Benefit policy spans the spending and tax programs that increase individual income. The two main types of programs on the spending side are social assistance programs and social insurance programs. Social assistance programs are typically financed through general revenue, take the form of cash or in-kind benefit, and are directed at low-income, low- and middle-income, or otherwise economically insecure populations. Social insurance programs are typically contributory programs in which individuals earn eligibility through insurance contributions—made by them or on their behalf—and then later claim benefits when experiencing an insured event.¹⁶⁷The Academy’s Report to the New Leadership and the American People on Social Insurance and Inequality draws on Robert M. Ball’s nine guiding principles to define social insurance (see pages xxi-xxii). In broad strokes, the benefits of social insurance programs tend to be more strongly based on and linked to one’s work history and one’s earnings history than those of social assistance programs. A vast majority of a nation’s population is covered by social insurance programs, whereas a much smaller portion tends to be eligible for social assistance programs.

The three main types of benefits on the tax side are tax credits, tax deductions, and tax exemptions.¹⁶⁸The Tax Foundation defines these terms as follows:
“A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.”
“A tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions.”
“A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.”
Page 3 of Sammartino and Toder 2020 goes into more detail about the various forms of tax expenditures.
The IRS lists the various tax credits and tax deductions available to both individuals and businesses on its website. These tax policies—designed to achieve a social purpose—are broadly grouped together as tax expenditures.¹⁶⁹See An Overview of Tax Expenditures for more information about the significance of tax expenditures in the U.S. (Bipartisan Policy Center, 2018). This report differentiates tax policy from tax expenditure policy and focuses on the latter. Tax policy encompasses the rates applied to taxable income from which an individual’s or entity’s tax liability is calculated. Tax expenditure policy relates to exceptions that reduce tax liability to promote certain social outcomes.

Two key tensions lie at the heart of benefit policy: 1) determining who should benefit and when, while considering how to prevent or ameliorate economic insecurity but not discourage work and economic self-sufficiency; and 2) determining the cost of providing benefits to a given population to prevent or ameliorate economic insecurity, and whether a more cost-effective way to do so is available.

A program is said to be “means tested” if the program conditions eligibility for benefits on having low enough income and, in some cases, assets. Demonstrating eligibility for benefits often requires more than simply proving that one’s income is sufficiently low.

First, most programs are intended for specific populations within the broader category of low- to middle-income individuals. For example, SNAP benefits are intended to supplement the food budget of low-income families. In practice, benefits are often targeted toward families with dependents, people with disabilities, adults over 49 years of age, and low-income people ages 18–49 who are working.¹⁷⁵These individuals are termed “able-bodied adults without dependents,” or ABAWDs. That phrasing, however, can be considered pejorative for individuals with disabilities, and it incorrectly implies that disabilities are only physical. See SNAP Work Requirements (U.S. Department of Agriculture (USDA))., ¹⁷⁶In fiscal year 2018, 67.1 percent of SNAP beneficiaries were in households with children, 15.7 percent of beneficiaries were in households with “elderly individuals,” 18.6 percent of beneficiaries were in households with non-elderly individuals with disabilities, and 8.1 percent of beneficiaries were adults ages 18-49 without recognized disabilities and in childless households. Overlap between households with children and with elderly individuals is not clear, and overlap in households with non-elderly individuals with disabilities and other households is not clear (Cronquist, 2019. Table A.1, p. 41). SSI is intended for low-income elderly, blind, and disabled individuals. Directing benefits to specific groups allows policy makers to target populations deemed most in need and maintains strong work incentives for those deemed most capable and apt for labor market participation.

Second, historically, federal means-tested programs had asset as well as income tests.¹⁷⁷SSI is the largest program that continues to have and apply asset tests in every state. Many means-tested programs that once had asset tests either no longer have them or do not apply them. Medicaid for families with children, the CTC, CHIP, WIC, and rental assistance, for example, do not have asset tests. Most states have eliminated asset testing in SNAP. A straightforward example of an asset test would be “you must have less than $2,000 in your checking account/cash in order to qualify for….” Programs differ in what they consider assets and what resources are exempt from counting as assets. Typically, at least one car is exempt and the value of one’s home (up to a limit) is exempt. These asset tests were designed to ensure that only those with the least resources would qualify for benefits. Unfortunately, asset tests also discourage those receiving the program’s benefits from saving, or they create incentives for those trying to use the program to hide or dispose of their assets.¹⁷⁸McDonald et al. 2005 review the literature on the impact of asset tests on savings, and they state that “both theory and the available evidence suggest that this disincentive can reduce and distort saving among moderate- and lower-income families.” Chen and Lerman 2005 acknowledge the role that asset tests play in targeting benefits to those with the least resources and lowest incomes, while drawing a similar conclusion from existing literature: “In general, the studies find that asset limits lower the net worth of potentially eligible low-income individuals and families.” Over time, the deleterious consequences of asset limits have been recognized, and many programs have eliminated asset tests or greatly reduced their use, but some asset tests remain. SSI has an asset test determined solely by the federal government. SNAP and TANF have asset tests set by the federal government, but states can remove or amend them, and many have done so.¹⁷⁹Grehr 2018 finds that “states that have eliminated asset limits have found that the resulting administrative cost savings significantly outweigh any increase in the number of families receiving benefits.”A 2017 issue brief by The Pew Charitable Trusts found that, although lifting asset tests does not significantly increase savings among benefit-eligible populations, a number of positive effects were associated with lifting asset tests. Benefit-eligible households in states without asset tests were more likely to have a checking or savings account, and those in states with eliminated or relaxed vehicle limits were more likely to own a vehicle and to have liquid/semi-liquid assets exceeding $500. The Pew brief also reports that lifting asset tests does not yield increased administrative costs or caseload growth. The most recent information on asset tests for program eligibility is produced by the Prosperity Now Scorecard.

Third, in the 1996 welfare overhaul legislation, the federal government issued two sweeping ineligibility measures for federal social assistance programs: Any individual with a felony drug conviction¹⁸⁰Mauer and McCalmont 2013 discuss the 1996 legislation and its impact on individuals with drug felony convictions, as do Mohan et al. 2017. Polkey 2019 provides the most recent data on the degree to which each state continues to ban this group from receiving SNAP benefits. The Network for Public Health Law released a two-part issue brief in 2020, exploring both the public health consequences of the eligibility ban for individuals with felony drug convictions and how states have reacted to the federal ban. and certain categories of immigrants¹⁸¹Broder et al. 2015 explain how the 1996 legislation altered the eligibility status of many immigrants who were potential future beneficiaries of SNAP, TANF, and other federal and state programs. Immigrants who were already benefiting at the time the legislation was enacted did not have their eligibility rescinded. The National Immigration Law Center provides a general overview of immigrant eligibility for federal programs and a more specific body of resources on changes to immigrant eligibility. The National Immigration Forum created a frequently asked questions document in 2018 with regard to immigrants and access to public benefits. would no longer be eligible for benefits. In the time since, states have moved in two directions. Many fully or partially opted out of the felony restrictions, and the federal government has eased, but not eliminated, the immigrant restrictions. Some states, however, have added other behavior disqualifications such as drug tests, particularly in TANF.¹⁸²Thompson 2019 explores the recent uptick in the number of states subjecting potential beneficiaries of TANF and other public programs to various forms of drug screening. A 2016 USDA report lays out various potential “modified bans” for those with drug felonies. These restrictions include “1) limiting the circumstances in which the permanent disqualification applies (such as only when convictions involve the sale of drugs); 2) requiring the person convicted to submit to drug testing; 3) requiring participation in a drug treatment program; and/or 4) imposing a temporary disqualification period.”

