documents are located in Box 13, folder "Welfare Reform - Caspar
Weinberger Proposal (2)" of the Richard B. Cheney Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 13 of the Richard B. Cheney Files at the Gerald R. Ford Presidential Library
TAB C
Tab C
FEDERAL BENEFIT LEVEL AND FEDERAL-STATE RELATIONS
Federal Benefit Level
The level of the Federal benefit in the ISP is one of the most visible
program components. It will figure heavily in Congressional and public
reaction to the plan because it not only affects the perceived adequacy
of the program, but has implications for State and Federal expenditures
as well.
The existing welfare system is made up of many programs: some of them
fully Federally-funded, some jointly funded by the Federal and state
and local governments, and some having no Federal participation at all.
One of the basic goals of the ISP is to replace this system in such a
way as to permit us to eliminate the major means-tested programs,
especially the ones in which the Federal government participates; reduce
substantially the size of the total governmental bureaucracy involved
in transfer payments and simplify the administration of what remains;
bring about a more appropriate Federal role in income assistance overall
and permit the Federal government to exercise strong administrative control
over the new transfer system.
In order to achieve these goals within a reasonable cost and with regard
to other concerns, I have recommended a Federal benefit structure with
a $3600 basic benefit level for families of four with no income. (Tab E
describes fully the proposed benefit structure. Expressing the benefit
structure in terms of a four person household or family has become con-
ventional shorthand usage in describing transfer reform proposals.) While
this benefit level may appear high to some, it reflects the recent growth
in the programs that it would replace. The following considerations
dictated our choices about the proposed benefit structure:
Benefit levels must be high enough to permit virtually
full replacement of the Federal financial share in the
existing programs that would be superseded by the ISP.
The present Federal participation in SSI and Food Stamps
for the aged, blind, and disabled and AFDC and Food Stamps
for single parent families set the necessary lower bounds
for the Federal basic benefit in ISP. The proposed benefit
structure would replace the Federal share of basic benefits
in all states for both AFDC and SSI families. (See attached
Table 1 for full display of Federal shares of AFDC plus Food
Stamp levels in the states.)
ISP levels should completely dominate combined AFDC and
Food Stamp benefit levels -- including the state contributions
-- in as many states as possible. This will enable us to
limit to the maximum degree the number of states where
state supplementation of ISP benefits would be necessary
in order to maintain existing or probable benefit levels.
The proposed benefit structure would do this in sixteen
states. (See attached Table 2 for a full display of total AFDC plus
2
Food Stamp levels in the states.) The comparable ISP
positions with respect to state supplements in SSI
plus Food Stamps for the aged, blind and disabled
are even more advantageous. The strong program
and political reasons for limiting the need for state
supplementation are discussed more fully below.
Though the basic benefit level would for many units
fall below the official poverty standard, we have
designed the program so that households with some
substantial though inadequate income from either
present earnings or transfer programs based on past
earnings will have a total income above that standard.
Only with respect to households with no sizable source
of other income would ISP be inadequate to match the
poverty standard, and in many states it is probable that
there will be state supplement programs targeted towards
such households.
The benefit levels that are proposed are the minimum necessary to achieve
the above objectives at acceptable net costs to the Federal budget.
However, the proposed structure allows you some compromise room later in
the likely event that during the Congressional debate some seek to raise
the benefit level. We also hope that the proposed ISP benefit levels
will provide a sufficient defense against any major new Federal commit-
ments in subsidized housing for the poor. Clearly the ISP will strongly
blunt pressure for a housing allowance or voucher program, and even any
major expansion in the existing housing authorities.
Our proposed benefit structure would be expressed in December, 1974 dollars
and adjusted upward for inflation thereafter. This should mitigate the
political pressures for a more generous benefit structure and insure that
the benefits will be high enough to replace the Federal share of existing
programs at the time of implementation.
State Supplementation
Even with the Federal benefit structure that I have recommended, it is clear
that as many as half of the states might wish to supplement the Federal
benefit for some categories of low-income households so that large numbers
of current recipients, especially AFDC type families, will not be made
worse off. State supplementation, as noted above, can pose problems of
program interaction and administrative complexity. The state supplements
in the new Supplemental Security Income (SSI) program, for example, have
proved to be especially burdensome, primarily because the Congress chose
to mandate grandfathering of former aid to the aged, blind and disabled
recipients in the form of state supplements. This seriously compromised
the goal of establishing a program that can be easily administered and
controlled.
3
These problems have been especially troublesome in the context of Federal
(SSA) administration of those supplements, an option which 31 states have
exercised. In light of the SSI experience, the possibility of not per-
mitting Federal administration of state supplements under any circumstances
was considered. This alternative was rejected on the grounds that it could
create even greater overall administrative inefficiencies and generate some
avoidable political problems.
It was therefore decided to offer the states the option of selecting Federal
administration of their state supplements under the strict conditions that
key program elements, e.g., the eligible filing unit and income, must be
identical to or a simple subset of the Federal definitions so that additional
data collection needs are avoided, any additional special determinations are
minimal, and such exceptions which do exist can be handled in a manner
consistent with the objective and automated nature of the Federal program.
In effect, optional Federal administration of state supplements under ISP
would be analogous to the provision already in the Federal Tax Code for
optional Federal administration of state income taxes. Because there are
no duplicate Federal and state administrative structures in the states
that choose to exercise the option under these restrictions, Federal adminis-
tration of state supplements will require significantly fewer total employees
than the combined number of Federal and state employees if those states
had to administer their own supplements (See Tab G for relevant administrative
personnel comparisons.) Thus, offering the option will enable us to more
adequately meet our goal of reducing the size of the welfare bureaucracy
that remains at the state and local levels.
Some states may choose however to reject the option, deciding that their
program goals for supplementation dictate retention of the discretionary
and subjective rules that characterize the present welfare programs. In
those instances the States would continue to bear the costs of maintaining
their public assistance bureaucracies.
What must be prevented, if we are to avoid repeating the very troublesome
SSI precedent in this area, is Congress allowing optional Federal adminis-
tration of the latter type of welfare oriented state supplement. Not only
would such a result be totally antithetical to the conceptual nature of
this welfare replacement plan, but also it is administratively infeasible
for a Federal agency to run what would amount to twenty-five or more separate
assistance programs. Our position on this matter will have to rest on firm
resolve, an emphasis on the SSI experience, and the linkage to the Federal
tax system.
Regardless of whether a state chooses Federal or state administration, there
is one subject in which Federal intervention is necessary unless we are
prepared to see the work incentive feature of the ISP proposal diluted.
If states were allowed to supplement completely without Federal regulation,
the relatively low benefit reduction rate in ISP could be effectively doubled
by the structure of the state supplements. For example, a state could
decide to impose a benefit reduction rate on state supplements which was
4
about as large as that on the Federal benefit. In order to preserve both
equity and work incentives, state supplement benefit reduction rates must
be held to 15% or less until the household's earnings exceeds the Federal
breakeven level at which point they could impose a rate equal to the
Federal 50% rate. While this provision will not be popular with the
states, it is absolutely critical to the integrity of our proposal.
Despite our decisions to regulate state benefit reduction rates and to
permit optional Federal administration of state supplements under controlled
conditions, we otherwise decided to adopt a position of Federal neutrality
about state decisions in this area as being most consistent with the
proposal's underlying philosophy. Hence we rejected either mandating state
supplements or directing Federal administration of them. It will be up to
each State to decide whether or not it wishes to supplement and, with the
exceptions discussed above, under what program and administrative conditions.
At the same time, however, we recognize that because of procedural anomalies
in existing programs or unforeseen events between now and the time of passage,
it may be necessary to offer a hold harmless to the states against cost
increases over and above their current system expenditure levels, as was
done in H.R. 1. This would permit those states who view it as desirable
to supplement the Federal benefit to do so with the knowledge that their
costs would not exceed former levels. As a practical matter, the hold
harmless would add very slightly to program costs and pose only minor
administrative problems. However, it would represent a departure from
our basic stance of neutrality in state supplementation. For this reason,
we chose not to include a hold harmless provision, although we would be
prepared to utilize it as a bargaining chip in negotiations with Congress.
Finally, the possibility of grandfathering current recipients was also
rejected. SSI has such a provision. The result is to continue the old
program rules, rules which have no place in a welfare replacement plan.
In keeping with our basic stance, the states may elect to operate their
supplemental programs in such a way as to grandfather the eligibility and
benefits of current recipients. The Federal government, however, should not
be a partner to that effort.
Emergency Needs
Whatever a state's situation with respect to a supplement, it will have
responsibility for administering its own emergency needs program. There
will be cases of sudden and severe need which the Income Supplementation
Program and many of the state supplement programs will not be able to address.
For example, low-income families receiving benefits under both ISP and an
ISP-consistent state supplement will encounter sudden losses that are
unforseeable and cannot be budgeted for (e.g., the breakdown of a car essen-
tial for employment). Since some of these instances are now being handled
by the present system, we are vulnerable to the criticism that we are
creating an overall income maintenance scheme that is less responsive and less
5
sensitive to the needs of the low-income population than the system which
it would replace. Much of such criticism would be disproportionate and
inaccurate. However, we can easily counter the objections and help fill
the actual gaps by combining a residual emergency assistance authority
with our new initiative in social services. The costs to the budget of
Federal participation in state-administered emergency needs programs are
very modest and will strengthen the chances of the overall ISP proposal
in Congress.
TABLE 1
Federal Share of Basic AFDC/Food Stamp 2/ Benefits
(AFDC- Plus Food Stamps
for a Family of Four With No Other Income
in Those Jurisdictions 3/ Where the Federal Share
is less than $2700
1. Mississippi
2268
2. Ohio
2436
3. Maryland
2448
4. District of Columbia
2556
5. Indiana
2568
6. South Carolina
2568
7. Tennessee
2579
8. Louisiana
2580
9. Alabama
2604
10. Texas
2604
11. Rhode Island
2604
12. California
2604
13. Arkansas
2616
14. Nebraska
2616
15. Massachusetts
2628
16. Florida
2652
17. Connecticut
2652
18. Nevada
2664
19. Washington
2676
is less than $3000
20. Maine
2712
21. Kentucky
2736
22. Wyoming
2748
23. Arizona
2760
24. Colorado
2760
25. Georgia
2772
26. New York
2796
27. New Jersey
2796
Table 1 continued
28. Missouri
2808
29. Delaware
2832
30. Michigan
2832
31. North Carolina
2844
32. Iowa
2868
33. Oklahoma
2880
34. New Mexico
2892
35. Pennsylvania
2976
36. Oregon
2988
is less than $3300
37. Kansas
3012
38. Illinoia
3048
39. Minnesota
3072
40. Montana
3084
41. West Virginia
3096
42. Virginia
3120
43. New Hampshire
3132
44. Wisconsin
3156
45. Utah
3204
46. Alaska
3264
is less than $3600
47. Hawaii
3312
48. Vermont
3348
49. Idaho
3360
50. North Dakota
3432
51. South Dakota
3456
See footnote to Table 1.
TABLE 2
The Largest Amount Paid for Basic Needs
(AFDC1 / plus Food Stamps 2/ )
for a Family of Four with No Other Income
in those Jurisdictions: 37 Where the Benefit
is less than $3000
% AFDC
4/
Recipients
1. Mississippi
2364
1.7
2. South Carolina
2868
1.1
3. Louisiana
2892
2.4
4. Alabama
2928
1.5
5. Arkansas
2928
.8
6. Tennessee
2976
1.8
is less than $3300
9.3%
9.3%
7. Texas
3036
4.0
8. Florida
3120
2.9
9. Georgia
3228
3.2
10. Kentucky*
3288
1.5
is less than $3600
11.6%
20.9%
11. Maine
3324
.7
12. Misseuri
3432
2.3
13. Arizona
3444
.7
14. North Carolina
3444
1.4
15. Ohio
3576
4.6
16. Nevada
3576
.1
is less than $3900
9.8%
30.7%
17. New Mexico
3636
.6
18. West Virginia
3696
.7
19. Delaware
3780
.3
20. Maryland
3804
2.1
21. Nebraska*
3804
.4
22. Wyoming
3816
.1
23. Oklahoma
3852
.9
is less than $4200
5.1%
35.8%
24. Indiana
3948
1.6
25. Colorado
4092
:9
26. Montana*
4164
.2
27. Utah
4164
.4
3.1%
38.9
Table 2 Continued
% AFDC
Recipients
28. District of Columbia
4224
1.0
29. Illinois
4332
7.3
30. Iowa
4356
.8
31. Idaho
4380
.2
32. Massachusetts
4452
2.8
33. Rhode Island
4464
.5
34. Virginia
4464
1.5
35. California
4464
12.7
26.8%
65.7%
is less than $4800
36. North Dakota
4512
.1
37. Kansas
4644
.7
38. Connecticut
4644
1.1
39. South Dakota
4668
.2
40. Oregon*
4668
.7
41. Washington
4692
1.4
4.2%
69.9%
is less than $5100
42. New Hampshire
4812
.2
43. Pennsylvania
4848
5.8
44. Vermont
4872
.2
45. New York*
4932
11.5
46. New Jersey
4932
3.9
47. Minnesota
4992
1.2
22.8%
92.75
is less than $5700
48. Michigan
5112-
6
5.6
49. Wisconsin
5280
1.3
50. Alaska
5364
.1
51. Hawaii
5664
/
.4
7.4%
100.0%
*Exact combined benefit. levels for these states are currently uncertain;
however, their relative positions are probably as indicated.
1/ For AFDC, the largest amount paid for basic needs for a family of four
with no other income is derived by combining information from two sources:
1) preliminary data for NOSS publication D-2 for July 1974, reporting
information on the "largest amount paid for basic needs" to an
family
of four; 2) data from a special SRS/APA survey taken about August 1974,
TAB D
TAB D
BACKGROUND ON TAX RELIEF
Structure of Tax Changes
In order to bring about the desired relationship between the tax
and restructured transfer system it is essential that the exempt
income levels for families in the positive tax system be increased
to the ISP breakeven levels of income. For example, for a family
of four, income tax exempt income would be increased from $4,300
to $7,200.
