Understanding the Welfare Reform Bill

In August Congress passed, and President Clinton signed, historic welfare reform legislation. The legislation reforms the current welfare system in four ways.

It eliminates perverse financial incentives for state government.

The Aid to Families with Dependent Children (AFDC) program is currently funded on an entitlement basis. This means that the more persons a state enrolls in AFDC, the greater will be the funds received from the federal government. Conversely, if a governor reduces the number of persons on welfare, federal funding to his state is reduced. Clearly the current "entitlement" funding structure of AFDC creates perverse incentives for state government, penalizing states that reduce dependency and rewarding states that allow their welfare caseload to grow. The welfare reform legislation will eliminate these perverse incentives.

The new plan also creates a new funding system in which each state will be given a fixed dollar grant that will be gradually increased from year to year. If a state reduces its AFDC caseload, its federal grant will not be cut. Instead, the state will be permitted to keep any surplus federal funds that are generated by caseload reduction and apply those funds to other efforts to aid the poor. On the other hand, if a state permits its AFDC caseload to grow rapidly, the state, not the federal government, will bear the added cost.

It slows the growth of welfare spending.

Contrary to reports in the press, the bill will not cut welfare spending. Instead, it merely slows the rate of growth in spending. Seven major programs are affected by the legislation: Aid to Families with Dependent Children; Food Stamps; Supplemental Security Income (SSI); School lunch and other child nutrition programs; Foster Care; Social Services Block Grant; and the Earned Income Tax Credit (EITC). Under prior law aggregate spending in those programs was scheduled to grow by nearly 50 percent over the next seven years (an annual growth rate of roughly 6 percent). The reform bill will slow the rate of growth to around 35 percent over seven years (an annual growth rate of roughly 4.5 percent). Thus the reform will permit future aggregate spending in these programs to expand faster than the rate of inflation.

It establishes work requirements.

Under the reform bill, welfare will no longer be a one-way handout. Specified percentages of the AFDC caseload will be required to take private-sector jobs. If a private-sector job cannot be found, AFDC recipients will be required to perform community service work in exchange for welfare benefits. When working in a community service job, the welfare recipient must be in a "pay after performance" system: this means the beneficiary will not receive AFDC benefits until after the community service work has been satisfactorily completed. If the individual fails to perform the prescribed number of hours of work, benefits will be reduced. However, because of numerous loopholes, the actual number of recipients who will be required to work is quite low. For example, by 1999 the typical state will be required to have only 18 percent of the AFDC caseload working.

It reduces illegitimacy.

One-third of all American children are born out of wedlock. The collapse of marriage and rise of out-of-wedlock births are the cause of growing welfare dependency, as well as crime and many other social problems. The welfare reform bill contains three provisions to combat illegitimacy. First, it will focus the attention of state governments on the illegitimacy problem by requiring each state to set numeric goals for reducing illegitimacy over the next ten years. Second, it will provide extra bonus funding to states that reduce illegitimacy without increasing abortions. Third, the bill creates a new program to provide abstinence education.

Conclusion

While there are weaknesses in the reform legislation, particularly in the low level of required work, the bill is a significant step in the right direction and does represent the largest change in the welfare system since the early years of the War on Poverty.

Robert Rector is a welfare expert at The Heritage Foundation.