House of Commons - Social Security

- AFDC (Aid to Families with Dependent Children) had been replaced by TANF (Temporary Assistance for Needy Families). Under TANF States operated the programmes and each received a block grant allocation and had a maintenance of effort requirement. The total federal block grant was $16.5 billion each year until 2002. The block grant covered benefits, administrative expenses, and services. States determined eligibility and benefit levels and services provided to needy families, and there was no longer a federal entitlement to assistance. Under TANF, States were required to make an initial assessment of recipients' skills. With few exceptions, recipients had to work after two years on assistance. Twenty-five per cent of all families and seventy-five per cent of all families in each State had to be engaged in work activities in 1997, rising to 50 per cent and 90 per cent respectively in 2002. Single parents had to participate for at least 20 hours per week in the first year, increasing to at least 30 hours per week by 2000. Two-parent families had to participate for 35 hours per week in 1997. States that had succeeded in moving families into work and off welfare faced lower participation rates.

The year since the Presidential signature of the Reconciliation Act had been fascinating. It was a good time for welfare reform because of the flourishing American economy. There had been effective personal leadership from the President, especially concerning the involvement of business and the non-profit (voluntary) sector. The States were 'awash' with money because the block grants had been based on 1994 levels when welfare caseloads were higher. This had 'lubricated' the whole system, allowing expenditure on child care and transport.

It was important to take advantage of these beneficial conditions to invest in recipients who would be in a better position to deal with any economic downturn if and when this occurred.

There had been the development of coalitions comprising the States, business community, non-profit organisations, transport providers and so on. Welfare social workers had undergone a real shift, which involved seeing welfare recipients as clients or partners rather than dependents. 'Empathy' and 'connection' were now important concepts in dealing with recipients.

There were enormous variations between States, as there had indeed always been. There was now one stream of Federal funding but it was disbursed in various different ways. In many States, there was a decoupling of child care from welfare, leading to more help for low income families. The Head Start programme involved high quality pre-school care and education, which was allied with an increasingly important belief that child care should be educational. It was however recognised that much child care was not of high quality. The White House had recently hosted a Conference on Child Care Issues.

It was too early to give any real verdict about the effects of the time limits for benefit receipt, but initial reports from some States were available. In Iowa, families who had lost benefit broke into two groups: those who were now working and those who were relying on informal support (mainly extended family).

Everybody had been surprised by the extent to which families had been able to meet expectations. State legislatures needed to think about the strategy to build skills in the workforce. There had already been fairly strict sanctions tied to receipt of welfare and the 1996 Act had simply strengthened the sanctions with new penalties and time limits. There was a discussion about the likely effects of the cut-off time limits with political and press issues determining how the effects would be judged.

Child support was regarded as one form of safety net, although currently only about 4 million people were receiving maintenance out of a potential 20 million non-custodial parents. The problem was so severe that Congress had given new powers to enforce child support. There were five stages included in the child support process:

- establish paternity

- make a court order

- enforce the order

- access and visitation rights.

This approach had had some success in the past year: 1.2 million children had been born out of wedlock and 1.1 million paternity cases had been established. There was a new hire reporting scheme which obliged employers to notify child support agencies of newly hired employees. The annual amount collected was $7.8 billion and the target was $20 billion by the end of President Clinton's term. There was an increase in the use of wage withholding (deductions). It was left to States to decide how much the custodial parent should receive from the maintenance raised.

There was an increasing number of measures to encourage/force a non-custodial parent into paying including withdrawal of licenses for driving, practising law and medicine.

It was important to recognise that the old system had not worked, creating dependency and discouraging individual responsibility, and that the new system might work, even though it had risks attached.

Adoption laws had been changed to reduce parental rights where children had been abandoned. There was to be greater monitoring and evaluation of child development with funding mainly from private foundations.

2. US TREASURY

Dr John Karl Scholz Assistant Under Secretary of State, Tax Policy Division

Dr Janet Holtzblatt Deputy Director, Individual Taxation Division, Tax Analysis Office

The earned income tax credit (EITC) was originally put into the Income Tax Code in 1975, largely at the urging of Senator Russell Long, then head of the Senate Finance Committee. It had been expanded under successive Presidents in 1986 (Regan), 1990 (Bush) and 1993 (Clinton).