Exempt income can be increased to the desired levels by adjusting
the personal exemption and/or the standard deduction. To the extent
the personal exemption is increased, taxes are lowered for all tax-
payers. On the other hand, increasing the standard deduction benefits
only taxpaying units that do not itemize, primarily lower income units.
Therefore, raising exempt income by increasing only the standard deduction
limits more the amount of tax relief and concentrates it on low and
moderate income units. For this reason the decision was made to
increase exempt income solely through the upward adjustment of the
standard deduction leaving the personal exemption unchanged at $750.
Table 1 displays the five basic standard deductions that result from
the method of equating the new higher tax exempt levels of income for
various family types with their breakeven levels of income under ISP.
New Standard Deduction**
(for those with incomes
less than the breakeven
level)
Single Person not Aged, Blind, or
Disabled (ABD)
$2,000
Single ABD
3,100
Two Person Family
3,300
Three Person Family
3,750
Four or more Person Family
4,200
* By income tax exempt income is meant the sum of the value of personal
exemptions plus the standard deductions, i.e., the minimum amount of
a family's income which is guaranteed to be non-taxable. Under current
law the minimum standard deduction or low income allowance is $1300 and
each personal exemption is worth $750. Thus, a four person family has
exempt income equal to $1300 + 4 X $750 = $4300.
**
These new standard deductions are expressed in December 1974 dollars.
It is assumed that they would be increased at the rate of inflation
between then and the time of full implementation of the proposal in
such a way as to preserve the real value of ISP benefits.
2
If these new higher standard deductions were made available to all tax-
payers the revenue loss would be considerable, $ 15.0 billion in 1978
(in December 1974 dollars), the first year by which the new schedule
would have to be fully in place. This is a larger amount of tax relief
than is desired. Therefore, the tax aspects of the plan have been
designed so that the standard deductions are phased down above the
breakeven level of income at a rate of 50 cents on the dollar. Each
dollar of additional income above the breakeven reduces the value of
the standard deduction from the maximums in Table 1 (which are, there-
fore, applicable only to low-income households) down to the current
law level of $2,000 for moderate income units.
Distribution of Tax Relief
The amount of tax relief that would be extended by the above structure
is about $4.1 billion rather than $15 billion if the new standard
deductions were not phased down at higher income levels. Of this
$1.8 billion would go to families with adjusted gross incomes below
the newly established tax exempt levels and the remainder to taxpayers
with incomes in excess of these. The distribution of this tax relief
is shown in Table 3.
An effect of this phase down is that it increases the actual marginal
tax rates applicable to families in the phase down range of income.
An additional dollar of income increases taxes by one hundred and fifty
percent of the nominal tax rate since extra earnings add a dollar to adjusted
gross income and reduce exempt income by fifty cents. This results
in an effective marginal tax rate structure in which rates first fall
and then increase as income increasesabove the breakeven level. Although
average tax rates over this range would always be increasing with income,
it may be difficult to justify such a marginal tax structure. HEW-
Treasury staff are currently examining options which would directly
change the explicit tax rates applicable to taxable incomes in such
a way as to result in a more optimal tax rate structure while still
yielding a roughly equivalent amount of tax relief.
3
Table 2
Adjusted Gross
Tax Relief
Percentage of Total
Income
($ Millions)
Relief
0-$1,999
$ 449
10.9
2,000-3,999
748
18.1
4,000-5,999
1024
24.8
6,000-7,999
989
23.9
8,000-9,999
573
13.9
10,000-11,999
332
8.0
12,000-14,999
17
.4
15,000 +*
5
100*
Total
4137
Table 3 illustrates the amount of this tax relief that would accrue to a
four person family at different adjusted gross income levels.
Table 3**
Adjusted Gross Figure
Amount of Tax Relief
below $4,300
0
5,000
$ 98
6,000
$249
7,200
438
10,000
243
12,000
38
over 13,333
0
*
The relief to families with income in excess of $15,000 results because
of (1) large family sizes, and (2) the fact that some high income
tax units continue to profit from use of the standard deduction
rather than itemizing.
** All figures in this table are for CY78 and expressed in December 1974
dollars. They assume the standard deductions specified in Table 1
and the 50% phase down.
TAB E
Tab E
DETAILS OF BENEFIT STRUCTURE AND RECIPIENT POPULATION
For reasons discussed in the paper at Tab C, I am recommending a
benefit structure that would yield an Income Supplement Program
(ISP) benefit of $3600 per year in 1974 dollars to a four person
family with no other income. However, there would be relatively
few such families in the ISP recipient population. This paper
will first illustrate the details of the benefit structure across
the entire range of family types and their levels of earnings, and
then discuss the composition of the recipient population.
BENEFIT STRUCTURE
The ISP has the basic characteristics common to all negative
income tax type proposals: a family with no other income receives
a basic benefit which is then reduced as family income increases.
As a general rule, ISP benefits would be reduced by 50 cents for
each dollar of other family income. This feature insures that a
recipient will always be substantially better off for having worked
an additional hour or for having received a wage increase.
With respect to non-wage or non-salary income, ISP rules would be
slightly more complicated. Such income would be treated exactly
like current earnings and reduce ISP benefits by 50 cents for each
dollar up to certain bench marks; thereafter each dollar of such
income would reduce ISP benefits dollar-for-dollar. The bench
marks would be equal to the unit's basic benefit level. This
pattern reflects a compromise between our policy goals to, on the
one hand, introduce greater equity in our treatment under means-
tested transfer programs of income from current earnings and income
from wage replacement transfer programs (such as Social Security)
which are based on contributions from past earnings and, on the other
hand, the need to keep the net costs in transfer payments of the ISP
proposal within desirable bounds.
The attached Table 1 illustrates the full benefit structure, demon-
strating for a variety of family types the benefit levels and how
they are phased down with other income.
A family of four with no other income would receive
an annual benefit of $3600. If the earner should
work half-time (1000 hours) at $2.00 per hour, the
ISP benefit would fall to $2600. Total family income
would be $4600.
Full-time work at the minimum wage would further
reduce the benefit to $1600 and raise total family
income to $5600. We estimate that the average ISP
benefit for a two-parent family of four would be
2
$1269 per year, suggesting that in most such
families at least one member will be working
nearly full-time.
As earnings continue to rise, the ISP benefit is
gradually reduced until, for this type family, it
falls to zero at $7200. This is known as the
breakeven level of income.
If the family head has full-time employment at the
minimum wage, his or her earnings when combined
with the ISP benefit would remove the family from
poverty. This would be true for all recipient units.
The effects of conditioning the benefit structure
by family size can be seen in the case of a single
individual. With no other income, a single person
would be eligible for a $1200 benefit. In the
*more likely case that he or she is working full-
time at the minimum wage (earning approximately
$4000 per year) a single person would pay taxes
rather than be eligible for a benefit.
An aged, blind or disabled couple with no other
income would receive a benefit of $3150. A family
composed of three children and headed by a disabled
parent with no other income would receive $3975
annually.
COMPARISON TO EXISTING PROGRAMS
Intact Families. If the family of four described above in the dis-
cussion of ISP were a two-parent family, it would not currently be
eligible for any cash assistance program in which the Federal govern-
ment now participates, except in certain limited instances (AFDC-UF,
Emergency Assistance and special programs for veterans, Cuban
refugees and Indians). However, such a family can presently,
regardless of location, purchase Food Stamps with a face value of
$1898 per year. If the family has no other income, it receives the
stamps for free. The price of the stamps varies according to family
income, generally increasing 30 cents for each dollar of additional
family income. However, because taxes and large medical and housing
expenses are not counted in determining income for the purposes of
benefit calculation, the breakeven level for the Food Stamp program
is often well above the $7200 breakeven level in the ISP.
3
Single-Parent Families. If the family of four is headed by a
single parent, it could receive cash benefits from the state-
administered AFDC programs, as well as Food Stamps. Since the
amount of benefits differs greatly from state to state, we will
consider the states of Georgia and Michigan for purposes of
illustration.
AFDC and Food Stamp Benefits Payable to Families of Four*
Earned Income
Breakeven Income
0
2000
4000
Income
Georgia
3240
2700
1560
7000
Michigan
5120
4370
2870
11000
Georgia, a state with a relatively low AFDC benefit, provides a
combined Food Stamp and AFDC benefit of $3240 to families of four
with no*income. Because of generous deductions for such expenses
as day care in the calculation of family income, the income level
at which eligibility ceases is about the same as that in the ISP.
The ISP would completely replace the AFDC program in Georgia.
Michigan on the other hand, has a high AFDC basic benefit which,
when combined with the generous income disregards for such items
as taxes results in a breakeven income of more than $11,000.
In addition to the inequitable benefit differentials among the
states, the present welfare system is less efficient than ISP would
be in focusing Federal transfer dollars to recipients with the
lowest incomes (see Table 2). ISP would direct over 90 percent of its
monies to persons who would be poor in the absence of ISP. Less than 10
percent of ISP expenditures would go to persons whose non-benefit
income is above their appropriate poverty levels (e.g., approxi-
mately $5,000 for a family of four in December 1974 terms), but
below their breakeven levels (e.g., $7200 for a family of four in
December 1974 terms). Though comparable figures for the Federal
share in the present system are virtually impossible to derive at
this time, other comparisons indicate that the present system focuses
*
The benefit levels shown here are based on July, 1974 AFDC levels
and the July, 1974 Food Stamp bonus schedule. Child càre expenses
of $50 per month were deducted in the Georgia example. No child
expenses were deducted in Michigan since that state pays for child
care expenses through the social services program. These benefit
levels should be regarded as approximations since they are based
on average work related expenses. Actual benefits will vary depending
on the specific circumstances of each recipient household.
4
its resources less efficiently. For example, while the present
welfare programs lift roughly 16 percent of the pre-transfer poor,
or an estimated 4.5 million persons, out of poverty, ISP would
reduce the poverty population by some 9-10 million persons, or 30-
40 percent of the pre-transfer poor. The reasons for this greater
antipoverty effect in ISP are several: higher levels of assistance
to many whose present cash and/or Food Stamp benefits are insufficient
to lift them from poverty; a somewhat less stringent assets test
than those in current law programs; and a considerably more lenient
treatment of non-wage income than now prevails. The last two
changes will especially contribute to the virtual elimination of
poverty among the aged. The resources that allow this increased
aid to the pre-transfer poor derive from the $3.4 billion increase
in Federal net expenditures for ISP, and the introduction into the
ISP of program design elements (the annual accountable period and
a definition of income that permits no exclusions or deductions)
which focus transfer dollars more efficiently than does the present
welfare system. This greater efficiency, it should be noted, can
and probably will lead to the reduction and even elimination of
benefits to some who are now eligible and participating in current
law programs.
ISP RECIPIENT POPULATION
Eligibility for ISP benefits would be based primarily upon income
and household size. Assuming a family does not have assets in which
equity exceeds specified values, and the family's income is below the
breakeven level, a family would be eligible to receive benefits.
However, not all those eligible will elect to participate in the
program, principally because large numbers of households whose
incomes are close to their breakeven levels will not perceive
the small benefits they could obtain from ISP as worth the effort
of application and regular reporting. If transfer costs and the
number of recipients are projected solely on the basis of a simple
comparison of family income and eligibility levels, each would be
overestimated. Therefore, projections have been reduced using specific.
assumptions about probable participation by various household types
at various income and asset levels.
In the display below the effect of these adjustments on projections
is indicated. While 35.8 million persons would be eligible
for ISP benefits, only 27.2 million are expected to be in households
that would apply and receive benefits. Similarly, gross transfer
costs are projected to be $17.2 billion, or $3.3 billion less than an
unadjusted figure that assumes full participation.
5
ISP Recipients and Transfers: FY 79
Eligible
Recipients
Number of Units
(million)
14.5
10.5
Number of Persons
(million)
35.8
27.2
Transfers
($ billion)
20.5
17.2
(1974 dollars)
per year
Table 3 provides a breakdown of the potential ISP recipient population.
For each group the table displays the number of households (generally
families), the number of persons, the aggregate transfers to that
group, and the average transfer to that household type. The following
points emerge from comparing data from existing programs to the data
on Table 3:
0 In the absence of the ISP initiative (for FY 79):
-- Some 6-7 million persons will be eligible to
receive benefits for the newly federalized Supple-
mental Security Income (SSI) program for the aged,
blind and disabled, and State supplements to that
program. One-half of all ISP house-
holds (50.0%) would either be composed solely of
aged, blind or disabled individuals or would
contain such an individual.
-- Assuming that the current stability in the AFDC
caseload continues, approximately 10 to 12 million
persons will be in families receiving AFDC benefits.
One quarter of the ISP recipient population would
be in households generally comparable to this
group of current cash recipients.
--
It has been estimated that those eligible for Food
Stamps may well number as, many as 50 million persons;
a substantially larger number than the 35.8 million
ISP eligibles. (However, because it is one of the in-
kind programs which historically have had low partici-
pation rates, the number of persons participating in
the Food Stamp program in FY 79 may be less than the
27.2 million we would expect to participate in the
(ISP.)
*
See column 4 in Table 3.
6
Virtually all of the potential ISP recipients would otherwise
be eligible for Food Stamps and most of the families for
public housing in the absence of ISP. As noted above, the
Food Stamp eligible population is much larger than the
ISP eligible population. Most of the growth in the
Food Stamp program can be expected in the intact family
category, the members of which are approximately 40
percent of ISP recipients.
These intact families, often called the "working poor,"
are typically headed by an employed father whose substantial
earnings over the year would typically make the benefit for
this group quite modest ($1269 annually on the average), but
sufficient to remove them from poverty. This group would
therefore receive 14 percent of the benefits though it com-
prises almost 30 percent of the recipient population.
The average benefits that households would actually receive
are well below the basic benefit levels to which they would
be entitled if they had no other income, for most will have
substantial earnings or other income (see Table 1). Even groups
which we generally do not consider as being employed have in fact
substantial income which would serve to reduce the benefits
they would receive. For example, single-parent families
with children would receive, on the average, $1000 below
their basic benefit.
TABLE 1.
