Do Government Benefits Really Have a ‘Discouragement Effect’?
- By
- June 27, 2023
- CBR - Public Policy
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Critics of social safety net spending say it discourages people from working for a better future for themselves and their families.
But in a study involving thousands of recipients of the US government’s biggest cash welfare program for children, University of Chicago’s Manasi Deshpande and Chicago Booth’s Rebecca Dizon-Ross cast doubt on this assumption.
The findings suggest that “redistribution is more efficient, and thus the optimal amount of redistribution potentially higher, than previously thought.”
The researchers focused on the Supplemental Security Income program, which spent $51 billion in 2022 assisting 1 million children and 5.5 million adults with disabilities and low income. Many of the children qualified for the benefits because of serious mental and behavioral issues such as ADHD, and they received as much as $10,092 in 2022.
Deshpande and Dizon-Ross investigated whether parents invested less in the children—by forgoing tutoring or job training for them, for example—because they expected the benefits to continue in the future.
When it comes to parents’ investment in their children’s future, traditional economic models have supported the theory of a dynamic discouragement effect of government assistance, which can take two forms. One aspect is what’s called the income effect—the expectation that continued assistance will make it unnecessary for the aid recipient to need to earn a lot of money as an adult. The second is the substitution effect: parents fear a child’s future benefits will be reduced if the child eventually earns too much money.
Children who receive SSI are reevaluated for eligibility when they turn 18. Because the standards for receiving benefits are different for adults and children, close to 40 percent of kids overall and 70 percent of those with mental and behavioral issues lose the benefits at 18. When surveyed by Deshpande and Dizon-Ross, experts from the National Bureau of Economic Research’s Children and Economics of Education Programs overwhelmingly predicted that parents would be likely to invest more in their children’s future if they understood this.
Expectations changed; investment didn’t
However, that wasn’t borne out by the study, which included a sample of 6,000 households with at least one child collecting SSI benefits. All the recipients were 14–17 years old and had a predicted likelihood of removal from the program of 35–95 percent, based on diagnosis, the severity of their condition, and their state of residence.
In a survey, 60 percent of parent participants said there was “no chance” their children would lose benefits, and 80 percent underestimated the likelihood of removal. Many parents, when shown a video that provided information on their child’s probability of losing SSI, were more likely to recognize the possibility.
But the added information didn’t change how these parents invested in their children. The researchers offered parents a variety of ways—including job training, online math lessons, tutoring, and a career resource book—to invest in their children’s future, noting in the paper that job training can increase earnings potential by as much as $5,000 annually, and math skills training, by up to $1,600. Still, take-up rates between the parents who watched a video and those in a control group were essentially the same, contradicting the view of the NBER experts, who had predicted that a treatment effect would lead to a 14 percentage point difference, on average, in parental investment.
The researchers note a few possible reasons for their results. Parents may not be forward thinking enough to alter their behavior now in response to a future change in government assistance. But limited money and time may also play a role—and instead of investing directly in their children, the data suggest that working parents who realize their children are likely to lose benefits actually work more themselves.
Also, parents may make decisions about their children’s future based not only on financial incentives but also on social ones, such as wanting their children to find purpose in work or to not face the stigma of being a high-school dropout, the research finds. Such incentives aren’t affected by a child’s likelihood of receiving SSI in adulthood.
The key finding from a policy perspective is that contrary to expert opinion, parents’ expectations about whether their children will receive government assistance programs as adults likely won’t have a detrimental effect on outcomes in adulthood. Instead, the researchers point out that a growing amount of evidence indicates that it’s removing children from programs such as SSI at age 18 that hurts their prospects.
Manasi Deshpande and Rebecca Dizon-Ross, “The (Lack of) Anticipatory Effects of the Social Safety Net on Human Capital Investment,” Working paper, December 2022.
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