Options:

1. End the use of asset tests in eligibility for those means-tested programs in which they remain. This change would eliminate remaining state assets tests in SNAP¹⁸³Thirty-five states and Washington, DC, have already removed the asset limit for eligibility for SNAP. Three states—Idaho, Indiana, and Texas—have raised their asset limit to $5,000, and Michigan and Nebraska have limits of $15,000 and $25,000, respectively. Of the forty states with increased or removed asset limits, sixteen impose asset limits of $3,500 on households with seniors or people with disabilities and gross income exceeding 200 percent of the poverty threshold. and Medicaid¹⁸⁴While Medicaid removed asset tests for low-income families including pregnant women in 2014, asset tests still exist for the income-poor sixty-five and older population and people with disabilities. This asset test is especially relevant to the extent that many in these groups qualify for Medicaid via SSI, which continues to have the most prohibitive asset test. Individuals with especially high health care costs might also qualify for Medicaid, though these individuals are also subject to the asset limit. To qualify, they must “spend down” their countable assets. and end federal and state use of asset tests in SSI¹⁸⁵The Social Security Administration outlines the existing asset test for SSI, including what resources do and do not count as assets and how beneficiaries may save some resources via a “Plan to Achieve Self Support (PASS)” and an “Achieving a Better Life Experience (ABLE)” account. and LIHEAP.¹⁸⁶In fiscal year 2021, eleven states continued to use asset tests to limit eligibility for LIHEAP (see DHHS 2021).

2. Raise the asset-test threshold and design a phase-out of benefits when the asset test is met. Rather than prohibit the use of asset tests, this policy would improve their design. In SSI, for example, asset tests limits are $2,000 for a person and $3,000 for a couple; the limit for couples is 1.5 times the limit for individuals if both are recipients. These limits were set in 1984, fully phased in by 1989, and have since greatly eroded in value.¹⁸⁷Had the asset tests for individuals and couples in SSI kept pace with CPI-U inflation since 1989, they would have been $4,320 and $6,480 respectively in January 2021. Had they kept pace with inflation since they were implemented at $1,500 for individuals and $2,250 for couples in 1974, they would have been $8,420 and $12,630 in January 2021. An increased asset threshold could be accompanied by a benefit phase-out, assuming the administrative feasibility of such a policy.

If the program sets a benefit “cliff,” in which an additional dollar of savings results in a total loss of benefits, recipients are encouraged to keep savings below the cutoff. A phase-out softens this disincentive.¹⁸⁸The ASSET Act, sponsored by TJ Cox (D-CA) in the House and by Christopher Coons (D-DE) in the Senate in 2020, would prohibit asset tests in TANF, SNAP, and LIHEAP, while increasing limits in SSI to $10,000 and $20,000 for individuals and couples, respectively, and indexing them to inflation. Policy makers should think carefully about what sort of phase-out best incentivizes asset accumulation and the administrative difficulties of closely tracking asset levels.¹⁸⁹One type of phase-out might decrease benefits by 8.33 percentage points per month when one exceeds the asset threshold, thus completely phasing out when one has exceeded the threshold for twelve months. Another might decrease benefits as one’s asset levels further exceed the threshold, completely phasing out when one has doubled the asset limit.

3. Prohibit the use of behavior disqualifications in all means-tested programs. This policy would reverse the federal drug felony ban and prohibit states from enacting similar or related policies.

4. Allow more documented immigrants to access means-tested programs. This policy would reverse the immigrant disqualification from certain benefits and prohibit states from enacting similar or related policies.¹⁹⁰The federal government also excludes most immigrants from eligibility for SSI. Immigrant restrictions were intensified with the passing of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (Title V, Subtitle A, Sec. 501). Some states have taken steps in this direction; this policy would remove such disqualifications as a federal rule. One of the consequences of immigrant restrictions is to deter eligible individuals from applying for benefits. Many individuals live in mixed-status families, where the immigration status varies by person, and immigrant disqualification leads to a “chilling” effect, causing eligible immigrants and citizens to be reluctant to apply.¹⁹¹The Center for American Progress, using data from 2010 to 2014, found that almost 10.75 million individuals in the U.S. share a household with an undocumented immigrant. Twersky 2019 does not find evidence of a chilling effect in SNAP in the early 2000s but does observe a lower likelihood of SNAP enrollment among immigrant families relative to “native-born” families. The implementation of the “public charge” rule—which allows for immigrant applications for admission and residency in the U.S. to be denied on the basis of having received public benefits in the past and on the basis of whether one is deemed likely to receive public benefits in the future—in February 2020 has immediately renewed the conversation around chilling effects. Early data analyses from The Urban Institute show that, between 2018 and 2019, the portion of adults in benefit-eligible immigrant families with at least one nonpermanent resident that experienced a chilling effect (i.e., did not enroll in public benefit programs out of fear of immigration consequences) increased from 21.8 percent to 31.0 percent. Capps 2020 discusses the findings of the report and interviews its lead author.

SNAP benefit amounts are based on the Thrifty Food Plan¹⁹³USDA, Center for Nutrition Policy and Promotion. Thrifty Food Plan, 2006.  produced by the U.S. Department of Agriculture.¹⁹⁴See Carlson 2019 for a discussion of the Thrifty Food Plan and why it fails to meet the needs of low-income households. Total SNAP benefits awarded to a household vary by the number of people in it.¹⁹⁵Center on Budget and Policy Priorities. 2020. A Quick Guide to SNAP Eligibility and Benefits.

Prior to the enactment of the American Rescue Plan Act of 2021 (ARP) and the COVID-19 relief package enacted in December 2020, maximum SNAP benefits for an individual in 2021 were set to provide $204 per month and decline per individual with each additional family member. This benefit calculation came out to $6.71 per day for a household of one receiving maximum benefits. For a household of five, the maximum benefit drops to $5.31 per day per individual.

With the enactment of the ARP, the 15 percent increase in SNAP benefits enacted by the December 2020 COVID-19 relief package extended through September 2021.¹⁹⁶Center on Budget and Policy Priorities. 2021. States Are Using Much-Needed Temporary Flexibility in SNAP to Respond to COVID-19 Challenges. Furthermore, many states provided “emergency allotment” benefits of at least $95 per household per month through the early summer of 2021.¹⁹⁷Food and Nutrition Service. 2021. SNAP COVID-19 Emergency Allotments Guidance. U.S. Department of Agriculture.