ISP BENEFIT STRUCTURE (IN 1974 DOLLARS)
Breakeven
Benefits at Various
Total Income at
Level of Earnings
Earnings Levels
Various Earnings Levels
Total Income Average
a
a
$0
$2000
$4000
$6000
0
$2000
$4000
$6000
(Benefit = 0)
Benefit
Single Individual
$1200
$ 200
*
*
1200
$2200
*
*
$2400
$726
Childless Couple
$2400
$1400
$ 400
*
2400
$3400
$4400
*
$4800
995
Single Parent, One child
$2400
$1400
$ 400
*
2400
$3400
$4400
*
$4800
1603
$6600
$7200
2593
Single Parent, Three children
$3600
$2600
$1600
$600
3600
$4600
$5600
Two Parents, Two Children
$3600
$2600
$1600
$600
3600
$4600
$5600
$6600
$7200
1269
$2300
$1300
$ 300
*
2300
$3300
$4300
*
$4600
1281
SSI Individual
SSI Couple
$3150
$2150
$1150
$150
3150
$4150
$5150
$6150
$6300
1293
Disabled Parent, Three Children $3975
$2975
$1975
$975
3975
$4975
$5975
$6975
$7975
3722
a
The benefit at zero income is the "basic benefit." When income is zero the total income of a family
will equal the benefit.
*
At this income level the family is above the ISP breakeven income and will therefor receive no ISP
benefits and might have a positive tax liability.
TABLE 2
COVERAGE AND ANTIPOVERTY EFFECT OF ISP TRANSFER BENEFITS
*
Number of families receiving a transfer (millions)
10.7
-- As a percent of all families
14
Number of persons receiving a transfer (millions)
27.2
-- As a percent of all persons
12
**
Transfers to families below poverty line
15-16
(Billions of $)
90-95
-- As a percent of total transfers
Number of poor families receiving a transfer
(millions)
9-11
-- As a percent of all poor families
80-90
Number of persons in families below poverty line
and receiving a transfer (millions)
24-26
-- As a percent of persons in poverty
80-90
Number of families escaping poverty (millions)
4-5
-- As a percent of all families in poverty
30-40
Number of persons escaping poverty (millions.)
9-10
-- As a percent of persons in poverty
30-40
*
Unrelated individuals are included as families of size one.
Since we do not know which poor families will participate and
which will not, all poverty figures are expressed as ranges
instead of point estimates. A unit is classified as poor if
its income before means tested transfers is below the poverty
threshold.
TABLE 3
ISP RECIPIENTS AND TRANSFERS: ESTIMATES FOR FY 79
No. of
No. of
Sum of Transfers Sum of Transfers
Primary Filing
Units
Persons
(Billions/Year in
Unit Characteristics
(Billions/Year in
(Millions)
(Millions)
FY 79 dollars)
December 1974 dollars
1. Single-parent
2.0
7.5
6.2
4.6
families with
(19.2%)
(27.6%)
(27.0%)
(26.7%)
children; no
ABD's* present
2. Two-parent families
1.5
7.6
3.1
2.3
with children; no
(14.4%)
(27.9%)
(13.5%)
ABD's present
(13.4%)
3. Families with
.6
3.3
2.5
1.9
children; at least
( 5.8%)
(12.1%)
(10.9%)
one ABD
(10.9%)
4. Related adults; no
.5
1.1
.8
.6
children; no ABD
( 4.8%)
( 4.0%)
( 3.5%)
( 3.5%)
present
Related adults; no
1.6
3.5
3.3
2.5
children; at least
(15.4%)
(12.9%)
(14.3%)
(14.5%)
one ABD
6. Single adult; not ABD
1.2
1.2
1:4
1.0
(11.5%)
( 4.4%)
( 6.1%)
( 5.8%)
7. Single ABD adult
3.0
3.0
5.7
4.3
(28.8%)
(11.0%)
(24.8%)
( 25.0%)
Total Population
10.4
27.2
Total Transfer Costs
23.0**
17.2
*
ABD means person who is aged, blind, or disabled
**
In addition to transfers, ISP costs would include: $1.2 billion for program
administration, $0.1 for the work test, and $0.5 billion for emergency
assistance. Total costs would be $24.8 billion in FY 1979 as shown
in Tab F.
H TAB
TAB F
BACKGROUND ON ISP COSTS
There are two independent cost components which must be estimated
in order to arrive at the net transfer costs of ISP -- the gross
transfer costs of ISP and the expenditures under those programs that
will be eliminated or reduced because of ISP. In the latter case
estimates are based on the continuation of the present set of income
tested programs (except that CHIP would displace Medicaid); it is
not assumed that, in the absence of ISP, any new ones would evolve
or that existing programs would expand or contract appreciably
because of changes in regulation or legislation or increases in
participation among the eligible population above that reflected in
the official OMB projections. To the extent .any of these would
occur, the cost estimates presented here would require adjustment.
The gross costs for ISP in FY '79, the first year in which the
program would be fully implemented, are estimated to be $24.8 billion.
Program offsets are estimated to be $20.2 billion. This yields FY '79
net costs of $4.6 billion which in today's dollars is $3.4 billion.
The following sections provide detailed information on the derivation
of these figures as well as other possible influences on costs which
are not reflected in these estimates.
It is reasonable to assume that gross costs will remain relatively
constant in real terms for some years after FY '79 then gradually
fall. Benefits will be adjusted upward with inflation, but, over
time, the average earnings of the eligible population will increase
by even more than the amount of inflation, due to the real growth
rate of the economy. This is the phenomenon that should cause costs
to decline in the long run. However, in the early years of the
program, an increase in participation among the eligible population
may put upward pressure on costs. The assumption that costs would
remain constant in the shorter term rests on the foundation that
these two trends (increased participation and growth of income in
excess of inflation) will be roughly offsetting.
2
DERIVATION OF PROGRAM OFFSETS ESTIMATE
Program offsets of ISP fall into two categories:
Programs which would necessarily be
eliminated in favor of ISP
Estimate of Federal Program
Outlays in FY 79 (Billions
in FY 79 dollars)*
AFDC
$6.6
SSI
6.1
Food Stamps
5.5
WIN
0.3
$18.5
Programs not eliminated, but which would have lower
outlays as a result of greater cash income among the
low-income population.
Housing
$0.6
School Lunches
0.3
CHIP
0.8
$1.7
DERIVATION OF GROSS TRANSFER COSTS
The gross transfer cost estimate for ISP is derived by utilizing the
basic output of the computer simulation model known as TRIM (Transfer
Income Model). This model can be programmed to estimate the cost
of a program very similar to ISP, which then can be adjusted to
reflect certain factors which the model cannot take into account.
Below is a discussion of the assumptions built into TRIM and of the
nature and cost impact of the adjustments made.
These are the official OMB "free fall" estimates which reflect
no change to current program policies and adjust for both
inflation and increases in program participation. A discussion
of offsets using OMB "reduction" estimates which assume the
implementation of various cost saving changes is contained in
the final section of this tab.
3
Assumptions Built Into TRIM
The assumptions which were built into TRIM computer runs are listed
below. As will be obvious, many of these are not entirely appropri-
ate and are the reason for some of the adjustments listed later.
The March 1973 Current Population Survey (which provides
income data for CY 72) is aged to FY 79 to produce the
expected profile of numbers and types of households
and their (non-ISP) income; since the unemploy-
ment rate was 5.6 percent in 1972, this same rate is
carried forward to FY 79 when the CPS is aged.
The benefit structure of ISP is specified in December 1974
dollars and adjusted thereafter for inflation. The rates of
inflation assumed are the official Troika estimates (1974, 11.2%;
1975, 10.9%; 1976, 7.8%; 1977, 6.6%; and 1978, 4.8%).
These same rates of inflation of the CPI are assumed
in projecting the levels of other sources of income
(although additional assumptions such as for the
growth rate of real wages are also necessary).
A comprehensive filing unit definition is employed,
which means that all related members of a household
are assumed to be filing together for ISP eligibility
and benefit determinations.
All non-wage income up to the amount of the basic
benefit for which a filing unit would be eligible
is treated the same as earnings -- i.e., a flat 50
percent benefit reduction rate is applied; all non-
wage income above this level is used to offset ISP
benefits dollar-for-dollar.
No ISP income-eligible filing units have assets above
the limit permitted for eligibility and all such units
participate in ISP.
Adjustments to TRIM Output
The following adjustments to TRIM output are necessary to arrive
at appropriate gross cost estimates for ISP.
4
Upward Adjustments
Billions
Accounting Period Adjustment - As presently
0.3
formulated, monthly ISP benefits for a filing
unit would be based upon the previous twelve
months' income, utilizing a system which carries
forward for twelve months the amount of monthly
income in excess of the breakeven level for
the filing unit. This system. is somewhat more
responsive to fluctuations in monthly income
than is the calendar year accounting period
assumption which is built into TRIM.
Certification of Separate Economic Status -
1.0
TRIM assumes that all related residents
living together will be required to file
together. This is the general rule that
would be prescribed for ISP; however, ISP
rules would permit any subgroup of a house-
hold that can prove separate economic status
to file separately. It is difficult to assess
accurately how many people will be able to
satisfy this condition, but many who are able
will want to file separately (since they may
then receive greater benefits than if they
were the additional member of a larger unit
where they would not have a separate minimum
standard deduction)
Labor supply reduction - The evidence from
0.6
income maintenance experiments and studies
using Census data suggest quite modest re-
ductions in work effort occasioned by a
program such as ISP. While very few persons
would quit their jobs as a result of ISP
eligibility, some marginal hours of work
reductions might result among those recipients
who would not otherwise be participating in
a welfare program eliminated by ISP. As a
consequence their earnings would be lower and
benefits higher.
Emergency needs - The following three cate-
0.5
gories of households may have requirements
for a payment outside of the ISP to cover an
emergency need: (1) ISP eligible households
waiting for their first check (because of
payment lag in the system); (2) ISP recipients
5
Billions
households who have exhausted their current
payment; and (3) households which, because of
the accounting period and/or the assets test,
have low current income and no liquid assets,
but are currently ineligible for ISP. The
latter two categories are best dealt with at
state/local levels, perhaps with some Federal
cost sharing. The first category is more
easily seen as a Federal responsibility and
could be dealt with by the Federal government
or by a state/local entity which represents the
Federal government.
Work Test - Some Federal funds would have to be
0.1
provided to states for them to administer the
work test mandated under ISP.
Program administration - The IRS Task Force
1.2
estimates that the annual costs of ISP would
run somewhat over one billion dollars.
Downward Adjustments to TRIM Output
o
Assets screen - Estimates based upon studies of
2.2
the Survey of Economic Opportunity which provides
data on asset holdings of households cross
classified by income levels indicates that
fifteen percent or more of the filing units
that will be income eligible for the ISP will
have other resources sufficient to make them
ineligible to receive ISP benefits.
o
Under reporting of income - There is a substantial
3.0
amount of income that is not reported by respondents
to the Current Population Survey (and, therefore, is
not in our cost estimating income base), but which
would be picked up by ISP reporting, audit and
verification procedures. Independent data bases,
such as income tax reports, provide information
that make it possible to estimate the magnitude
of this under reporting.
o
Demographic Aging - A recent decline in the birth
0.4
rate has resulted in a significant reduction in
the average size of U. S. families. Between 1970
and 1974, average family size fell from 3.58 to
3.44. The demographic aging process in TRIM does
not adjust for this reduction in the number of young
children in families, and as a result, TRIM over-
states expected transfers to families with children.
6
Billions
Participation Rates - Substantially less than
4.4
all of the eligible households can be expected
to participate in ISP. It is estimated that
about 90 percent of eligible AFDC families,
90 percent of eligibles for SSI who are disabled
and 65 percent of eligibles for SSI who are
aged actually apply for cash benefits. The
current participation of eligible two-parent
families and non-aged, non-disabled adults in
Food Stamps is considerably lower, probably
averaging closer to 30 percent. Under a com-
prehensive nationally uniform cash assistance
program which is tied to the income tax system,
we can expect these latter two groups to have
substantially higher participation rates; there-
fore, we have assumed that 70 percent of eligible
families of this type will participate.
In adjusting for participation rates less
than 100 percent, costs were reduced by a sub-
stantially smaller percentage (about 30%) than units,
since participation rates in ISP are likely to
increase with the size of the potential benefit.
Total Adjustments Made to TRIM
The necessary upward adjustments to the TRIM output total $3.7 billion.
The total downward adjustments to TRIM necessary to account for all
the factors mentioned above is $10.0 billion. Thus, the net adjust-
ment to TRIM necessary to account for all factors mentioned above
is $6.3 billion downward. Since before these adjustments are made
TRIM indicates a gross cost of $31.1 billion for transfers alone,
the final estimate utilized for total ISP program costs is $24.8
billion.
Actually far less than 65 percent of those aged eligibles for
SSI are presently participating, but the official OMB projections
assume that this is the rate which will prevail in equilibrium --
i.e., after the program has been in place for a few years. Ac-
cordingly, the assumption of 65 percent participation underlies
the SSI offset estimate for FY 79 and we have used it as a base
in determining likely participation of the same group under ISP.
7
OTHER FACTORS WHICH MAY INFLUENCE COSTS
In addition to the factors detailed above and reflected in the cost
estimates provided, there are a number of other possible influences
on costs that should be noted.
Influences Which Could Go Either Way
Many of the adjustments to the TRIM output are based upon estimates that
have a fair amount of uncertainty attached to them. Although they are
based upon the best available evidence, they could easily be over or
under estimates of what would actually occur. In these cases, we have
attempted to pick realistic mid-range values.
Obviously marked changes from the overall economic or demographic
projections which form the basic input to the TRIM model would lead
to sizeable shifts in the cost estimates. Here we have simply relied
upon official troika and Census projections wherever they are avail-
able and made consistent, reasonable projections where not.
Upward Influences on Costs
The most important of the upward influences fall into two categories --
those that would be caused by regulatory or legislative changes in
programs being offset and those that reflect possible structural changes in
the ISP, particularly as it becomes the focus of Congressional actions.
A series of budget reduction proposals have been adopted by the Adminis-
tration which, if all were accepted by Congress, are estimated by OMB
to reduce the FY79 outlays for the programs eliminated by ISP by
$1.7 billion below the free fall estimates reported earlier in this
tab. These have not been assumed in the cost estimating process because,
particularly to the extent that recent experience is a guide, it appears
more realistic to assume that they will be rejected by Congress. However,
if some are adopted, this would have the effect of lowering program
offsets and raising ISP net costs.