The EITC was designed to phase in, go along a plateau and phase out. The EITC was a large credit, which was intended to make work pay. It was an attractive mechanism which had positive labour supply effects, although there were some negative effects in the phase-out range as income rose. Its overall economic effects were likely to be favourable. The EITC enjoyed a wide measure of bipartisan support. Over 15 per cent of taxpayers were in receipt of an EITC, amounting to 18.6 million taxpayers receiving an average benefit of $1,422. The EITC was a refundable tax credit, so taxpayers with no income tax liability would receive a cheque from the US Treasury. The EITC was important to the Clinton Administration, because it raised the income of 4.3 million families above the official poverty line. The low wage labour market had not performed well, and the US still had a high rate of poverty. Between 1979 and 1992 the median earnings of male non-high school graduates had fallen by 23 per cent in real terms. Almost as large a drop (17 per cent) was recorded by males with no more than a high school education. Unemployment rates were low.

The US welfare reform abolished AFDC, replaced it with TANF which imposed Federal time limits on eligibility. Very few families had yet experienced the time limits coming into effect.

In favour of the EITC was its ability to deliver money to low wage working families. EITC increased as earnings increased and could reach poor or near-poor families and raise them above the poverty line. It also had low administrative costs compared to AFDC as it could piggyback on the income tax system and be administered by a bureaucracy already in place.

EITC provided modest (but favourable) labour market incentives by increasing as earnings went up (to a certain threshold). TANF increased income of families and did not reward work. Therefore it did not have the best behavioural effects. It was clawed back at a meagre level. EITC increased in value as people worked more and had modest income effects up to a plateau after which it was clawed back gradually.

Employers in the low wage market were quite competitive. Employers could not cut wages because the wage subsidy was not for the most part delivered through employers. It was less transparent than a credit coming direct from employers.

Pay scales reflected the relative scarcity of labour at low wage rates.

The policy was directed at giving working poor families a boost to reinforce the notion that it paid to work. EITC without a safety net would be a disaster. Some people could not work. EITC could be delivered in real time through the paychecks though only a small fraction - about 1 per cent - took up this option. Almost all recipients received a cheque only after submitting their annual tax return to the IRS. They could request payment in the paycheck by completing a Form W-5. Some people felt it was stigmatising to fill in a W-5 form. Others feared that if they received advance payment they might end up owing taxes. There was also still a lack of awareness, although the IRS tried to inform people of the advance payment option. An IRS study was underway into the reasons for the lack of take-up of the Form W-5. In 1992 a General Accounting Office study had found that the two reasons were the lack of available information (which had since been remedied) and people's unwillingness to take advantage of the W-5 option. Applying for the tax credit after the end of the tax year was a form of forced saving for low income families who would otherwise find it hard to save up for a car or a washing machine, for example.

The US had a family based tax system. By April 15 the person named first on the return would be sent a cheque made payable to either members of a couple. About 70 per cent of recipients with children were single parents. There was a mechanism in the advance payment system to allow employers to reduce the payment of their payroll taxes.

Employer resistance to advance payment of the EITC might be an issue for small businesses, which could have something to do with why employees were reluctant to take it up. The W-5 was the only information given to employers, who had to look up IRS tables to check the payment amounts. The employer was not expected to verify that children claimed for actually existed.