Researchers have found that families receiving SNAP vary their nutrition and caloric intake throughout the month as they receive, use, and then wait for additional benefits. This monthly fluctuation in food security has been shown to have a wide range of negative effects, from reducing child health to adversely affecting children’s academic performance.¹⁹⁸Gassman-Pines and Bellow 2018 find a statistically significant relationship between students’ test scores and the recency of a SNAP benefit transfer. Gennetian et al. 2016 find that students in Chicago public schools that receive SNAP benefits are more likely to commit “disciplinary infractions” at the end of the month than nonrecipients.

Effective October 2021, the Thrifty Food Plan—on which SNAP benefits are based—was reevaluated by the USDA, resulting in a 21 percent increase in maximum SNAP benefit amounts and a 27 percent increase in the average SNAP benefit.¹⁹⁹USDA, Food and Nutrition Service. 2021. SNAP Benefit Changes: October 1, 2021. This change comes out to a $12–$16 increase per person per month. The change will go a long way in reducing the “SNAP shortfall,” which was estimated to be $10–$20 per person per month as of 2015.²⁰⁰The Urban Institute finds that the average per meal snap benefit fell $0.50 short of the average cost per meal in 2015. Over a month, this shortfall comes to $46.50, or just over $10 per week per person. For those eligible for SNAP in the “ten percent of counties with the highest average meal cost, the monthly shortfall is $82.04 per person,” or roughly $20 per week per person.

Eligibility for SNAP is a three-part test of gross income, net income, and, in some states, assets. Gross income must be at or below 130 percent of the poverty line (except for households with an elderly member), net income must be at or below 100 percent of the poverty line, and in ten states²⁰¹See footnote 183. liquid assets (such as cash in a bank account) must be below a certain amount, typically $2,250 for a household without an elderly or disabled member. These income and asset tests often are not required, however, if individuals have “broad-based categorical eligibility” because they are currently enrolled in TANF, SSI, or state-run general assistance programs. In addition, individuals without dependent children who do not have a disability are only eligible for three months of SNAP while unemployed or working less than twenty hours a week in a three-year period, unless they are enrolled at least half-time in an approved work or training program or live in an area of elevated unemployment and their state has secured a waiver from the time limit for the area.²⁰²Center on Budget and Policy Priorities. 2020. A Quick Guide to SNAP Eligibility and Benefits.

Options:

1. Automatically increase SNAP benefits for families with children during summer months while school is not in session, beyond 2021. For families whose children are on free and reduced meals at school, their food budget needs increase in the summer. One proposal is to increase SNAP benefits by 50 percent for the summer months.²⁰³In the summer of 2018, only 13.1 percent of children who received free and reduced-price school lunches participated in a summer food service program (Children’s Defense Fund, Table 12). Nord and Romig 2007 found higher levels of food insecurity, especially among households with children, during the summer months.

The ARP provided corresponding benefits to families for any meals missed by children when schools were closed, including during the summer months of 2021.²⁰⁴U.S. Department of Agriculture. 2021. Help to Put Food on the Table: Facts on Nutrition Assistance in the American Rescue Plan.

2. Expand allowable purchases and enable families to afford a more nutritious diet. SNAP benefits may be used to purchase most food items, except prepared foods for immediate consumption and hot foods (anything like takeout).²⁰⁵U.S. Department of Agriculture, Food and Nutrition Service. 2020. What Can SNAP Buy? Increased flexibility in spending choices would make SNAP benefits more like cash, and in doing so better offset the costs of nutrition for low-income households.

This proposal would expand the allowable foods and provide further incentives for healthy food purchases.²⁰⁶The Bipartisan Policy Center’s 2018 report titled Leading with Nutrition: Leveraging Federal Programs for Better Health lays out options to change SNAP to emphasize better nutritional outcomes. Two specific recommendations include eliminating the purchase of sugar-sweetened beverages and strengthening incentives to purchase fruits and vegetables.

3. End the time limit for nondisabled adults without dependents. Currently, adults ages 18–49 who do not have dependents and do not have a disability that qualifies them for Medicaid or SSI are subject to a three-month time limit on receiving SNAP during any three-year period unless they report twenty hours of work per week. Eliminating SNAP’s time limit would enable unemployed and underemployed workers to continue to receive food assistance whether or not they are able to find steady work.

SSI is a cash benefit awarded to individuals with very low income and assets who are elderly, blind, or disabled. In 2021, the maximum federal SSI benefit for an individual was $794 per month.²⁰⁸Social Security Administration. 2021. SSI Federal Payment Amounts For 2021.

As of 1980—six years after its initial implementation—the majority of recipients were ages sixty-five and older; today, most SSI recipients are younger than sixty-five and disabled.²⁰⁹Congressional Budget Office. 2012. Supplemental Security Income: An Overview. Figure 2. For almost 60 percent of recipients, SSI benefits are their only source of income.²¹⁰Social Security Administration. 2020. SSI Annual Statistical Report, 2019. Table 9. Current benefits are calculated as a monthly amount. Monthly unearned and earned income reduce that monthly benefit, after initial disregards.²¹¹SSA 2020 states that “the first $65 of earnings and one-half of earnings over $65 received in a month” are not counted as income for SSI, and that they “subtract your ‘countable income’ from the SSI Federal benefit rate.” SSI also allows a $20 exemption for unearned income, which may be counted against earned income if one does not have $20 in unearned income. In other words, after $85 in earnings (if one has no unearned income), for every dollar a beneficiary earns, 50 cents are subtracted from their benefit. While earned income above the threshold is deducted at 50 cents per dollar earned, unearned income exceeding the threshold is offset dollar for dollar.

Options:

1. Increase the monthly SSI benefit to at least the federal poverty level. The current maximum monthly federal benefit is well below the poverty level.²¹²In 2021, the annual federal poverty level for a household of one was $12,880, or $1,073 per month. The maximum individual federal SSI benefit in 2021 of $794 per month was only 74 percent of monthly poverty level income. One proposal is to increase SSI benefits to the federal poverty level. A level increase in federal SSI benefits and continued annual inflation adjustments—currently achieved using the CPI-W, the price index for urban wage earners and clerical workers—would improve living standards for some of the most financially insecure populations and keep benefits at a relevant level over time.

2. Update the earned and unearned income disregards. In general, SSI benefits phase out as a person’s income from other sources increases above certain thresholds. Currently, SSI recipients can receive a combined total of $85 per month in earned and unearned income without experiencing a reduction in benefits. This proposal would increase both the earned income and unearned income disregards. One proposal is to update both disregards annually with inflation. Another proposal would tie the disregards to a multiple of the minimum wage for a full-time worker. For instance, an allowance of 160 (hours) times the minimum wage per month would allow four weeks of full-time work without benefit reductions.²¹³For purposes of illustration, in 2021, with a federal minimum wage of $7.25, this change would allow for roughly $1,257 of individual earnings per month prior to benefit reductions ($7.25 per hour x 40 hours of work per week x 4.33 weeks per month).