There are potential elements of ISP which are not without merit, but which
were rejected for sound policy reasons as the program was developed. It is
possible that some of these would be reconsidered and adopted by the Admini-
stration at a later date if their inclusion were to advance substantially the
possibilities for Congressional passage of ISP and this plus were not
outweighed by the negative aspects that intially led to their rejection.
The only two such elements that seem at all likely to fulfill these
criteria at this time are a standard deduction for work related day care
expenses of single parent families and permitting present SSI recipients
8
who are members of larger households to file separately with a one-third
grant reduction without having to certify separate economic status. Each
of these is estimated to cost on the order of half a billion dollars.
Downward Influences on Costs
As was mentioned in the beginning of this tab the program offsets are
based upon the assumptions of no unplanned increase in participation
among the eligible populations, no liberalizations of existing programs
and no additional programs being added to the welfare system. The possi-
bilities for each of these are discussed briefly below, since the true cost
cost ISP should take into account changes that would be made to the wel-
fare system in the absence of this proposal.
o Increased participation
Participation in the Food Stamp program is running low overall
(under 50%) and particularly low for the non-cash recipient
group. A minor increase in these present rates is assumed
in the Food Stamp FY79 estimate. Because of the great
potential for increased participation in this program,
rapidly rising food prices and the increased publicity of
Food Stamps, the participation could easily increase by
much more than is expected.
Program improvements
If ISP is not adopted, there will be considerable interest
both within Congress and the Administration in making changes
in the present welfare system which further the goals of
efficiency, equity, adequacy, etc. such as instituting a
national minimum in AFDC and moving to consolidated grants.
(See Tab
for more information on these). These improve-
ments would increase Federal costs for the present system
by $1-$2 billion over the program offset estimates used
to cost out ISP.
Add-ons to the Welfare System
In the absence of a comprehensive cash assistance program
for the lower income population there will be continued
pressure to add on additional categorical programs to
fill "gaps" in the present system. Although most of
these probably could be resisted, others undoubtedly could not.
Foremost among the latter is the "Work Bonus" or some
other scheme to aid lower income workers, particularly
those paying OASDI payroll taxes.
TAB G
TAB G
ADMINISTRATIVE PERSONNEL COMPARISONS
The passage of the Income Supplement Program (ISP) would pro-
foundly affect personnel requirements among the various levels of
government. This paper estimates probable staffing requirements
according to the likely configurations for income support programs.
The options shown range from no change in the present system to a
major welfare replacement. The first section examines total staffing,
the second the ratio of administrative to transfer costs as an indicator
of administrative efficiency. Because so much uncertainty exists on
these matters, the paper concludes with a section listing some parti-
cularly important caveats. Appended is a note on the methodology used.
Total Staffing
Absent any change the public assistance system would continue to be
composed of Food Stamps, Aid to Families with Dependent Children (AFDC),
Supplemental Security Income (SSI), Emergency Assistance and General
Assistance.* The ISP initiative would completely replace the first
three and change significant aspects of the last two. (General Assistance
is solely a State program.) Table 1 shows that in FY 77,** with no changes,
total personnel needs would be about 137,000, of which about 27,000 would
be Federal and 110,000 State/local
Table 1
Public Assistance Personnel Needs with No Welfare Replacement and
No Major Changes in Present System
FY 77
Recipients
State & Local
Federal
Total
Employees
Employees
Employees
(million)
(thousand)
(thousand)
(thousand)
Food Stamps
25.6
25.6
3.0
28.6
AFDC
12.3
61.2
.8
62.0
SSI
5.9
23.4
23.4
State Administered
Supplements to SSI
1.4
14.1
-
14.1
General Assistance
0.9
8.7
-
8.7
109.6
27.2
136.8
*
This list ignores other income tested transfers, such as public housing,
Medicaid and veterans' assistance.
These figures were originally prepared when ISP was costed out to FY 77.
When costs were extended to 79, there appeared to be no compelling
reason to re-calculate personnel estimates, particularly given the
limitations of available data.
2
If we assume no replacement of the basic set of programs, it is
probable that one or more programs will be added. The prime
candidate is the Assisted Health Insurance Program (AHIP) com-
ponent of the Administration's Comprehensive Health Insurance
Program (CHIP). It is also possible that a Housing Allowance and
a Work Bonus will pass into law absent an ISP which would fore-
close their need. The upper panel of Table 2 summarizes these probable
situations should there be "No Replacement" of the present programs.
It is estimated that AHIP income information collection, a universal
Housing Allowance, and a Work Bonus would require 30,000; 40,000; and
3,000 new employees, respectively. It should be noted that AHIP or
something like it is likely to become law regardless of whether or
not there is a welfare replacement initiative. Thus, either way
AHIP will require additional personnel at some level of government,
but the amount needed to collect information on income and filing unit
characteristics would be very minimal if ISP exists and AHIP conforms
its comparable program elements to those in ISP (e.g., income and
filing unit definitions). Under these conditions the information
generated by ISP would be both available and useable to income test
eligibility under AHIP.
Total government employment for income support programs given welfare
replacement (i.e., ISP) would depend on the manner in which State
supplements were handled. The lower panel of Table 2 summarizes employ-
ment needs assuming ISP and with three different possible methods of
handling State supplements. (See Tab C for a discussion of the issues in-
volved in State supplementation.)
Public sector payrolls would be the largest if there were no Federal
administration of State supplements. This is because there would then
be, in effect, two parallel income transfer systems -- the Federal ISP
system and the several State systems running autonomous State supplement
programs. As Table 2 shows, Federal administration of State supplements,
whether for some or all States, involves little added burden for the ISP
agency. The ISP caseload would already contain most of those eligible
for State supplements, and the extra State supplement computation is a
simple matter for the automated Federal system to handle so long as the
States rigorously adhere to Federal definitions and categories (the only
conditions under which the Federal government would administer State
supplements). Thus while 122,000 employees (58,000 Federal and 64,000
State/local) would be needed in the "no Federal administration" case, only
66,000 (60,000 Federal and 6,000 State local) would be needed if the
Federal government administered all supplements. In the more likely
intermediate case of partial Federal administration of State supplements,
total employment would be more in the area of 70,000. The actual figure,
of course, depends upon exactly how many States would opt for Federal
administration.
3.
Table 2
Public Assistance Personnel Needs with and
without Welfare Replacement
State & Local
Federal
Program
Employees
Employees
Configuration
Total Employees
(thousand)
(thousand)
(thousand)
No Replacement
110
27
137
" "
a
w/CHIP (AHIP)
30
+30
w/Housing Allowance
b
40
+40
w/Work Bonus
3
+ 3
Replacement (ISP) and
No Federal administration of
State supplements
64
58
122
Optional Federal administration
of State supplementsᶜ
11
59
70
Federal administration of all
State supplements
d
6
60
66
a. AHIP collection of information on income and other filing unit
characteristics only; AHIP will require additional personnel for
other functions whether or not ISP exists.
b. Distribution of effort between levels of government unclear at present.
C. Precise figure depends upon State decisions on administration. The
estimate here was derived on the assumption that those States which have
opted for Federal administration of State supplements to SSI would also
do so for ISP.
d. It is extremely unlikely that all States which might choose to supplement
ISP would also opt for Federal administration; however, this line is
shown for comparison purposes. The residual group of State and local
employees is shown on the assumption that there would be a State-
administered Emergency Needs Program.
4
Administration Efficiency
Staffing figures are only one measure of relative administrative costs.
In programs such as Food Stamps, there are significant additional ex-
penses involved in the operation of the program. To obtain a more
complete indication of total costs and to demonstrate the relative
efficiency of different modes of making transfer payments, the total
administrative costs of individual assistance programs were divided by
their gross transfer costs to determine as a percentage of transfers
the amounts additionally required for administration.
As can be seen in Table 3, the Income Supplement Program has the
smallest ratio of administrative costs to transfer costs of any of the
other programs -- approximately half that of present cash programs, and
even less than that of Food Stamps. If the Income Supplement Program
replaces other transfer programs, its potential for administrative
efficiency would allow more benefits to be transferred at a lower relative
cost.
Table 3
The Percentage of Total Administrative
to Gross Transfer Costs
Program
Percentage
AFDC
9.5
SSI
9.1
ISP
4.5
Food Stamps (to non-public
15.0*
assistance recipients)
Caveats
Data limitations, the still changing nature of ISP and CHIP program
designs, and the uncertainty surrounding administrative and substantive
choices of the States in current law or future programs mean that
The figure for Food Stamps is an estimate based on actual program data
and limited information which gives a general indication of the magnitude
of hidden and unreported costs. Reported costs are close to 10 percent
of transfer costs and do not reflect joint program costs which have not
been allocated to overhead, indirect expenditures and some administrative
costs. State data reported to the Senate Committee on Nutrition and Human
needs and a recent study in Los Angeles County indicate that these costs
probably add another 40 to 60 percent to total administrative expenditures.
5
estimates presented here can only be general and tentative. These
limitations arise from several sources:
The lack of reliable information on current State public
assistance staffing - The existing data on the number of
State and local staff performing cash eligibility de-
terminations are unreliable and often officially not
available, primarily because of weaknesses in the manner
in which States report personnel statistics. One obvious
defect is the shift of personnel into the social service
category with its higher Federal reimbursement formula,
leading to an understatement of the number of staff engaged
in cash transfer related duties.
The lack of State and local cost information on the Food Stamp
Program - The only reliable Food Stamp cost data currently
available are those related to Federal program costs and
Federally-cost-shared personnel. These costs only cover a
portion of total Food Stamp administrative requirements, and
most States and localities do not separate out or report
their total direct costs and substantial indirect costs. Thus
estimates of the total figures can only be approximate.
*
Uncertainty about developments in present and proposed programs -
There are many factors which could materially affect the estimates
developed here
- If, as some predict, the Food Stamp program experiences very
rapid growth over the next few years, the administrative burdens
borne by State and local governments could increase to the
point where they could no longer be handled as marginal addi-
tions to staff and facilities needed for other functions
- Passage of the Comprehensive Health Insurance (CHIP) is
possible and enactment would require the States to significantly
increase staff levels to handle the eligibility functions re-
quired for the assisted portion (AHIP) of the program, including
the collection of relevant income and asset information.
-
Similarly, the shape of the State supplemental portion of the
ISP is still unknown. The implications for total staffing under
a Federally-run supplement are very different from those if
the supplements are left as the sole responsibility of the States.
In either case, the behavior of States in deciding whether or not
*A recent legislative change provides for a 50 percent Federal matching
of all Food Stamp administrative costs. When this provision becomes
effective more complete administrative cost data should become available,
permitting the development of more precise administrative cost estimates.
6
to supplement, and, if given the option, whether or not to
administer their own supplemental programs or to transfer
responsibility to the Federal agency can only be guessed on
the basis of tenuous assumptions. In addition, State staff
made superfluous by a Federal program will not always be
eliminated immediately but will decrease through attrition
over time.
Tentative nature of Federal personnel estimates for an
ISP - Another, less serious, reason for uncertainty regarding
administrative staff comparison is that although the staffing
estimates for the ISP were derived in a systematic manner, the
number of unknown factors in the early stages of program develop-
ment make it more difficult to achieve the degree of precision
in these projections which will be possible later in the planning
process.
Appendix: Technical Notes
Personnel needs for FY 1977 were estimated by calculating current
ratios of recipients per employee and applying these ratios to expected
recipients in FY 1977.
Table 4
Recipients per Employee
Program
State & Local Ratio
Federal Ratio
Food Stamps
1001
8,630
AFDC
201
15,409
SSI
99
252
GA
104
Recipients per Employee
1. Recipients per employee for state and local government have
been calculated by dividing the number of recipients by the
number of employees engaged in income maintenance for each
program. Employee figures were provided by the National
Center for Social Statistics. For state-administered
supplementation of SSI, the number of employees and recipients
in the adult çategories in FY 1972 was used to calculate the state
and local ratio.
2. Federal recipients per employee were calculated in the same
way. For Food Stamps, the number of employees as reported
in the Federal Budget was used. For AFDC the number of
Federal employees was estimated to represent 28 percent of
the SRS staff, since this is the percentage of the funds
dispensed by SRS that goes to AFDC. For SSI, the number of
staff needed in FY 1975 as estimated by SSA was used.
Personnel Needs with and without an Income Supplement Program
1. For existing programs, the number of Federal, state and local
employees was calculated by taking the estimated recipients
and dividing by the number of recipients per employee. This
assumes that the relationship between recipients and employees
is linear. State and local recipients per employee for AFDC
and the adult programs were used for the estimates of state
administration of AFDC and SSI supplements. Absent any other
change, only those states now administering SSI supplements
were assumed to administer them in FY 1977. Employees
administering the supplement for those states that have
opted for Federal administration are included with Federal
employees administering the regular SSI program.
2. FY 1977 recipients for AFDC and SSI were estimated by
projecting the caseload estimate shown in the FY 1975 Budget.
Food Stamp recipient estimates were developed from the TRIM
model using CPS data. State supplements were handled by
extrapolating from the current situation in a similar manner.
3. With a reform, 30 states will supplement AFDC and 10 states
SSI, containing 64 percent and 32 percent of the caseload
respectively. These estimates are based on a comparison of
the ISP benefit levels with the sum of AFDC or SSI benefits
and the bonus value of Food Stamps. These estimates should be
considered an upward bound for reasons discussed in Tab C.
The SSI benefit estimate additionally includes any state
supplements. Although fewer states would administer a supplement
to SSI recipients under a reform program, the percentage of
the caseload in those states which are assumed to supplement
the ISP could be greater than that in the 18 states currently
administering their own SSI supplement. This could occur
because some states with large caseloads like New York
have chosen Federal administration for their supplement
under SSI but might be required to administer their
supplement under ISP.
These calculations reflect the present levels. The absence
of any provisions in the proposed program for Federal cost-
sharing or hold harmless guarantees in supplementation, and
possibly no participation in administration makes this
assumption problematical. These estimates may therefore
overstate total state and local personnel needs under ISP.
