Monday, July 16, 2012
The Welfare Cliff
The "welfare cliff" is the point in which a persons wage and combined welfare benefits is at a point in which getting a raise actually causes them economic harm. For example, a single mother making $29,000 per year will earn a net income and benefits of $57,327, while a single mother earning $69,000 per year will have a net income and benefits of $57,045, making it more financially beneficial to earn less.
The "welfare cliff" phenomenon creates a significant disincentive for women to strive for higher pay and career advancement. If a woman earning $29k per year were to get a raise of just $1,000, she would actually end up with a net loss of $9,000 in income and benefits. In addition to the financial penalty, higher salaries often come with added stress and demands to perform. By remaining at a wage level at or below the "welfare cliff", the single mother can avoid these added pressures.
Unless the single mother's career opportunities have the potential for allowing her to earn more than $70,000 per year in a rather short time period, she would be making a massive financial mistake to try and advance her career. Let's take a look at an example.
Say the woman enters her field at the $29,000 annual wage. She works hard, puts in the extra hours at the office and skips a few vacations and after 11 years, at an average wage increase of 10% per year, she can expect to earn $70,000 year or more.
If she follows that career path she will earn $569,527 total in net income and benefits over that 11 years. Meanwhile, if she had decided to stay at the entry level wage, and not advance her career at all, she would have earned $859,905 total in net income and benefits, netting her a benefit of nearly $300,000.
By the time she reaches that $70,000 figure she will be well into her middle age years, having already put her career on hold to have kids. It will likely take her another decade just to make up that $300,000 wage and benefit deficit. If she wishes to grow her income beyond that $70,000 figure, she will most likely need to return to school and obtain some sort of graduate level degree, adding another $100,000 or more onto her debt load and taking away even more precious time with her kids.
By the time she is finished paying off the debt and breaking even on what she would have otherwise earned had she opted to just stick to her entry-level wage, 20 years or more will have passed, her kids will have become full grown and moved on to start their own lives and all she will have to show for all her hard work is decades of regret.
Is this the kind of hope and change Americans thought they were getting when they elected Barack Obama?