3. Eliminate or reform the one-third benefit reduction for “in-kind support and maintenance.” Currently, SSI beneficiaries see meager benefits reduced by one-third if they are considered to be receiving help paying for food or shelter.²¹⁴Social Security Administration. 2021. Understanding Supplemental Security Income Living Arrangements. Eliminating this one-third reduction would increase benefits for many of the most financially insecure SSI beneficiaries.

4. Extend the benefit phase-out for earnings to more effectively support beneficiaries attempting to return to work. Currently, for every dollar of earned income above a threshold amount, an SSI recipient loses 50 cents in benefits, a 2:1 ratio. An extended benefit phase-out would change the benefit loss to a 4:1 or 5:1 ratio to encourage and permit work.

5. Eliminate marriage penalties. Currently couples in which both individuals are SSI beneficiaries see benefits reduced by 25 percent if they marry.²¹⁵Social Security Administration. 2021. SSI Federal Payment Amounts for 2021. SSI beneficiaries who marry non-SSI beneficiaries can lose benefits altogether due in large part to the program’s asset limits, which include spousal assets. Eliminating the benefit reduction for married couples receiving SSI and eliminating or increasing asset limits would extend marriage equality to SSI beneficiaries and better assure that the most financially insecure populations have a meaningful, steady stream of income.

6. Extend SSI eligibility to qualifying residents of U.S. territories. Under current law, residents of American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands are ineligible for SSI, even if they are U.S. citizens or documented U.S. immigrants. Guam, Puerto Rico, and the U.S. Virgin Islands have programs that provide benefits to the same populations, but the benefits are small compared to what SSI would offer.²¹⁶In 2011, Puerto Rico’s Aid to the Aged, Blind, or Disabled program provided benefits to 34,401 individuals per month. The Government Accountability Office finds that “average monthly participation in SSI would have ranged from 305,000 to 354,000” if residents were eligible. Government Accountability Office. 2014. Information on How Statehood Would Potentially Affect Selected Federal Programs and Revenue Sources. GAO-14-31, p. 78. American Samoa has no such programs.²¹⁷Congressional Research Service. 2021. Proposed Extension of Supplemental Security Income (SSI) to American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands. IN11793. This option was proposed in the Build Back Better legislation of 2021.²¹⁸Balmaceda, Javier. 2021. Build Back Better Permanently Extends Economic Security to Puerto Rico and Other Territories. Center on Budget and Policy Priorities.

An adult cash benefit program would provide a modest but reliable amount of income to every adult each month, regardless of income, assets, disability status, criminal record, and the many other criteria often used to determine program eligibility in the U.S. This concept recognizes that the need for income stability and support extends beyond categories of individuals and that, for many individuals, periods of low or very low income happen sporadically. It also allows people to choose how to use their resources, without having to establish need or eligibility, and frees them from having to account to the government for how funds may be used. A universal cash benefit providing adequately for all individuals’ needs is not, however, financially feasible without major new revenue sources or rearranging the current safety net.²²⁰The UIB should not be confused with the universal basic income (UBI). The former aims to provide a small cash base of income, but not one that could reasonably be expected to fill all basic needs. The latter is a larger benefit that would require significant increases in government spending or the elimination of large parts of the existing safety net so that the monthly benefit would provide enough income to meet a “basic” standard of living. In addition, very high benefits might raise concerns about work disincentives.

A cash benefit flowing to all adults creates the infrastructure for Congress to respond quickly to economic shocks that require relief—for example, increasing the UIB in regions affected by natural disasters or efficiently and quickly providing a stimulus during recessions. An alternative approach to a UIB, a negative income tax, is outlined later in this section in the context of tax credits.

Options:

1. Create a UIB for all adults. A universal cash benefit program would help individuals in current economic need and/or would support savings for future needs. The UIB would be a modest monthly amount to provide a floor but not meet, or be intended to meet, adequacy standards, such as $200 a month.

2. Subject the UIB to income taxation. Taxing UIB payments would “claw back” some of the benefit for higher income households. For example, when filing tax returns each year, individuals might be allowed to opt out of future UIB payments, transfer UIB payments to a savings account, or automatically transfer the UIB payments to a charity. The Alaska Permanent Fund operates similarly.²²¹Alaska 529 allows for Alaskans to contribute their permanent fund dividend directly to a tax-advantaged savings account for educational expenses. Pick. Click. Give. allows for Alaskans to donate their dividend to charities and causes within their state. More information about the dividend and the Permanent Fund can be found on Alaska.gov.

3. Exempt the UIB from the income amount used to determine eligibility for other programs. The benefit would not be counted as income for SNAP or SSI, for example. This exemption ensures that the payment adds to economic security and does not create perverse disincentives, as discussed in the context of other programs.

4. Index the UIB to growth in the average or median wage. Indexing the UIB payment would ensure that the benefit increases automatically each year.

Individuals earn eligibility for Old Age, Survivors, and Disability Insurance (OASDI) by working in covered employment and making contributions that are deducted from their earnings, as authorized by the Federal Insurance Contributions Act (FICA). Their contributions are matched by equal contributions made by their employers. Earnings are subject to the contribution for Social Security up to a maximum, $142,800 in 2021. These earnings are used to calculate benefits.²²⁸Social Security Administration. 2021. Contribution and Benefit Base.

Individuals born after 1959 have a statutorily defined full “Retirement Age” of sixty-seven years old.²²⁹Congress raised the full retirement age to sixty-seven for all individuals born in 1960 and later. A full retirement age of sixty-five applies to individuals born before 1938, and a full retirement age of sixty-six for individuals born between 1943 and 1954. All other birth years reach full retirement at two-month increments in between the whole-number ages (SSA 1983). Benefits are calculated from their earnings history and are based on the highest thirty-five years of earnings.²³⁰To qualify for Social Security benefits, an individual must have at least forty “quarters of coverage,” or “credits.” In 2021, one credit is received per $1,470 of covered earnings up to a maximum of four credits per year. So in 2021, for example, one needed to earn 4 x $1,470 = $5,880 in covered earnings in order to receive four credits (SSA 2021). Certain groups of workers are not covered by Social Security. Berry 2020 offers more information regarding how Social Security benefits are calculated. The formula is progressive, meaning that individuals with a lower lifetime income have a higher replacement rate than individuals with higher lifetime income.²³¹An example of a progressive benefit structure is as follows: Person A averaged inflation-adjusted earnings of $40,000/year over their thirty-five highest earning years and receives $20,000/year in retirement benefits. Person B averaged inflation-adjusted earnings of $100,000/year over their thirty-five highest earning years and receives $30,000/year in retirement benefits. Although Person A receives $10,000 less per year in retirement benefits, their replacement rate is 50 percent ($20,000 / $40,000) compared to Person B’s replacement rate of 30 percent ($30,000 / $100,000). The Office of the Chief Actuary provides more detailed examples of how Social Security benefits are calculated.Claiming one’s Social Security retirement benefit before one’s full retirement age (i.e., before turning sixty-seven for individuals born after 1959) reduces the monthly benefit, while claiming benefits after one’s full retirement age increases the monthly benefit. In this regard, the benefit structure may not appear progressive if two people claim at very different times due to the penalty for claiming early and the credit for claiming late. See Early or Late Retirement on the SSA’s website for information on the extent to which benefits are decreased and increased depending on when one claims. The last time Congress comprehensively addressed OASDI was in 1983. The last time Congress increased OASDI benefits was in 1972.