Another factor which may make these estimates too high is
that supplementation has been assumed in some states in
which the actual state benefit would be very low. Few
states are in fact likely to supplement unless the average
benefit would be significant.
4. The recipient estimate for ISP is taken from the IRS Task
Force Report adjusted to reflect changes in the estimated caseload.
TAB H
TAB H
COMPARISON OF THE INCOME SUPPLEMENT PROGRAM
TO PLAN OF SUBCOMMITTEE ON FISCAL POLICY
Recently Congresswoman Martha Griffiths introduced a comprehensive
welfare reform bill titled "The Tax Credits and Allowances Act of
1974" (H.R. 17574). It provides for major changes in the Federal
income tax structure and considerable tax relief; for replacing
the Food Stamp program and the Federal portion of AFDC in part with
a new, Federally funded and administered means-tested cash transfer
program and in part with rebatable tax credits; and for a variety of
other changes in related income transfer programs, such as Unemploy-
ment Insurance.
In significant ways, especially in overall theory, the Griffiths' plan
and the Income Supplement Program are quite similar. In equally
significant ways they differ. This paper will first outline the major
elements of the Griffiths' proposal and then compare and contrast
that plan with the Income Supplement Program.
THE GRIFFITHS' PROPOSAL: INCOME SECURITY FOR AMERICANS
The Grifffths' 1 Income Security for Americans plan would create a new
income assistance system by:
Eliminating personal exemptions and the low-income allowance
(or "minimum standard deduction") in the Federal income tax
and replacing them with a $225 refundable tax credit for each
individual in the country. Such a tax credit would extend
tax relief to all families with income less than about $23,500.
Since it is refundable, current non-filers and non-taxpayers
would also benefit.
Eliminating the AFDC and Food Stamps programs and replacing
them with a new Allowance for Basic Living Expenses (ABLE)
program for all low-income families and individuals with the
exception of those eligible for SSI.
Retaining, but restructuring somewhat, the Supplemental
Security Income program.
Abolishing the itemizable day-care deduction in the Federal
Income Tax in favor of a new adjustment to gross income in
the tax system and in the ABLE program for work expenses.
2
Rebatable Tax Credits. The current $750 personal exemption and the
low-income allowance of $1300 would be replaced by rebatable tax
credits of $225 for each individual in the country. The effect of
this change, along with complementary measures to integrate the
grant programs with the tax system, is to raise the tax exempt
income level (i.e., the highest income at which no tax liability
is incurred) for a typical four person family from its current level
of $4300 to $7200. In addition, the introduction of the tax credit would
extend tax relief to all four person taxpaying units with income of
less than $23,500.
Since the tax credit is rebatable, units that incur no tax liability
would have the full credit paid to them in cash. Units that have a-
tax liability of less than the tax credit for which they are eligible
would receive the difference between the credit and their tax liability.
The key point is that the unused tax credits are rebated.
The Allowance for Basic Living Expenses Program, ABLE. Federal funding
would largely be ended for Aid to Families with Dependent Children
(AFDC), and the Food Stamp program would be abolished and be replaced
by a new system of allowances operated by the Internal Revenue Service
(IRS) in conjunction with the Federal income tax. These Allowances
for Basic Living Expenses (referred to as ABLE grants hereafter)
would be payable to qualified low-income families and individuals
every month. Allowances would be uniform throughout the Nation and
available to all the poor, except the aged, blind, and disabled and
their dependents who would remain covered by the Federal Supplemental
Security Income (SSI) program. The basic structure of the ABLE program
is as follows:
Benefits: The annual basic benefit for a two-parent,
two-child family with no other income would be $2700,
while that for a one-parent, three-child family would
be $2100. This more generous treatment of married
adults is considered to be an important feature of the
bill. The following table presents basic benefits for
various family types:
3
ABLE Benefit at
Family Type
Zero Income*
Unrelated Individual
$ 825
Childless Couple
2050
One Parent, One Child
2050
Two Parents, Two Children
2700
One Parent, Three Children
2100
Benefit to succeeding children
through:
six
225
seven and above
0
Benefit Reduction Rates: ABLE payments would be reduced
as other income accrued to the family and the benefit
reduction rate would vary depending on the type of income.
The benefit reduction rates are as follows:
- Earned income -- 50 percent on earnings less deductions
for social security taxes, implying that most earners
would face rates no greater than 47 percent.
- Public housing subsidies -- 80 percent.
- Veterans pensions and farm subsidies -- 100 percent.
- All other income (e.g., property income, retirement
benefits, child support) -- 67 percent.
Breakeven Income. The level of income at which a family
would become ineligible for ABLE benefits would, because
of the complex schedule of benefit reduction rates and a
proportional work expenses deduction, depend on the source
of the family's income and the labor force activity of the
These benefit levels may seem relatively low to anyone familiar
with the present welfare system. It must be remembered that the
ABLE benefit must be combined with the value of the tax credit to
determine the basic benefits in the ISA plan. This interaction
is examined below.
4
adults. However, "normal" breakeven incomes can be
determined. For a two-parent, two-child family not
entitled to the work expense deduction and with income
only from earnings not subject to the social security
payroll tax, eligibility would cease at an annual income
of $5400. The more typical case, however, is a similar
family in which both parents work in covered employment.
In that case the breakeven income level would be about
$6000 because of the payroll tax deduction and the work
expenses deduction.
Tax Credit-ABLE Interaction. The benefit levels in the ABLE program
may seem low to those familiar with benefits in current welfare
programs (e.g., AFDC and Food Stamps). In this regard the interaction
between the revised tax system and the ABLE program must be examined.
The net disposable income to an ABLE family with no other income is
the sum of its ABLE benefit and the amount of its rebated tax credit.
Thus, $900 in rebated tax credits (4 times $225) would be added to
the ABLE basic benefit of $2700 for a four-person family, yielding
to a family with no other income total benefits of $3600 (identical
to that proposed for the Income Supplement Program).
The effects of the combination of ABLE payments and tax credits may
be seen by examining the ABLE and/or tax status of a four person
family (with no deductions) at various income levels:
ABLE and/or
Income
Tax Status
0 - $5400
Unit receives an ABLE payment that varies
with its income: from a $2700 benefit at
zero income to a zero benefit at income of
$5400; unit receives a $900 tax credit and
pays no taxes.
$5400 $7200
Unit has net tax credit which falls from
$900 at income of $5400 to zero at income
of $7200. Unit receives no ABLE payment.
$7200 - $23,500
Unit incurs net tax liability that would
be lower than that under current law. In
income range of $7200-$7563 unit would use
a new, alternative tax computation method.
(As indicated above, a more typical case would be for families that
have deductions, the consequence of which is that these income limits
would be raised somewhat.)
5
Tax credits would be rebated to ABLE and SSI recipients, together
with benefit payments under those programs, by the IRS and the SSA
respectively. Those families eligible for tax rebates who are not
ABLE or SSI participants (e.g., a family of four with earnings of
$6600) would apply to the IRS for their rebate, although the ad-
ministrative means to do this are not clearly spelled out in the plan.
Tax Credit and ABLE Costs. The net cost to the Federal government
of the Income Security for Americans program is estimated at $15
billion in 1977 -- $6.8 billion additional in transfers and $8.2
billion in tax relief. In current dollars these costs are $12.9
billion, $5.7 billion, and $7.2 billion, respectively.
6
COMPARISON OF THE INCOME SECURITY FOR AMERICANS
AND INCOME SUPPLEMENT PROGRAM PROPOSALS
The ISA and ISP proposals each would create a universal means-tested
cash transfer system that in significant ways would be tied to the
Federal tax system. This section will outline areas where the plans
are similar or different.
Components of the Income Assistance System. The ISA proposal would
retain a somewhat altered SSI program, whereas ISP would fold SSI,
AFDC, and Food Stamps into one cash transfer program. The Federal
government would therefore, under the ISA approach, maintain two
separate income assistance programs, administered by separate agencies
(IRS and SSA). Provisions of ISA minimize potential overlaps between
SSI and ABLE.
Integration with the Tax System. The ISP would have a simpler integration
with the tax system than the ISA plan. Under the ISP proposal, a
family's cash supplement would gradually diminish from the appropriate
basic benefit to its tax liability threshold, an amount equal to its
personal exemptions and standard deduction in the tax system. Beyond
that tax exempt level, the family would incur a tax liability according
to the present tax schedule with one exception. Under current planning,
its appropriate standard deduction would be phased down over a range
of taxable income until it equals the $2000 standard deduction in
current law.
The ISA plan requires a more complicated integration, In order to
forgive taxes at levels below the points at which families cease to
be eligible for a cash transfer (i.e., their breakevens), the ISA
would in effect create an alternative tax schedule with standard
deductions equal to those breakeven points and marginal tax rates
equal to those in the transfer programs (i.e., approximately 50 percent).
A family would compute its tax liability under either the regular
tax schedule (15 percent standard deduction up to $2000 and the present
marginal tax rates) or the alternative tax schedule apply its tax
credits against both figures, and pay the lesser of the two amounts.
Benefit Structure. The ISA makes a clear distinction between a second
parent and an additional child. The former brings to the family an
additional $600 relative to the latter. The ISP benefit structure
does not make such a distinction. The effect of the ISA treatment is
to provide what the ISA report calls a "marriage bonus. Relative
to current programs the ISA would make larger families relatively
worse off.
7
Except for that distinction, the basic benefit levels of both plans are
quite similar. However, the benefit levels of the ISA and ISP plans
depart somewhat as income accrues to a family. This is because the
benefit reduction rates for different kinds of income in the two plans
differ. In addition, though the earned income breakeven levels for
transfer payments theoretically are the same those in the ISA would be
higher because of deductions for work expenses and payroll taxes. In
essence, for those who work, the ISA has a lower benefit reduction rate
on earned income and, as a result, a higher breakeven income level.
Work Test. The ISP proposes a work registration requirement modeled
on that in the Unemployment Insurance system. The ISA proposal
"recommend (s) that a work registration requirement and the attendant
costly bureaucracy not be attached to a new program." The Griffiths'
report notes that "We have found little evidence or experience to
support -- and several grounds to oppose -- reliance on administrative
pressure and sanctions. "
Filing Unit. The two plans depart considerably on filing unit definitions.
ISP has a quasi-household definition (all persons related by blood,
marriage, or adoption living under one roof) as opposed to the filing
unit definitions in ISA which are patterned more on those in the tax
system. The distinction in the ISA plan between ABLE units and SSI
units enlarges considerably the number of separate filing units.
Benefit Reduction Rates. Except for those with considerable amounts of
non-wage and salary income, the ISP has one benefit reduction rate,
50 percent, that applies to all income. For those with non-wage and
salary income in excess of their basic benefit, the benefit reduction
rate is 100 percent on that amount.
The ISA has a complicated but sophisticated structure of benefit reduction
rates. While the nominal rate on earnings is 50 percent, the effective
rate is at most 47 percent for those in social security covered employ-
ment and/or those who take advantage of work related expense deductions.
The rates on income from other sources, as noted above, vary according
to those sources.
Treatment of Work Related Expenses. The ISP, as currently designed,
makes no provision for the deduction from income of work related expenses.
In contrast, the ISA plan in its ABLE component permits single-parent
and husband-wife families with children to deduct from income a fraction
of gross earnings (10 percent to 20 percent, depending on family type)
up to a maximum ($500 to $1500). Similar deductions would also be
permitted in the positive tax system. The effect of this treatment of
work related expense would be to raise transfers and lower tax revenues.
8
Income Definition and Accounting System. ISP and the ISA's ABLE component
generally share common definitions of income and a similar accounting
system. The income definition and accounting system in SSI would
continue unchanged, at least initially. For purposes of the rebatable
tax credit, it appears that either the tax system's income definition
or ABLE's income definition would be used whichever yields the greater
benefit to the filer. The report does not discuss in detail the
accounting system implications of the rebatable tax credit.
Assets Test. The ISP plan would exclude from consideration assets which
are difficult to value, difficult to liquidate, or are given preferred
treatment in the tax system as a reflection of social values (e.g., assets
needed for a business or a personal house). This leaves essentially
only liquid assets against which the assets test is applied. A unit
is categorically excluded from ISP if they are above the appropriate
limit. The ISA plan does not have an assets limitation as such.
Instead it would include in the income base the yearly income value
of all assets and reduce benefits by 67 cents for each dollar of such
income value. While the ISA approach is more equitable,it is far more
difficult to administer and was explicitly rejected by the IRS Task
Force.
Protection of Current Recipients. The ISA plan would require that the
states make supplemental payments, for two years after its enactment,
to families receiving AFDC in a base period in amounts needed to main-
tain total family income at base period levels. These state supplements
would be additional to the ABLE grant and the rebatable Federal tax
credit. The ISP plan opposes any "grandfathering" of current recipients.
Under the ISA plan, .it is not clear whether just basic AFDC benefit
levels (plus 80 percent of any Food Stamp bonus value), are grandfathered,
or whether each state's AFDC computation rules are also brought forward
in time. The need for grandfathering in ISA is greater than in ISP
because of the former's lower basic benefit levels for single-parent
families. States would administer their own state supplements.
The ISA provides for the protection of states against any incremental
costs resulting from the required grandfathering by holding the states
harmless at the calendar 1976 share of AFDC payments.
Administration. Under ISP, the entire tax and transfer system would be
administered by one agency. The Secretary of Health, Education, and
Welfare has stated his view that the IRS is the appropriate administering
agency; failing that, he prefers a new agency within Treasury. The
tax credit and ABLE components of the ISA would be administered by
the IRS, while administration of SSI would remain with the Social Security
Administration. It is probable that under ISA, the IRS would have to
create two new systems -- one for ABLE and one for the rebatable tax
credit -- in addition to its current structure for collecting the
9
Federal income tax.
Costs. The ISP and the ISA differ considerably in net cost to the Federal
government. The ISP would cost, in today's dollars (December 31, 1974),
$3.4 billion in increased transfers and would cause $4.1 billion in
reduced taxes. The ISA would cost in today's dollars $5.7 billion in
increased transfers and would cause $7.2 in reduced taxes. The reasons
for the higher costs and tax relief in ISA are:
-- The lower benefit reduction rate in ABLE, because of
the payroll tax and work expense deductions.
The higher breakeven levels, which extend eligibility
to a larger population.