The administration cost for the EITC was low and it carried a low level of stigma. Parents did not need to take time off work or stand in line at busy offices to make a claim. It was all part of the universal process of filling in a tax return. Dr Scholz's own research had indicated that 86 per cent of those eligible received the credit. The downside was that there was no upfront verification, so there were relatively high compliance problems. Published data on EITC. compliance in 1980 had indicated that 35 to 40 per cent of recipients were technically not eligible. No one had paid much attention to those data, as in those days EITC costs had been rather small. The subsequent three large expansions meant that EITC would cost over $27 billion in 1998. There needed to be closer scrutiny of compliance problems. Under the Bush and Clinton administrations the IRS had been taking steps to improve compliance. The easier steps had been taken in 1990 to improve understanding by clients of the forms and rules for eligibility. Before 1990 the IRS could not verify the requirement that the taxpayer provided over half the support for each child claimed for, as that information was not collected by any government agency. In order to reduce compliance errors, the definition of eligibility of children had been simplified. The support test had been scrapped in favour of a simpler test of family relationship and shared residence. The IRS now verified the existence of children claimed for, by requiring a social security number for each child. Social security numbers were now issued to newborn babies. IRS was now scanning data to check social security numbers and to detect any invalid social security numbers before any money was paid out. The dollar error rate had been reduced to 21 per cent, a reduction of nearly half the error rate. That still represented some $3.6 billion paid out incorrectly in 1994.

Babies could be issued with social security number with their birth certificate at the hospital. In theory, only one adult should be able to claim for a child. Around 110 million tax returns were filed each year which could in theory be data-matched. If a match was found, there still remained the need to determine which of the claims for a particular child was a valid one.

The poverty level was based on absolute needs according to now quite dated nutrition studies in the UK. It worked out at $17,000 for a family of four. The amounts had been indexed since the 1960s. The National Academy of Sciences had commissioned a report in 1995 to re-define the poverty level.

The minimum wage was independent of the EITC. They had both been law for decades. However, the increase in the EITC in 1993, followed by the increase in the minimum wage in 1994, had both been debated in the context of making work pay.

Food stamps and TANF were important sources of assistance. Even counties within States could have discretion on how safety net benefits should be applied.

Part of the explanation for the dramatic fall in welfare rolls might be the EITC and part may have resulted from the experimental "tough love" approaches. The strong economy also continued. The message was out to the recipients, that welfare could not be a way of life in a strong economy. The jury was still out on whether "welfare as we know it" had come to an end. Homeless shelters and soup kitchens had faced nothing like the kind of problems that critics had been afraid of. There remained the hardest to serve group who still needed to find self-sufficiency through work. If the economy turned down, some of the more dire predictions might be borne out.Wisconsin paid high levels of benefits compared to somewhere like Mississippi but their benefit levels appeared to have little effect on case loads, even if one tried to control the variations in the data for per capita income in different States. If the evidence was examined carefully, it was just not there to bear out the view that high benefit levels encouraged higher numbers on benefit.

The interaction of the EITC and other parts of the system in terms of marginal withdrawal rates was complicated by State and payroll taxes, but the marginal withdrawal rate could rise to 50 per cent at the EITC phase out levels of income.

The latest legislation to expand the EITC had been fully implemented in 1996. It was unlikely, in the current political environment, that the EITC would be expanded. The last frontier of social policy would be to further extend the tax credit to childless workers (as had been done under the 1993 legislation), but that could be very expensive.

There was a public debate about the effect of the EITC on the labour market, and on the slight evidence for a disincentive effect at clawback levels, and there was also the issue of compliance and error rates. The evidence was that the labour supply was not very responsive to the clawback effects.

The Canadians had got rid of a comparable credit in tax of an increased child benefit, but the withdrawal rates in Canada had got as high as 80 per cent. Economists were not always the best placed to analyse the decisions made by marginal workers who might be affected by different factors than applied in the kind of investment decisions in which economists were trained.

3. VISIT TO THE MARSHALL HEIGHTS COMMUNITY DEVELOPMENT CORPORATION

Mr Lloyd Smith President and Chief Executive Officer

Mr Richard Hamilton Board Chairman

Ms Jackie Henry Senior Vice President

Ms Natalie Green Ms Loretta Tate Ms Shirley Profit Mr Art Lindey

Ms Camilla Bosh Mr Eric Taylor Ms Yvette Tucker Ms Sylvia Butler

Ms Hattie Wins Ms Patricia Best Ms Aretha Razell

The Marshall Heights Community Development Corporation (MHCDO) was an inner city project which had reversed the steady economic and social decline of a deprived and struggling neighbourhood which had a 97 per cent African-American population. MHCDO provided food, clothing, emergency services and employment assistance to individuals and aimed to help in wider community development.