Although the benefit amount is a function of earnings, Social Security has minimum benefits and maximum family benefits. The so-called special minimum benefit provides a floor for people with a lifetime of very low earnings.²³²The “special minimum benefit” is calculated based on one’s special minimum primary insurance amount, which is a function of the number of years one has earnings at or above a certain threshold. (Li, 2020) The value of the special minimum has eroded significantly over time, however, since it is tied to increases in prices rather than wages, and prices tend to grow more slowly than wages. No new beneficiaries receive higher benefits from this minimum than from the regular formula; the last minimum benefit was awarded in 1998.²³³Feinstein 2013 shows that, although the last minimum benefit was awarded to a worker who became eligible for benefits in 1998, a small number of workers and family members of workers continue to receive benefits based on the special minimum primary insurance amount. The highest benefit is the benefit based on career earnings at the earnings cap; individuals receive the highest benefit if they earned at or above the cap for thirty-five years.

Social Security benefits are payable, as their own separate benefits, to a worker’s family, based on the worker’s earnings.²³⁴See Types of Beneficiaries on the SSA’s website for more information. Spouses, divorced spouses, dependent children, and, in some cases dependent grandchildren of retired or disabled workers, and the widow(er), divorced widow(er), or dependent children, and, in some cases dependent grandchildren and parents of a deceased worker may be eligible for benefits.²³⁵About 6.1 million children—8 percent of all children in the U.S.—are estimated to have either received benefits directly in their own right or indirectly as the result of living in households that received income from Social Security in 2018. In that year, Social Security benefits reduced child poverty by 1.6 percentage points, from 17.8 percent to 16.2 percent. Put differently, Social Security lifted almost 1.2 million children out of poverty (Romig, 2020). The benefit amount for an auxiliary beneficiary is a percentage of what is labeled the worker’s “primary insurance amount” (PIA).²³⁶The primary insurance amount is the average, inflation-adjusted earnings of the relevant worker’s thirty-five highest earning years during which they contributed to Social Security.

In addition to retired workers, survivors, and dependents, Social Security has three main types of beneficiaries with disabilities. Individuals who have worked previously and achieved insured status²³⁷See footnote 230 for information on a sufficient work history to qualify for Social Security benefits. are eligible for disability benefits if they are no longer able to work due to a medical condition that is expected to last at least one year or result in death.²³⁸Although both SSDI and SSI provide income to individuals with disabilities, they are very distinct programs. A 2018 CRS report outlines the many differences between the two programs. The report outlines the five-step process used to determine whether one’s condition meets the disability standard for SSDI and SSI adult eligibility. This process considers one’s current ability to earn income and the extent of the disability. Additionally, individuals with permanent disabilities that began before age twenty-two and have a parent with a sufficient work history are eligible to receive disabled adult child (DAC) benefits once their parent claims benefits. This group is a subset of survivors and dependents.²³⁹A DAC beneficiary receives benefits from the Trust Fund from which their parent is receiving benefits. If, for example, the parent of a DAC beneficiary is receiving retirement benefits, the DAC beneficiary will receive benefits from the Old-Age and Survivors Insurance Trust Fund as well, not the Disability Insurance (DI) Trust Fund. As a result, most DAC beneficiaries do not receive benefits out of the DI Trust Fund. A third group, widow(er)s with disabilities between ages 50–60, is eligible to receive benefits if the relevant disability began before or within seven years of a working spouse’s death. This group is also a subset of survivors and dependents.

Workers with disabilities who are awarded Social Security disability insurance benefits do not begin to receive those monthly benefits until five months after the date of the disability’s onset. They also receive Medicare, but only starting two years after the beginning of benefit eligibility. In December 2020, the average Social Security Disability Insurance worker benefit was $1,277 per month, or just over $15,000 per year.²⁴⁰Social Security Administration. 2021. Beneficiary Data: Number of Social Security recipients
at the End of Dec 2020.

Workers with disabilities receive Social Security disability insurance benefits until the worker recovers or dies, though once the worker reaches retirement age, the benefit is seamlessly converted to an old age insurance benefit of the same amount.²⁴¹“The Social Security full retirement age (FRA) is the age at which workers can first claim full (i.e.,unreduced) Social Security retired-worker benefits.” As of 2021 the FRA was sixty-six and ten months and is sixty-seven in 2022 (The Social Security Retirement Age, Congressional Research Service). Workers who earn enough to support themselves, an amount defined as “substantial gainful activity” (SGA),²⁴²In 2021 the monthly SGA amount was $1,310 ($15,720/year) for nonblind individuals and $2,190 ($26,280/year) for blind individuals. The monthly threshold must be exceeded “net of impairment-related work expenses,” and “[t]he amount of monthly earnings considered as SGA depends on the nature of a person’s disability” (Substantial Gainful Activity, Social Security Administration).are not considered disabled for the purposes of receiving Social Security. Workers with disabilities receiving Social Security disability insurance benefits are allowed to earn over the SGA in specified circumstances, to encourage return to work efforts.²⁴³If an individual exceeds the SGA threshold for nine months in a rolling sixty-month period, they will no longer receive disability benefits (Trial Work Period, Social Security Administration).

Options:

1. Update the special minimum benefit and index it over time to the average or median wage. As of 2012, 12.7 percent of retired worker Social Security beneficiaries and 23.4 percent disabled worker Social Security beneficiaries were living in poverty; secondary beneficiaries face high poverty rates as well.²⁴⁴This estimate of poverty uses the Supplemental Poverty Measure. Secondary Social Security beneficiaries faced the following poverty rates in 2012 (ordered from largest quantity to smallest): aged widow(er)s 19.7 percent, aged spouses 13.4 percent, disabled adult children 37.6 percent, disabled widow(er)s 31.0 percent, child-in-care widow(er)s 23.5 percent, and child-in-care spouses 33.8 percent (Poverty Status of Social Security Beneficiaries, by Type of Benefit, Bridges and Gesumaria 2016). This policy would increase income security for low lifetime earners and adjust the minimum benefit annually based on the change in wages so that it would not erode in the future. An updated minimum benefit would also ensure more adequate benefits for survivors and dependents of workers with low lifetime covered earnings.