-- The retention of the SSI program, leading to a greater
number of filing units in the total ISA transfer (ABLE,
SSI, rebatable tax credit) population. In addition,
the number of ABLE filing units is greater than if ISP
filing units rules were used in that program.
-- The tax system's narrower definition of income might
allow individuals or families who have considerable
tax free income or substantial deductions to receive
a rebated tax credit.
-- The ISA's tax credit and its introduction into the tax
code of ABLE rules as an alternative means to calculate
tax liability, extend greater tax relief than the approach
in ISP.
-- The ISA would introduce into the tax system a work
expense deduction as an adjustment to gross income.
This causes greater aggregate tax reductions than the
current itemizable personal child care deduction which
ISA would eliminate.
I TAB
TAB I
LABOR SUPPLY AND PROGRAM COSTS
INTRODUCTION
Static economic theory predicts that taxes and transfers have the
potential to reduce work effort: taxes because they reduce the
reward from work and transfers because they make work less necessary.
That theory, however, gives no clue as to the magnitude nor the
significance of any reduction. For many years economists and
others have been concerned lest the high marginal tax rates (i.e.,
taxes on the last dollar earned) in progressive tax systems reduce
the incentive to work of earners of high incomes. Nevertheless,
investigations into the work effort response of physicians and
lawyers have detected no such response to high rates of taxation.
In the 1960's comprehensive income-tested cash assistance plans,
which provide a basic benefit paid to families with zero income and
then reduce that benefit as family earnings increase, began to be
discussed. People soon realized two things. First, the amount of
the benefit paid and the rate at which it is reduced as earnings
increase' could reduce work effort. Second, the welfare system as
it then existed (and now exists) was of this same basic structure
and could be reducing the work effort of welfare recipients.
There are several reasons to be concerned about reductions in work
effort caused by a transfer program.
Work itself is valued. Moreover, since transfer
benefits are financed by taxes levied on those
working, it is not fair for transfer recipients
who could be working to choose leisure and be
supported by taxpayers.
If a transfer recipient reduces his/her work effort,
family earnings and thus family income falls. Since
the amount of transfer varies inversely with income,
a reduction in work effort has two undesirable
consequences:
This is the benefit reduction rate, which is like a tax rate in
its effect because it determines how much total income increases
with an increase in earnings.
2
the cost of the program to the Federal
treasury is increased; and
the efficiency of the program is reduced
since it takes more Federal funds to pro-
vide a given standard of living after the
work effort reduction than before.
A: reduction in work effort means a reduction in the potential
level of goods and services that can be produced by the nation's
work force. That is, if all members of the labor force were
employed, voluntary reductions in work effort by some would
result in a reduction in the gross national product. To the
extent that the economy is operating at less than full employ-
ment, any voluntary work effort reductions would cause a reduc-
tion in potential GNP, but no change in actual output. Economists
call such output reductions a "real" cost to society since society
actually (or potentially) loses something -- the goods and
services not produced by those who voluntarily reduce their work
effort. This is to be distinguished from the cost noted in
the above paragraph which involves a redistribution of, rather
than a reduction in, society's resources.
It should be noted that not all reductions in work effort are un-
desirable. Many in society would prefer that mothers of young
children be home caring for those children rather than be working
out of the home (or at least that they have the option of doing so).
Also, a reduction in hours worked, or even a resignation to
enable one to search for a better job or to engage in training,
can in the long run pay dividends to society as well as to the
individual. It should also be noted that labor supply response
to a transfer program can take two forms: (1) reducing hours
worked, and (2) quitting a job entirely. While both are worri-
some, the latter is generally considered the more serious concern
since it raises the specter of the able-bodied loafer.
SOURCES OF INFORMATION ON LABOR SUPPLY RESPONSE
Concern over possible work effort reductions led to the launching
of a series of government-sponsored, controlled experiments with
income transfer plans which in many ways are quite similar to
ISP and to a very large number of statistical studies of existing
data. The purpose of these studies was to produce quantitative
estimates in the three areas of concern discussed above: work
effort reduction, program cost increase, and reduction in the
gross national product.
There are two basic types of studies that produce estimates of
labor supply responses to income-tested transfer programs.
3
Experimental Studies. In the New Jersey Graduated Work Incentive
Experiment, the results of which were published by DHEW in
December, husband-wife families were actually enrolled in various
income-tested cash assistance plans with different levels of basic
benefits and benefit reduction rates. Their incomes, work effort,
and other characteristics were followed and recorded. Similar
data were also gathered over the same three year period from
members of a "control group" of quite similar families who re-
ceived no benefits from the experiment. The experimental and
control families were then compared with the knowledge that
differences in behavior were caused primarily by the income
transfer plan. Basic benefits in the experiment were 70%, 100%
and 125% of the poverty line ($4550 for a family of four in 1974)
and benefit reduction rates were 30%, 50% and 70%. Statistical
methods were applied to analyze the data in order to estimate the
effects of the various plans on measures of work effort. Other
experiments are investigating similar concerns, primarily for
other target populations.
Studies Using Census Cross-Section Data. The purpose of the ex-
periments described above was to generate data reflecting the
behavior of transfer program participants. In addition, other
sources of data exist which contain observations on the income,
earnings, and work effort of a wide range of persons (but not the
same persons over time, as is the case with the observations in
the experiment). These data bases, collected as a matter of course
by the Census Bureau and other groups, can also be used to estimate
the effect on work effort of a program like ISP,
ESTIMATES OF LABOR SUPPLY RESPONSE
The range of estimated work effort responses to transfer plans is
large and is dependent on the statistical methods used, the data
base, the population in question, and a number of other factors.
Nevertheless, some generalizations from the data seem permissible
and are presented below as the best information available on the
subject. These changes in work effort will then be used to derive
the consequent changes in program cost and in GNP. The three prin-
cipal areas of concern will be discussed in turn.
HEW is currently funding three other income maintenance experi-
ments. Two, Seattle-Denver and Gary are still in the operating
stage. Data from the rural experiment are currently being
analyzed. Preliminary results suggest findings consistent with
those from New Jersey.
4
Work Effort
The results of the New Jersey experiment suggest that very few
male family heads, most of whom would be newly covered by ISP,
would quit their jobs. Hours reductions, the experiment suggests,
would average about six percent. While it is difficult to predict
how various workers will react, it is likely that much of this
hours reduction would reflect reduced overtime and moonlighting.
Among wives with working husbands the reduction would be con-
siderably greater, ranging up to 40%, although the base from
which this reduction might occur is quite small since very few
low-income families have wives working regularly in addition to
the husband.
Many studies of the work effort response of male family heads using
cross-sectional Census data have been undertaken. Among those
considered to be the most sound methodologically, the range of
work effort reduction for male family heads is predicted to run
from a very small percentage to 15-18 percent. The average esti-
mate from among these studies, about eight percent, is roughly
consistent with that found in the New Jersey experiment. Esti-
mates of work effort response for wives from the cross-sectional
studies are also quite consistent with the experimental results.
There have been no experimental and relatively few cross-sectional
studies of the labor supply behavior of unrelated individuals and
older persons. Generally, the few existing studies suggest work
effort reduction on the order of 15 percent.
As is noted in the qualifications section below, much of the ISP
recipient population is now covered by transfer programs which
expose them to greater potential work disincentives than those
to be found in ISP. In addition the entire ISP-eligible popu-
lation (including unrelated individuals) is currently eligible
for Food Stamp benefits. The estimate of change in program costs
has been adjusted to reflect the existence of these current-law
transfer programs.
Program Costs
If hours worked are reduced, income will fall and as a result
program costs will rise. It is estimated that the labor supply
reduction that is predicted by the existing literature would lead
to an increase in ISP program costs of approximately $600 million.
This amount is included in the basic program cost estimates as
discussed in Tab F.
5
Gross National Product
A reduction in the amount of work would reduce society's capacity to
produce. Employing reasonable assumptions regarding how such a reduction
would affect the economy, it is estimated that as a consequence of ISP,
and assuming roughly full employment in FY 79, GNP might fall by about
$1.7 billion or less than one-tenth of one percent of FY 79 GNP.
CONCLUSION
It is unlikely that the ISP would result in much work effort reduction
among men that support families. Indeed, popular concerns about such
an eventuality seem to have been much exaggerated. The modest labor
supply effects we might expect led us to add $ 600 million to program
costs which is reflected in the cost data throughout this proposal.
This estimate can be considered an upper bound in that it assumes that
the work test would have zero impact. In fact, what scant evidence there
is on the efficacy of work tests indicates that they can be expected to
have little effect.
A1
APPENDIX: CAVEATS AND QUALIFICATIONS
As noted in the text, estimating labor supply response is a
complex undertaking. This appendix will list a number of factors
to be borne in mind when using the results of labor supply
studies.
The New Jersey experiment introduced a temporary change in the
lives of participants and for this reason may not be fully re-
flective of their true long run behavior in response to a
permanent program. Also, during the experiment the state of
New Jersey changed the structure of the local welfare system
by adding an unemployed fathers component to AFDC. It is unclear
how these factors may affect the results, but on balance a modest
underestimate is likely to have occurred. Further analyses of
the data for New Jersey are underway and it is expected that more
information on these issues will be forthcoming.
The basic assumption of the cross-sectional studies, that the
measured response to wage and income variations in the data
accurately reflects the likely behavioral response to an alter-
ation in transfer policy, is a tenuous one. In addition, the
cross-sectional estimates do not account for the fact that
workers in families whose incomes are above, but close to, the
breakeven point (income level at which eligibility ceases) might
reduce their work effort so as to qualify for benefits. The
magnitude of such an effect is difficult to gauge, but to the
extent that it occurs the estimated change in labor supply would
be too small. Hence the estimates of change in work effort have
been adjusted upward to reflect this problem.
Another problem in using the results of the labor supply studies
to predict behavior is that many participants in any new transfer
plan will have been receiving benefits under existing programs,
such as AFDC or Food Stamps. For this reason, the existence of the
basic benefit and benefit reduction rate in ISP will not be a new
event in the lives of participants and ignoring this fact could
lead to considerable overestimates of labor supply response. There
is no fully satisfactory way to handle this problem. For the pur-
poses of producing the estimates presented in the text, the
following assumption has been made: the ISP will produce no change
in the work effort of AFDC and SSI recipients. This is reasonable
since the basic benefit and benefit reduction rates in the three
programs are not too dissimilar.
A2
All those who would be eligible for ISP benefits are currently
eligible for Food Stamp benefits. The Food Stamp basic benefit
and benefit reduction rate are one-half and 60 percent of those
in ISP, respectively. Thus even for members of intact families,
childless couples, and unrelated individuals, the potential work
disincentive effect of ISP would not be new. In order to account
for this fact, the reduction in earnings for those currently covered
by Food Stamps and to be newly covered by ISP has been reduced by
40 percent.
TAB J
INCOME SUPPLEMENT PROGRAM WORK TEST
Available evidence suggests that only in rare instances would the receipt
of an Income Supplement Program benefit cause persons to cease working.
Nevertheless, in order to insure that none can question the integrity
of the program, I am recommending that the ISP legislation mandate the
states to operate, for specified categories of recipients, a regis-
tration-type work test.
This tab briefly discusses the issues involved in the design of a
work test and describes the principle elements of the recommended
form of work test.
Basically there are three issues involved in developing a work test:
At what level of government -- Federal or state -- should
the work test be administered?
How much manpower service delivery should be authorized by
the work test? and
What administrative mechanism should be used to deliver services?
In particular, should existing delivery systems and legal
authority (ies) be used or should new mechanisms be developed?
I believe that the experience of the Federal government's manpower and
social service programs over the last decade has taught us that such
services are best administered by state and local government. This view
is central to the block-grant approach behind the new Comprehensive Employ-
ment and Training Act of 1973. Among other things, this new Act closed
down the programs that tried to create a delivery system directed from
Washington. Thus, a state-administered work test fully supports
the Administration's view of the appropriate distribution of functions
across levels of government. In addition, the alternative of a Federally-
administered work test can easily become very expensive. It is well to
recall that the second version of FAP contained a Federally-administered
work test which became so heavily laden with supportive services and the
costs of creating a new delivery system that over 30% ($1.7 billion) of
H.R. 1's net welfare expenditures would have gone to such ends rather than
direct cash assistance.
The questions of the level of service delivery and which delivery mechanism
are closely related. Experience with the heavily service-oriented work
requirement in the Aid to Families with Dependent Children program sug-
gests that such work tests are expensive, administratively cumbersome
and cost-ineffective. Many evaluations of the manpower programs launched
2
in the 1960's suggest that in the absence of an adequate number of
jobs, these programs, too, are not cost-effective. Thus, a
work test that both well serves those subjected to it and provides
for simple and efficient government would stress job finding as a
goal.
The discouraging evidence on the likely efficacy of a wide range of
manpower and social services suggests that the Federal government
should not require their use. Instead, the Federal government should
make certain that those ISP recipients who could probably profit from
assistance in job finding be required to accept such services. Job
finding services will ultimately be provided at a local level since
their provision at any other level makes little sense (although, of
course, various localities should share information so that regional
disparities in labor supply and demand do not persist). Thus, state
administration of the work test is indicated with the states developing
procedures within Federal guidelines that spell out the Federal govern-
ment's overall goals for the ISP work test. It is important to remember
that such a Federal-state relationship already exists with respect to
the work test in the states' Unemployment Insurance programs, and there-
fore the existing Federal-State Employment Service network already is
equipped to perform precisely the tasks envisioned here for the ISP
work test.
Finally, the absence of a work test in ISP could be easily challenged
on equity grounds. The Federal government, as already noted, mandates
a work test in Unemployment Insurance, a Federal-state program in which
the Federal presence is relatively restrained and which is based on
"social insurance" principles. It would be inconsistent for the Federal
government to impose a less stringent work requirement on recipients of
ISP which will be a fully Federal endeavor financed from the general
revenue (with the possible exception of state supplementation programs).
Description of the Work Test
The legislation enacting the ISP would mandate the states to operate a
work registration-type work requirement and provide funds for that
purpose. The major features of such a work test would be:
0
Federal regulation or legislation would establish two types
of recipients. The first type would consist of all those who
would be categorically excluded from the work test, such as
the aged, blind, and disabled population; minors; those needed
to care for members of the two previously mentioned groups;
and the already employed. The second type would include the
remainder -- those presumptively able bodied persons with no
child care or other home responsibilities and who are not
already employed.