The strategies used to raise the community included attracting a new large Safeway supermarket, 2 new banks, a new restaurant and a government data processing centre. Similarly, new housing (of various types) was being built or supported and a medical facility is being encouraged to set up in the neighbourhood. Some of the housing was deliberately pitched at middle and higher earning groups in an attempt to rebuild a social mix.

The Committee then was taken to view the area and visited a single room occupancy housing centre run by MHCDO.

4. DINNER HOSTED BY THE BRITISH AMBASSADOR

Mr Jeff Bell Family Research Council

Mr Sidney Blumenthal Assistant to the President, Office of Strategy, Planning and Communications, The White House

Mr Gary Burtless Senior Fellow, Brookings Institution

Mr Alvin From President, Democratic Leadership Council

Ms Olivia Golden Assistant Secretary, Administration for Families and Children, Department of Health and Human Services

Ms Yvette Jackson Deputy Administrator, Food Stamp Programme, Department of Agriculture

Mr Robert T Jones President, National Alliance of Business

Mr Garrison Moore National Association of Private Industry Councils

Dr Silvester Schieber Director & Vice President, Information Center, Watson Wyatt Worldwide

Mr Eli Segal President and CEO, US Welfare to Work Partnership

Mr Raymond Uhalde Assistant Secretary, Employment & Training Administration, Department of Labor

Ms Melanne Verveer Chief of Staff, Office of the First Lady

5. NATIONAL ASSOCIATION OF MANUFACTURERS

Ms Phyllis Eisen Senior Policy Director, Education and Workplace Readiness

Ms Sandy Boyd Human Resources Policy

Ms Inger Parker Associate Director

Ms Kerry Lyn Schmit Communications and Media

Mr Jeff Joseph US Chambers of Commerce

NAM, the US equivalent of the CBI, has as its mission the enhancement of the competitiveness of US manufacturers and the improvement of the living standards of working Americans. President Clinton had made it a priority of his Administration to engage employers throughout America in the Welfare to Work initiative.

The National Association of Manufacturers was 103 years old and lobbied on behalf of its 230,000 members, large and small, which were involved in manufacturing. The current period was one of great growth marred by extreme skilled labour shortages. In a survey, 9 out of 10 respondents believed that skills shortages would be a barrier to growth and productivity. Additionally, the greying of the workforce also presented problems with the loss of skills. NAM's members were spending an increasing amount on education and training although substantial amounts went into basic skills such as reading and writing.

Welfare to work presented challenges and opportunities for NAM members, opportunities in that more workers were needed in the labour market, and challenges in that many 'welfare workers' had sufficient skills for entry level jobs only and significant investment was needed in these workers if they were to progress up the career ladder. This progression was important both for the workers themselves and for the economy as a whole. The rewards for those who could get work was great. The average manufacturing wage was $46,000 and this would be the wage for someone with basic technical skills. More highly skilled workers would be beyond this. There was however great demand even for workers with basic technical skills. Wages were only part of a workers wealth: performance pay, bonuses, stock ownership, 401k plans (occupational pensions) all added significantly to real income.

The attributes in workers that employers wanted were the ability to think clearly, problem solve, communicate, work in teams, ability to write, read and use maths and understand the nature of technology, basic employability skills including work discipline and reliability.

There were currently high levels of workplace illiteracy and the gap had to be closed between school and the world of work. Frequently there needed to be training in basic literacy skills and work readiness skills even for entry level jobs. This presented a burden for small and medium-sized companies.

There was a discussion about whether compulsion or voluntary measures would be better in taking the right workers to the right companies.

Welfare recipients were seen to come in three broad bands:

- those who were work ready and could be reintegrated quite quickly back into the workforce;

- those who needed some attention to improve their work readiness but otherwise had no major barriers stopping them from working;

- those who would need intensive training and support before they would be ready to work, if indeed work would ever be a viable option.

The EITC clearly helped individual low paid workers to boost their income. However, tax credits for employers to take on staff were far less popular and effective partly because of the perceived bureaucratic process involved and possible lack of awareness.

36 These notes have been prepared by the Committee staff and should not be treated as verbatim notes. Back



© Parliamentary copyright 1998	Prepared 18 February 1998