2. Increase all benefits (progressively) by increasing the rate at which first dollars of earnings are replaced. A worker’s PIA is calculated from a formula that is bracketed and progressive.²⁴⁵Social Security Administration. Primary Insurance Amount. The summary of potential changes to the PIA formula can be found at Provisions Affecting Monthly Benefit Levels.“Bracketed” means that a replacement rate is applied to “brackets” of wages. “Progressive” means that the lower the wage’s bracket, the higher the marginal replacement rate. This formula might be amended to increase benefits disproportionately for workers with the lowest lifetime earnings by increasing the replacement rate and dollar amounts of the first bracket. This change would also ensure more adequate benefits for survivors and dependents of workers—especially those workers with low lifetime covered earnings.

3. Increase benefits for the oldest beneficiaries. This policy would add a flat dollar amount or percentage increase once beneficiaries reach age eighty or eighty-five in acknowledgement of the tendency for health care and caregiving costs to increase as one ages and the potential for savings depletion at later ages.

4. Eliminate the five-month waiting period for disability insurance benefits. This change would reduce the need for workers with disabilities to draw down savings and assets—if they have them—in the interim and eliminate a period of potential hardship if they do not.

5. Eliminate the 24-month waiting period for Medicare following receipt of disability insurance benefits. Workers with disabilities who receive Social Security disability insurance (SSDI) benefits by definition cannot engage in substantial gainful activity (and are therefore not accessing employer-sponsored insurance), have a preexisting condition, and are likely to have greater health care needs than a person without a disability. Insurance may be difficult to attain or afford, and out-of-pocket expenses may be unaffordable. Immediate Medicare eligibility would protect recipients of disability insurance benefits from these additional health and financial risks.

6. Improve work incentives for individuals receiving disability benefits by increasing SGA thresholds and phasing out benefits more gradually. If countable monthly earnings exceed the SGA threshold, Social Security disability benefits continue for nine months to avoid penalizing efforts to return to work.²⁴⁶Countable earnings are gross earnings minus applicable exclusions. An example of an exclusion is impairment-related work expenses. Even so, the current structure creates a benefit cliff that can disincentivize both part- and full-time work. In addition, workers with disabilities frequently experience changes in their conditions that may enable or limit access to work for periods of time. The 2021 SGA level employed by SSDI is $1,310/month ($15,720/year) for nonblind individuals and $2,190/month ($26,280/year) for blind individuals. SSI uses the lower SGA level for both blind and nonblind individuals with disabilities. A policy to improve work incentives might include a redesign of the benefit phase-out and a change to the SGA threshold.²⁴⁷A 2015 Bipartisan Policy Center report lays out options for policy makers to improve work incentives, to increase experimentation around returning to work, and to improve interagency coordination to better help people with disabilities remain in the workforce in some capacity.Fichtner and Seligman 2018 explore changes to SSDI that would allow for benefits to be received for temporary and partial disabilities.

7. Address program needs of people receiving DAC benefits. Some people with disabilities attain Social Security benefits through the work history of their parents. These individuals, also known as DAC beneficiaries, face key program design issues. The first is a marriage penalty. Unless a DAC beneficiary marries another DAC beneficiary, disability benefits typically end. This policy puts DAC beneficiaries in a difficult situation, where marriage may cost them key income as well as access to Medicare.

The second design issue is the work incentive. DAC beneficiaries who lose benefits due to earned income exceeding the SGA threshold may return to those benefits in the future if they are no longer earning above the SGA threshold and continue to have the qualifying disability. Individuals who would receive DAC benefits but for their parent having yet to claim Social Security benefits, however, will permanently forfeit their benefits and access to Medicare if they earn income above that threshold for even a short period prior to their parent claiming benefits. As such, people with disabilities receiving SSI who attempt to use the work incentives within SSI risk permanently losing the valuable support of the OASDI benefits and Medicare. This aspect of the law creates a major work disincentive for potential DAC beneficiaries.

8. Change the calculation of spousal and widow(er) benefits.²⁴⁸The Social Security Administration provides a brief overview of spousal benefits. The spousal benefit structure was designed in 1939 when most families had only a single earner. The spouse of a worker beneficiary is entitled to a benefit calculated from their own earnings and, if that amount is less than 50 percent of their spouse’s benefit, a spousal benefit that brings the total benefit up to that 50 percent level. Surviving spouses of deceased workers receive the higher of their benefit or their deceased spouse’s benefit. This formulation of the survivor benefit can result in the survivor in a couple with two equal earners experiencing a sharper decline in Social Security benefits than does the survivor of a single-earner couple. This change would increase benefits to survivors of dual-earning marriages by either 1) increasing the percent of their spouse’s benefit to which they are entitled or 2) entitling survivors to 100 percent of their spouse’s benefit altogether. These survivor benefits would supplement any individual benefits received by the widow(er). This policy would ensure that dual-earning households are not penalized relative to single-earning households.

Another possible change that would increase the economic security of some spouses—in practice, primarily women—would be to reduce the number of years of marriage required for someone to qualify for a spousal benefit and phase it out such that benefits vary with years of marriage up to a certain length. Currently that requirement is ten years, and it functions as a cliff.

9. Restore the student benefit for college-aged children. Prior to the 1981 repeal, child beneficiaries (receiving auxiliary benefits) were eligible for benefits through age twenty-two if they were enrolled in postsecondary education. Now they are eligible only through age nineteen, and only if still in high school. Restoring this more extensive benefit would increase income security for students with a parent who is no longer earning income in the labor market.