3
The presumptively able bodied recipients of ISP benefits
who are available for job placement would be referred to
the State Employment Services for assistance in obtaining
an appropriate job or training opportunity. In the event
that such persons refused to cooperate with the State
Employment Services, their ISP eligibility would cease and
the amount of their families' benefit would be reduced
accordingly,
Funding for the work test, which would include funds
currently expended to support the work requirements in the
WIN and Food Stamp programs, would be placed in existing
authorities. While final decisions await further con-
sultation with the Department of Labor, it is likely that
funds to support the work test would be delegated to the
Secretary of Labor and expended under Comprehensive Employ-
ment and Training Act authorities and/or the provisions of
the Wagner-Peyser Act (the Federal-State Employment Services
system). This would allocate to the States and localities
which would administer the work test under ISP the funds to
support the services they deem appropriate.
Summary
I would mislead you if I argued that the work test recommended here
is vital to the ISP for programmatic reasons or that it would pay for
itself. Indeed, available evidence suggests the opposite. I do feel,
however, that a work test based on something like required referral
of unemployed ISP applicants to the State Employment Services would
answer any concerns regarding the proposal's commitment to work, while
minimizing the administrative burden and financial costs associated
with such efforts. The alternatives of Federal administration and/or
intensive service delivery promise only to build large bureaucracies which
would perform functions that are, in significant ways, foreign to the
ISP proposal and in which we can have little confidence of high social
return.
TAB K
TAB K
ADMINISTRATIVE STRUCTURE OF THE INCOME SUPPLEMENT PROGRAM
As part of the interagency planning in support of this proposal's pre-
paration, a Task Force, directed by the Internal Revenue Service with
members from HEW and Treasury, examined its administrative feasibility
and standards of operation. In order to be able to reach a judgment
on those issues the Task Force had, in effect, to design an operational
system for ISP and determine what the resource needs of such an endeavor
would be. The principal findings in the Task Force Report, submitted
in late April, may be summarized as follows:
o The benefits payments portion of the proposal is adminis-
tratively feasible, both in terms of the proposal's goals
of objectivity, simplicity and universality, and in terms
of the IRS's standards of program integrity -- provided
that there is reasonable adherence to the Task Force's
recommendations concerning pre-legislation planning, systems
testing and implementation, enrollment phase-in and proposed
levels of assistance to recipients and enforcement in the
ongoing program.
Using a set of operating assumptions, the Task Force designed,
in broad outline, a structure for ISP and estimated its personnel
and other resource needs. These estimates, which relied
on both analogous IRS activities and directly relevant experi-
ence from the HEW Income Maintenance Experiments, compare favorably
to IRS manpower and administrative resources devoted to
revenue collection.
The ISP has no operational program design feature that would
either require or preclude the .selection of one agency rather
than another to assume operational responsibility for the
program; it could be administered by an existing agency,
such as IRS or SSA, or by a newly created special purpose
agency.
The remaining sections of this tab describe ISP's basic substantive
elements and administrative structure, outline its field operations
and conclude with some observations on feasibility conditions.
PROGRAM ELEMENTS
A household's eligibility for benefit payments and the amount of such
payments would be determined by the composition of its membership, the
amount of its nonbenefit income, and the nature and value of the assets
owned by its members.
2.
Filing Unit Rules - As a general presumption, all individuals
related by blood, marriage or adoption who live in the same
household would be regarded as members of a single unit for purposes of
ISP benefit determinations. In contrast, the filing unit for
tax liability would continue to be defined primarily in terms
of individuals because of the limits on the extent to which
one individual should be compelled either to compute or pay a
tax liability on another's income. This departure from the
tax system in the ISP is necessary because it is the income
of a family or household that is the single best measure of
the need of its individual members. Any alternative which
would attempt to measure the actual extent of income pooling
and joint consumption among individuals within a household
would be administratively infeasible and intrusive.
In addition to the general definition of a filing unit, there
would be rules to cover the special situations of foster
children, nonseparated spouses who are living apart, non-
resident children under age 18, and sub-families in a house-
hold that can certify themselves as separate and distinct
economic units.
Income Definition - The definition of income which would be
countable in the calculation of benefits would include all
gross receipts in cash or in kind from any source, with the
exception of a very few types of receipts specifically identi-
fied as excludable.
Items were excluded only if: they represented income that was
not truly available to meet current needs; their inclusion
would defeat a program goal; the reporting and compliance
consequences would be disproportionately great; an unreasonable
economic incentive would otherwise obtain; or their inclusion
would grossly violate a generally accepted social viewpoint.
Using this approach the definition of income for the ISP
would be very broad, including items such as Social Security
benefits and gifts which are not treated as income for
Federal income tax liability.
Few expenditure deductions from income would be permitted in
the computation of benefits under the ISP. The only departure
from the presumption against deductions would be in the area
of those existing "adjustments to income" allowed in the tax
system, such as expenses incurred in the production of self-
employment income.
3
Assets Test - In addition to having to meet the principal criteria
of income eligibility, a filing unit could not own more than a
specified dollar amount of certain types of assets. The test
would exclude from consideration business related assets, owner
occupied dwellings and reasonable amounts of land appurtenant,
one automobile, the cash value of life insurance, and furniture
and personal effects located in the place of residency. These
proposed exclusions from the assets test are based on consider-
ations of administrative feasibility and accepted social views
regarding housing and essential personal property. The fair
market value, net of applicable encumbrances, of the house-
hold's nonexcluded assets could not exceed certain benchmarks.
Within a range bounded by a minimum for a filing unit of one
or two persons and a maximum for a unit of seven or more, the
benchmark increases with additional members. This approach is
of necessity somewhat arbitrary. However, the alternative of
imputing income from nonexcluded assets, while theoretically
more equitable, would entail considerable administrative complexity.
Accounting System - The program would consider eligibility only
on a yearly basis. Unlike the tax system's fixed calendar year,
the year for ISP purposes would be defined in terms of a twelve
month moving period. In addition all determinations would be
retrospective; that is, based only on income for an elapsed
period of time. These two features (a moving calendar year
and retrospective reporting), in combination with a method of
accounting for the income stream called the "carry forward,"
provide the best possible compromise among the competing
policy objectives of equity, responsiveness to change in family
income and composition, and administrative efficiency. Alter-
natives that would have involved the fixed calendar year or
prospective estimates of a unit's future income stream were
examined but rejected, for they would have entailed serious
over and underpayment problems, collection consequences, and
greater opportunities to manipulate the program.
In order for the preferred accounting system to function with
reasonable responsiveness, the ISP population will be required
to report either once every month or once every three months.
A unit will be designated as a monthly or quarterly filer
depending on the constancy of its income. Units with a history
of stable or no income would file quarterly; those with a
history of fluctuating income monthly.
Self-Employed - The ISP, just as its tax system counterpart,
would perforce have some special rules for the unique situations
of the self-employed. As noted, the tax system's adjustments
to income would generally be allowed as deductions from the income
base. Similarly, business related assets, that is, property
reasonably related to and needed for the production of income,
would be excluded from that eligibility test. While the Internal
Revenue Code would offer primary guidance on these two matters,
special rules will be needed to prevent the incorporation
into the ISP of measures, however desirable in the tax system,
which are inappropriate in measuring income need; for example,
accelerated depreciation, capital loss carryovers, and the like.
The most significant departure from normal practice in the
treatment of the self-employed would be in the accounting
system. Self-employment net income which is suitable for
monthly or quarterly reporting, as in the case of a carpenter,
would be thus measured and reported along with all other
income in that filing unit. However, much self-employment,
as in the case of a farmer, involves irregular income and
expense patterns. For these situations, the program would
take the previous year's actual 1ump sum self-employment
income, divide it into twelve equal segments and impute the
average monthly amount into the current year as if it were
received in that year. Once imputed this self-employment
income would be treated no differently than other income in
the operation of the ISP accounting system.
ORGANIZATIONAL STRUCTURE
The operational base of the agency would be a field structure of approx-
imately 1000 field offices supervised by some 40 area offices. The
field offices would contain groups of front line personnel primarily
concerned with enrollment and assistance to filing units in reporting
on changes in income, assets, and household composition. These same
people would, however, perform various verification functions which
can be done in the office. Each field office would additionally
contain a conferee to conduct informal redeterminations of assistors'
decisions when questioned by a filing unit, and personnel to keypunch
data from applications, income and other periodic reports directly
into the national computer system. The area offices would exercise
direct management control over the field offices and provide adminis-
trative support to them. In addition, the area offices would house
education staff to inform the public about ISP benefits and obligations,
investigation staff to perform indepth or on-site enforcement activi-
ties beyond the capacity of field office personnel, and an adminis-
trative law judge to hear formal appeals from contested decisions not
settled at the conferee level.
Complementing the field structure would be about seven data processing
centers which would receive information directly from terminals in the
field offices, process it and prepare the payment tapes for use by the
5
Bureau of Accounts. The agency would be centrally directed by a national
office supported by staff at the regional level. In keeping with the
nondiscretionary and substantively simple nature of the ISP, the number
of personnel needed at the national and regional levels would be few,
and approximately one-third of them would be assigned to inspection
activities in the field.
SYSTEMS DESIGN
The central concept in the systems design is the placing of decentralized
data entry and access in the field offices. To accomplish this, each
field office would be provided with one or more terminals that would
allow it directly to enter or access data into or from the national
computer system by means of a data link to its associated data processing
center. In practice, all data communications between a field office and
its data processing center would be routed through a mini-computer and
communications concentrator located at the appropriate area office.
This intermediate link would provide communications traffic control,
detection of errors or missing data elements and data formatting.
Decentralized data entry implies that all reports from the program's
filing units, such as the monthly or quarterly income change reports,
must be delivered to the field offices by mail or hand. The laternative
of consolidated report collection and data entry in either the area
offices or at the data processing centers was considered but rejected.
While that alternative might yield economies of scale in data processing,
it was determined that the collection, human review and edit, and data
conversion of reports at consolidated points would introduce unaccep-
table delays in processing and responding to filing errors and omissions.
In addition, decentralized data entry is the logical extension of any
capacity in the field for immediate query and response. It was the
judgment that such a capacity would be essential if the program is to
be responsive to recipients, efficient in correcting agency errors,
and effective in the prevention of duplicate filing and other improper
actions.
PROGRAM OPERATIONS
Enrollment. Four features of program operations are especially important--
enrollment, periodic reporting, enforcement and sanctions, review and
appeal. They are each briefly described below. The agency design
provides for a public information or education staff to inform the public
of the program, and a system of toll free operators so that people can
obtain more detailed descriptions of the program's eligibility require-
ments. However, persons who believe that their households might be
eligible would have to take the initiative and contact their nearest
field office. Manifest ineligibles would be screened out by field
office personnel by means of a short questionnaire. These personnel
6
would then assist those who would appear to fall within the program's
income and asset criteria in the application and enrollment process.
Upon completion and review of supporting documentation, the infor-
mation would be entered into the national computer system by field
office terminal and automatically compared to a master directory file
to prevent any duplicate filing or other improper action.
Periodic Reporting. A critical aspect to the program is its periodic
reporting requirements. Depending on the constancy of their income,
recipient households would have to report on their income either every
month or every three months. Each income report updates the households
moving twelve-month accountable period, while obsolete information from
the year previous is dropped from the base used to calculate benefits.
After receipt in the field office, each income report would be reviewed
and, if it has no obvious errors or omissions, entered into the national
computer system. In the event of an omission or obvious error, the head
of the household would be contacted and asked to come to the office to
complete or correct the form. Benefit payments would be made monthly.
Thus, a typical sequence in the ongoing program would be as follows:
A family receives a form to report January income in early February,
completes it and sends or carries it to the appropriate field office
by mid-February. Personnel in the field office review the report,
contact the family if necessary, and enter the information into the
national computer system. In early March, the family receives a check
based on its income history through January. Coincidently, the family
receives a form to report on February's income, and the cycle would then
repeat itself.
All filing units would also be subject to an annual assets review
report which would be handled in exactly the same manner as the
periodic income reports.
Enforcement. The need for program integrity demands a vigorous enforce-
ment program, particularly in the early years of operation. Efforts
to encourage accurate reporting would include:
0 mandatory face-to-face assistance on initial enrollment,
with a requirement that certain information be documented;
educational activities involving the use of news media
and direct distribution of information to recipients;
audit examinations conducted randomly and as a result
of apparent discrepancies detected through the use of
third party information obtained through computer infor-
mation matching; and
periodic face-to-face reviews on a sample basis of reports
submitted by filing units not otherwise examined.
Some of this activity would happen as a by-product of other program
operations. The enforcement activity as such would be divided into
two levels: verification, which is a set of activities that can be
done by normal field office personnel in the office; and investigation,
which requires specialized personnel to conduct in-depth office reviews
or on-site visits.
Sanctions, Review and Appeal. A variety of sanctions would be available
to the agency to assure its enforcement activities:
o In cases of willful fraud, criminal prosecution would be
available, though limited in practice to either flagrant
first offenses or a second willful offense after previous
warning.
In cases of knowing fraud that, on balance, do not warrant
criminal prosecution, or in cases of inexcusable neligence,
a flexible civil monetary penalty would be available, not
to exceed 100 percent of the over-payment in question.
Cases that involve either noncompliance with a work require-
ment, should there be one, or a household member misleading
the unit's head in reporting on the household's income or
assets, would result in the elimination of the offending
party from the unit for purposes of setting its basic
benefit level. Such a person would, in the latter instance,
also be barred for a year from filing for benefits as a
new and separate unit. In addition, if a filing unit
continued to. keep inadequate records after warning and
instruction in bookkeeping, the agency could, in cases
of notorious noncompliance, reduce the unit's guarantee
level until compliance was obtained.
Any sanction would be applied only after a determination by a front
line employee, review by his supervisor, and notice and opportunity
for a hearing to the affected filing unit. After an informal discussion
with the employee and his supervisor, the first recourse to the affected
party would be to request an informal administrative review by a field
office conferee. The next level would be to an administrative law
judge at the area office level. However, for the convenience of
appellants, many of the judges would travel a circuit among the field
offices in their areas. Decisions of an administrative law judge
would be reviewable in a de novo proceeding in the U.S. District Courts.
8
The same review and appeal process would be available in instances
where a party feels aggrieved over a routine agency determination;
for example, rejection of an enrollment application, amount of a
given monthly check, or refusal to certify separate economic status
from a larger household.
FEASIBILITY CONDITIONS
The Task Force concluded that certain conditions should be adhered to
in order for ISP to be administered at reasonable cost and in an
efficient and effective manner. A brief overview of those conditions
follows:
Compliance - As noted, persons on the program would be required
to submit monthly, quarterly or annual reports on income,
assets and household composition. Widespread noncompliance
in the form of late or incomplete reports could seriously
undermine the administrative feasibility of the program.
The Income Maintenance Experiments have shown, however, that
the incidence of such deficiencies is well within accep-
table levels if the system is properly structured. IRS
planning for its new National Tax Administration offers
assurance that the computer hardware and procedures exist
to handle large and complex reporting volumes.
Enforcement - The program is equally dependent on reporting
accuracy. Understatement of income or assets, oversiatement
of household size, or duplicate filing in more than one
household could, if on a large scale, have severe fiscal
consequences and undermine public confidence. The Task
Force thus concluded that a sizable and visible enforcement
effort should be built into the program. The Task Force
set an initial annual coverage of twenty percent of the
caseload for verification or examination. After the first
three years, the coverage could be reduced to around ten
percent.
Implementation Schedule - The Task Force concluded that the
time required to place in position the manpower, facilities
and equipment necessary to effectively enroll and administer
ISP was approximately four years. The principal constraint
is that twenty months must be allowed subsequent to enact-
ment for data processing equipment procurement, installation
and operational testing. When combined with the need for a
phase-in of initial enrollment, thereby preventing an expensive
workload peak, the first payment under ISP could not be
made before the twenty-fifth month after enactment. Fortunately,
the two years of systems design, contract bidding, office site
selection, and personnel training can take place between the
time the legislation is introduced and its enactment.
TAB L
WEALTH Sprication ATION
TAB L
THE SECRETARY OF HEALTH, EDUCATION, AND WELFARE
WASHINGTON, D. C. 20201
November 6, 1973
MEMORANDUM FOR THE PRESIDENT
Subject: Major Domestic Program and Tax Reform
My staff and I have been struggling over the past eight months with
the reform of our social programs, including specifically the welfare
system. The problems we confront are complex and difficult -- some
say intractable.
While there is much in the diagnosis of these issues to warrant
pessimism about whether there is any solution, I have been exploring
one concept which in its elegant simplicity, boldness and scope offers
a way out of the mess. I advance it in this memo now, because if you
find it attractive and acceptable, we could:
develop the proposal quietly with a very small group as the
domestic centerpiece of your State of the Union Message;
provide a surprise initiative which in its boldness and
balance could capture the imagination of the American people,
if not the Congress; and
reassert your leadership in the domestic field in a very
strong and affirmative way.
BACKGROUND
When I step back from the details of the problems which your major
reforms have encountered, I find a common set of issues and obstacles
which have impeded them.
Although the approach to broad social problems which relies
on a multiplicity of narrow categorical assistance programs
has been widely recognized as a failure, or at least not
effective, recommendations to eliminate these assistance
programs in favor of direct assistance to individuals, or
revenue sharing, is usually not well received. Without
a broad based understanding and support, we have been left
to do battle one at a time with particular recipients,
2
interest groups and Congressional committees with a strong
stake in the existing structure of such categorical programs.
This posture is not a winner.
The interrelationships of the domestic assistance programs
have become as important as the content of each one. To ignore
these interrelationships is to pile one program on top of another
with undesirable, unintended and costly results. Congresswoman
Griffiths' ongoing studies have been documenting this fact in
excruciating detail in the public welfare area. The involvement
of 19 different Congressional committees in various income security
programs does not help. In retrospect, your Family Assistance Plan
probably ran into as much trouble for what it did not address as
for what it contained.
There has been no assured means of linking domestic assistance
programs--reformed or otherwise--with fiscal sanity. The piece-
meal approach to expenditures and taxes in the Congress, and the
schizophrenic public attitudes of support for specific programs
and distaste for the total bill must be addressed with some
specific linkages. Your 1974 budget engendered a growing con-
cern with this issue in the Congress, and attempted to deal
with it by means of a ceiling. Governor Reagan, with the same
consideration in mind, has proposed a specific Constitutional
ceiling in California.
We have not really come to grips with public frustration and
dissatisfaction with the performance and size of the Federal
bureaucracy and a related, growing dissatisfaction with the
equity of the tax system. Much of the latter stems, I believe,
from disillusionment about results achieved for taxes paid.
While you have made consistent efforts to reduce the Federal
payroll, improved efficiency is swamped by program additions
and changes. Only major structural reforms are likely to make
more than a marginal difference.
If I were persuaded that the disorder and costs of the present programs
could be contained or somewhat improved, I might be tempted to recom-
mend a series of modest improvements in welfare for you to present the
Congress and the country. My assessment is to the contrary. A more
modest approach just does not address the fundamental issues, and does
not provide promise of success. Time is not on our side. Left alone
or altered modestly, the present situation will inexorably get worse,
making fundamental reform even more difficult later.
3
A few examples in the welfare system may undergird this assessment.
Food stamps costing about $2.2 billion in FY 1974 are now projected
to cost about $6 billion--perhaps more--by FY 1976. Our efforts to
cash them out for a part of the low income population--the aged,
blind and disabled--is rapidly eroding to nothing. Senator Long is
gaining support for his work bonus which would pay a modest benefit
to low income workers covered by the payroll tax. Appropriate in
purpose, the Long proposal trivializes a good idea in a way that is
likely to create more problems than it solves, since it adds yet
another means-tested transfer program to the existing system. The
drumbeat of social security increases, which puts you in an im-
possible position, continues apace. The list could go on and on.
You are slowly but surely being pushed into a corner of choosing
between tax increases and an economically sane budget without attaining
reform. Minor tinkering or sequential changes do not seem to work
with the Congress and, in any event, do not deal with fundamental
structural problems and program interrelationships. Only a major
reform initiative seems to offer a way out.
MAJOR TAX REFORM
The reform proposal which I have in mind is based on Milton Friedman's
concepts. It is fundamentally tax reform, but deals simultaneously
with the tax, welfare and domestic assistance systems. Through such
an approach, we could:
Tie virtually all of our income support programs for the low
income population to the positive tax system and the IRS in
such a way that these separate programs and many related service
activities would no longer be required: The Federal bureaucracy
could be significantly simplified and reduced.
Construct a system that requires benefit increases and tax
increases to be considered simultaneously. By locking tax
and benefit structures together, it would be virtually im-
possible to adjust one without adjusting the other. Indeed,
this action could perhaps be coupled with a constitutional
amendment which would limit the maximum percent of income that
could be taken in Federal taxes unless voters agreed to a
higher level.
Remand to the States most of the individualized services and
any cash supplementation which they might desire to make as a
proper State and local role.
4
Adjust the personal exemption levels and tax brackets in a way
that will greatly improve the equity of the positive tax system.
As I noted at the outset, this concept is the only one which embodies
features designed to meet all of the major issues and obstacles which
I have described. Specifically, this system would be designed along
the following lines:
All individuals or families would file an income tax return.
Those above a set amount would pay taxes; those below it would
be eligible to receive cash benefits (some below the set amount
who have non-taxable income would not receive benefits).
The benefit schedule would be based upon the level of personal
exemptions and standard deduction that the income tax system
prescribes for the taxpayer or his family. For example, a
family might receive a cash benefit equal to one-half of the
difference between its income and the sum of its personal ex-
emptions and standard deduction. Such a schedule would provide
for a gradual phasing down of the cash benefit as family income
increases, thus:
- paying greater benefits to those with greater need;
- preserving work incentives; and
- insuring that no one who is eligible for benefits would
also have a tax liability; and conversely, that no one
with a tax liability would receive benefits.
Benefits would be set initially at levels that would permit at
least the elimination of the Federal role in AFDC and cashing
out of Food Stamps. The new Supplemental Security Program (SSI)
for the aged, blind and disabled would also be superseded by
this program. Such benefit levels would require that the level
of personal exemptions and possibly the standard deduction in
the tax system be raised. Any future increase in benefit levels
would require concomitant changes in taxes. Consideration
could also be given to some device--perhaps a Constitutional
amendment to require a referendum-to make tax increases above
some level subject to the vote of the public.
It would be possible to eliminate or sharply curtail Federal
programs in social services, manpower, housing and other anti-
poverty activities, leaving such activities to the States. I
would expect that we could make very large reductions in Federal
employees in this Department and other agencies as well.
5
Subsequently, should inflation occur, we could widen the tax
brackets to which given tax rates apply, thus preventing both
decreases in the real value of the benefits transferred and
increases in the real tax burden on taxpayers.
DISCUSSION
We have done some initial exploration of several important questions
about this reform proposal: how would the benefit structure work and
what would it cost us? what problems would it raise?
Our estimates at this point are necessarily preliminary, but inter-
esting enough to warrant some optimism. The basic structure we have
used for estimating purposes is a $3,000 benefit for a family of four
without other income and a benefit structure for the aged, blind and
disabled which is the same as they are receiving under the SSI program.
A benefit reduction rate as earned income rises of 50% is assumed so
that there are no payments above $6,000 made to a family of four.
This benefit schedule would provide $2,000 to a two person family
or $3,900 to a six person family if they had no other income.
Since most individuals and families have some income, a more
typical case would be a family of four with a $4,000 income who
would receive $1,000 or the same family earning $5,000 who would
receive $500. At today's minimum wage, a father heading a family
of four earns about $3,200. Under the benefit schedule, his
family would receive $1,400 in cash benefits, just enough to
raise the family above the 1974 poverty threshold.
The total benefits to low income persons would run about $17-19
billion in FY 1976. Over 90% of these benefits would go to those
below. the poverty level, which would cut the dollar poverty gap
approximately in half.
These costs would be automatically offset through the elimina-
tion of the AFDC, Food Stamp, and SSI programs which we esti-
mate will cost the Federal government $14-15 billion in FY 1976.
This would leave an initial gap of $3-5 billion.
A preliminary list of programs which would be eliminated or
sharply curtailed as a result of the general plan would include
social services, manpower programs, low-incore housing sub-
sidies and miscellaneous anti-poverty programs. A conservative
estimate of the FY 1976 cost offsets in this category would be
$2.5 to $3.5 billion, thus offsetting much of the potential net
cost. Potential personnel savings might add another $500 million
to $1 billion savings.
6
We estimate that the benefit program would provide $1.5 to $2.5
billion in fiscal relief to the states. If we turn social service
programs largely back to the states, such relief could provide a
potential source of financing either services or supplements, if
the states so choose.
Raising the exemption levels will result in reduced total Federal
receipts which we have not yet priced out with Treasury. This
loss either could be partly or completely offset with rate adjust-
ments, or it could be accepted. The decision would depend on how
much tax relief we could and wished to provide.
The net costs, if any, would be highest in the first and second
year. This comprehensive concept would, I am confident, be a
smaller burden on the taxpayers than the present system in the
long run.
When I consider the major problems which this reform proposal raises,
I find two: the potential difficulties with the Congress, and concern
with the work requirement.
The difficulties with the Congress come in two forms. First, the
proposal cuts across many committees and thus is threatening to them
and their categorical programs. I see no way to avoid this problem;
indeed we should seek it out since it is necessary to any significant
program reform and implies Congressional reform as well.
Second, the Congress will be sorely tempted to add the benefit program
without eliminating other programs such as food stamps. This difficulty
is clearly most serious and, like the first, cannot be avoided. If we
Judge this problem overwhelming, we simply 'give up any hope of major
reform. I do not understand you to be willing to admit defeat on this
issue, and I share that view. The only way to deal with this issue
is to put the proposal forward strongly and insist on comprehensive
reform. It strikes me as an impeccable position.
Some will no doubt attack this reform as not containing a strong work
requirement. It would be possible to put one in for able-bodied adults,
but I would strongly counsel against such a course. It seems to me
that a work requirement properly belongs and can be effectively adminis-
tered only at the state and local level. With whatever funds the state
chooses to use for supplementation or social services, they should be
empowered to impose such work tests or requirements that are appro-
priate and favored in their particular setting. If we attempt to
impose work requirements from the Federal level, we face the following
problems:
7
Logically, we incur an obligation to provide jobs in the public
sector if all else fails. In the past, we have settled for weak
work registration requirements which have little impact.
We are forced to maintain confusing, large and expensive bureau-
cratic structures independent of IRS to categorize the population
and to provide manpower training and other support services which
have not proved very effective.
We begin to unravel the basic simplicity of the system and fall
back toward the FAP proposal.
The incentives to work built into the reform proposal are strong rela-
tive to our present system, and there is reason to believe that they
will work for most low income persons. Recent studies show a strong
work ethic among the poor, and experimental evidence demonstrates that
work effort among male heads of families would not be affected signi-
ficantly by such a program.
In summary, the Congressional and work requirement problems have satis-
factory answers and, in any event, are far outweighed by the advantages
and opportunities of this reform:
Programmatic, tax and Congressional reform.
A certain means to link expenditures and taxes.
A strong measure to reduce the size of the Federal government.
A bold, comprehensive approach which would virtually wipe out
the old Federal welfare system in favor of a unified and simpli-
fied approach.
The use of the IRS system as a single efficient administrative
device in which the public has confidence and all participate.
This action would also have by-product benefits in tax collection.
American citizens, particularly those of low income, would be
treated equitably across the country under a set of objective
criteria which would reduce the amount of subjective govern-
mental intervention in their personal affairs.
The anti-poverty effects would be much better than current programs
which now transfer funds to individuals well above the poverty line.
8
RECOMMENDATION
I recommend that you adopt the Friedman concept in principle and direct
a small group from HEW, Treasury, OMB and the Domestic Council to
develop fully a specific proposal for inclusion in the State of the
Union message.
Approve
Disapprove
See Me
Secretary