Unlike SNAP or SSI, funding for Social Security (the OASDI programs) comes exclusively from its own dedicated revenue streams: Social Security contributions, investment income, and dedicated revenue from treating some benefits as taxable income for federal income tax purposes. As a social insurance program, the employer-employee contributions, which are the primary source of dedicated revenue, along with the work on which the contributions are based, confer insured status. Only workers who have worked in Social Security–covered employment for a sufficient number of quarters of coverage are eligible for Social Security worker benefits, on which all auxiliary benefits are based.²⁴⁹In 2010, about 4 percent of the elderly population was not eligible for current or future Social Security benefits due to insufficient earning histories. The poverty rate of this group was estimated to be about 44 percent (Whitman et al. 2011). Social Security is “current funded,” meaning that, for example, 2022 benefits are paid (in part) by revenue from 2022 payroll taxes. Annual trustees’ reports project future trust fund income and outgo to ensure that resources will be available to meet future benefit obligations.²⁵⁰Social Security Finances: Findings of the 2020 Trustees Report discusses how Social Security is financed and how the Office of the Chief Actuary at the SSA projects revenue and outlays each year over the next seventy-five years, summarized, as well over the ensuing nineteen, twenty-five, and fifty years. Whereas federal budgetary actions are measured over a ten-year window by the Congressional Budget Office, Social Security is projected much farther into the future. Since about 1994, Social Security’s Trustees reports have projected that around 2035–2040,²⁵¹The exact year in which the OASDI trust funds are projected to become depleted while projected outlays exceed projected revenue tends to vary with the economy. The more people who are working, generally, the more revenue goes to the trust funds. To take into account economic uncertainty, the Trustees Report projects low-cost, intermediate-cost, and high-cost scenarios for the OASDI trust funds over the time horizons previously mentioned. Over time, the projected year in which reserves will be fully drawn and outlays will exceed revenue has moved somewhat closer in time than when first projected, though some time around 2035 remained the consensus as of early 2020. The impact of the pandemic recession does not appear to change the trust fund depletion date by more than six months to a year, according to the SSA as of late 2020. the combined OASDI trust funds²⁵²The Social Security program operates two separate trust funds: the OASI trust fund and the DI trust fund. They are generally discussed as a group (OASDI), however, because if one of these trust funds were depleted before the other and still had unmet obligations, it is anticipated that the excess reserves in either fund would be used to pay out any unmet OASDI obligations. The use of the excess reserves would, however, require legislation passed by Congress and signed by the president. Read more about the trust funds in this CRS report from 2020. will no longer have sufficient revenue and reserves to meet all beneficiary obligations. To restore Social Security to long-range actuarial balance, as well as fund the cost of expansions to OASDI, additional revenue must be secured, the cost of benefits must be reduced, or some combination of the two.

Social Security, for decades, took in more revenue than the cost of current benefits and associated administrative costs. These funds are kept in Social Security’s two trust funds as reserves where they are invested until needed. By law, the reserves must be invested in federal bonds backed by the full faith and credit of the U.S. Currently, the reserves of approximately $2.9 trillion are invested in U.S. Treasury bonds. The key date for Social Security’s shortfall is when the trust funds’ reserves are expected to be depleted, at which point then-current income will cover only around 75–80 percent of then-current expenses. Hence, most policy options for Social Security are expressed in relation to reserve depletion. The current projection for reserve depletion is 2035.²⁵³Arnone, William, and Jay Patel. 2020. Social Security Finances: Findings of the 2020 Trustees Report. National Academy of Social Insurance.Board of Trustees. 2020. Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Social Security Administration. Many options exist for restoring Social Security to actuarial balance, some of which involve reducing benefits.²⁵⁴An Academy report from 2009 titled Fixing Social Security: Adequate Benefits, Adequate Financing lays out options that shore up the finances of the trust funds while also ensuring that benefits paid to those who most rely on them in retirement and in life are not reduced and in some cases are increased. The Office of the Chief Actuary projects the impact on the trust funds’ finances of many changes to Social Security, including certain benefit cuts. Since this report is focused on economic insecurity, the report does not discuss options that would reduce benefits and instead focuses on options to increase Social Security’s dedicated revenue.

Options:

1. Increase the Social Security insurance contribution (Federal Insurance Contributions Act, or FICA rate). The current Social Security FICA rate is 6.2 percent for employees and 6.2 percent for employers for a combined rate of 12.4 percent. This option would increase that rate. The Social Security Administration’s Office of the Chief Actuary (OACT) lays out ten options and their respective impacts on Social Security’s finances in the short and long terms.²⁵⁵See “Category E: Payroll Taxes” proposals E1.1 through E1.10 in Summary of Provisions that would Change the Social Security Program. For example, if the 6.2 percent rates were increased to 7.9 percent, for a combined employer-employee rate of 15.8 percent, 101 percent of the projected shortfall would be eliminated.

2. Increase or eliminate the maximum taxable wage base for Social Security. Social Security contributions are levied on “covered” wages, which are wages that are below an annually indexed amount, called the maximum taxable wage base, and after that point wages are not subject to Social Security for either contributions or benefits purposes. In 1977, Congress increased the wage base and indexed it to the average increase in wages nationwide, with the intention of covering 90 percent of total wages paid nationwide.²⁵⁶Whiteman, Kevin. 2009. Distributional Effects of Raising the Social Security Taxable Maximum. Social Security Administration. Policy Brief No. 2009-01. That 90 percent goal was reached in 1983 but has steadily declined since then because of increasing income inequality. That is, wages for the wealthiest have grown faster than average wages. Consequently, the current maximum covers only 83 percent of total wages nationwide.²⁵⁷In 2021, the taxable wage cap was $142,800.

This policy would increase or eliminate the cap; proposed options include removing the cap entirely, removing it on employers only, and increasing the cap to cover 90 percent of taxable wages. An additional option would phase out the cap over many years by starting with wages above a certain amount, such as $250,000 or $400,000. The amount of revenue raised by these options depends on specific design features, including how the higher wages are treated for benefit purposes.²⁵⁸Congressional Budget Office. 2018. Increase the Maximum Taxable Earnings for the Social Security Payroll Tax. The OACT analyzes thirty-four options to carry out some combination of raising, eliminating, or slowly phasing out the cap, as well as restoring the maximum taxable wage base to cover 90 percent of total wages.²⁵⁹See “Category E: Payroll Taxes” proposals E2.1 through E2.15 and E3.1 through E3.19 in Summary of Provisions that would Change the Social Security Program. For example, if the maximum taxable wage base were eliminated for contributions only, not benefits, then 73 percent of the projected shortfall would be eliminated.

3. Treat at least some 1099 workers more like W-2 workers for purposes of Social Security contributions. Individuals who are self-employed must pay both the employee and employer tax on earnings—the full 12.4 percent, though they deduct the employer portion from income for tax purposes.²⁶⁰Internal Revenue Service. 2020. Self-Employment Tax (Social Security and Medicare Taxes).  When income is paid from an employer to an employee, the employer must deduct the employee’s required Social Security contributions and transmit the amount, along with the employer portion, to the federal government. The employee portion transmitted is listed on an annual W-2, filed with the government. No withholdings for Social Security on income paid to nonemployees, including independent contractors, are made. The income is recorded on a 1099 form, which is transmitted to the government; a copy of which is also transmitted to the worker.²⁶¹There are several 1099 forms, based on the type of income and who issued it and how it was paid. In most cases, independent contractors will receive a Form 1099-K, a Form 1099-MISC, or a Form 1099-NEC from the person or entity that pays them compensation. You can read an overview here: What Is an IRS 1099 Form? What It Means, How 1099s Work (Orem, 2021) Firms do not have to compensate independent contractors in the same way they do employees; they are neither subject to labor standards such as the minimum wage or overtime, nor does the employer have to pay taxes on their compensation. Requiring employers of 1099 workers to pay some Social Security, as they do for W-2 workers, is one way to reduce the incentives of employers to misclassify these two different kinds of workers. It might be a flat tax per 1099 issued, might vary based on the total per person paid via 1099, or the number of 1099 forms the firm issues, or might be simply to treat 1099 workers identically to W-2 workers for Social Security purposes. The change might apply only to very large, profitable employers that employ a certain large number—hundreds of thousands, for example—of 1099 workers to reduce the burden placed on small businesses.

4. Dedicate a new source of progressive revenue to Social Security. While the vast majority of Social Security OASDI financing comes from payroll taxes (90 percent), payroll taxes are considered regressive, even though Social Security benefits are progressive. Only about 3 percent of Social Security’s dedicated revenue comes from a progressive source.²⁶²Board of Trustees. 2020. Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Table II.B1. Social Security Administration. Specifically, a portion of the benefits paid to higher income Social Security recipients are considered taxable income; proceeds from this tax are dedicated to Social Security. Other progressive sources of revenue, such as the Estate Tax or a Financial Transactions Tax, might be dedicated to Social Security to increase program progressivity and to increase trust fund revenues.

Unemployment Insurance (UI), unlike OASDI, is a joint state–federal undertaking, in which the obligation to make contributions is levied on employers only. The federal government sets broad requirements for who should benefit (workers who are willing and able to work, individuals who have worked, but have lost their job through no fault of their own), but individual states set the eligibility requirements, benefit amounts, and benefit durations. Each state maintains its own trust fund for UI benefits. In addition, the federal government maintains the federal unemployment insurance trust fund, which pays all administrative costs, makes loans to states, and generally pays part of the cost of extended benefits during periods of high unemployment.

Two payroll taxes on employers provide funding for UI; one is levied by the state pursuant to the State Unemployment Tax Acts (SUTAs) and one is levied by the federal government pursuant to the Federal Unemployment Tax Act (FUTA). Like FICA, the primary source of revenue for Social Security, both the SUTAs²⁶⁴The SUTA tax base and tax rate are determined by state legislatures. The base must be a minimum of $7,000 but may be higher. There is no constant minimum rate. State tax bases vary from the minimum of $7,000 to $52,700, and rates vary from 0 percent to 14.37 percent. Within each state, however, there is a minimum and maximum tax rate depending on an employer’s “experience rating,” or the likelihood that former employees successfully claim unemployment benefits. The higher the likelihood, the higher the tax rate. In Massachusetts, for example, the maximum rate is 14.37 percent, but the minimum rate is 0.94 percent. In addition, if a state’s trust fund is low (or if states are paying back a loan because their trust fund was depleted), some states automatically increase the SUTA tax rate until the funds are restored or the loan is paid back. SUTA taxes collect in a state’s trust fund and are used to finance benefits.For more information about state unemployment tax bases and rates, see Table 2 of Unemployment Insurance: Programs and Benefits (Congressional Research Service 2019). and FUTA,²⁶⁵The FUTA tax base is $7,000 and has not been increased since 1983. The FUTA tax rate is notionally 6.0 percent, but states with programs in good standing have their FUTA tax rebated to 0.6 percent. No program has ever not been in good standing; hence the FUTA tax is 0.6 percent on the first $7,000 of earnings, or $42 per employee per year. FUTA taxes are collected into a federal trust fund and are used to reimburse states for the program’s administrative costs (Whittaker, Julie M. 2016. Unemployment Compensation: The Fundamentals of the Federal Unemployment Tax (FUTA). Congressional Research Service). have two components: the tax base, which is the earnings subject to the tax, and the tax rate, which is the size of the tax when applied to the base.

UI’s financing has been a source of concern for a long time. First, state trust funds are not kept at adequate levels. In theory, states build up trust funds during economic expansions to forward finance the increase in unemployment during recessions. Instead, states keep trust funds at low levels and borrow from the federal government during downturns.²⁶⁶During the Great Recession, thirty-six states had federal trust fund loans (Unemployment Insurance: States’ Reductions in Maximum Benefit Durations Have Implications for Federal Costs, Government Accountability Office, p. 13). The reason for low levels of trust funds in many states is that state governments are reluctant to raise taxes on their employers and potentially deter hiring or new business creation. States compete over employers, creating a “race to the bottom” to have the lowest tax burden.²⁶⁷See Time to End the Race-to-the-Bottom on Unemployment Insurance for further comments on this phenomenon (Atkinson 2020, American Compass).

Second, the experience rating of employer taxes creates the incentive for employers to prevent former, laid-off employees from collecting benefits. Should a worker collect benefits, the employer’s taxes will increase.

The combination of little federal action to modify or strengthen the system’s structure, incentives on state governments to keep taxes low, and incentives on employers to keep costs low creates a system that is chronically underfunded. Rather than increase taxes and shore up funding, many states have opted to keep benefits low²⁶⁸Whittaker, Julie M., and Katelin P. Isaacs. 2019. Unemployment Insurance: Programs and Benefits. Table 1. Congressional Research Service. or cut them.²⁶⁹Will States Take the Wrong Lesson About Unemployment Insurance’s Failings? comments on this phenomenon (Edwards 2021, The RAND Blog).

Specifically, benefit duration ranges from up to 12 weeks in North Carolina and Florida to up to 30 weeks in Massachusetts, though most states offer up to 26 weeks. Benefit duration also varies with state or local economic conditions in many states. Minimum weekly benefits range between $5 in Hawaii and $188 in Washington, and maximum weekly benefits range between $235 in Mississippi and $795 in Massachusetts.

Broadly speaking, states have not kept UI finances sound or benefits meaningful.²⁷⁰As far back as 1993, the Government Accountability Office issued a report titled Unemployment Insurance: Program’s Ability to Meet Objectives Jeopardized which found that “the deteriorating financial solvency of state trust funds has led to changes in state laws affecting eligibility and compensation levels and adversely affected the percentage of unemployed persons receiving unemployment benefits,” among other key findings, suggesting critical problems in unemployment insurance programs. A New York Times piece published in January 2021 depicts the problematic trends in the unemployment insurance system in a number of telling graphics. During the 2020 recession, the federal government intervened to a great degree to enhance the program. Federal actions included increasing benefits through a flat federal weekly benefit supplement, creating a program for ineligible workers, and extending benefits through Pandemic Emergency Unemployment Compensation.²⁷¹Isaacs, Katelin P., and Julie M. Whittaker. 2020. Unemployment Insurance Provisions in the CARES Act. Congressional Research Service. All of these benefits were federally funded.

Options:

1. Overhaul the data-reporting architecture and create new performance measures for states regarding benefit levels, eligibility, and receipt rates. States must comply with an array of reporting requirements regarding their programs, but the data on unemployment claims have accuracy issues.²⁷²In a report issued on November 30, 2020, the Government Accountability Office recommended that the “DOL (1) revise its weekly news releases to clarify that in the current unemployment environment, the numbers it reports for weeks of unemployment claimed do not accurately estimate the number of unique individuals claiming benefits, and (2) pursue options to report the actual number of distinct individuals claiming benefits, such as by collecting these already available data from states. Further, performance is rightly centered on timely benefit delivery, but could be expanded to include take-up among the unemployed, to improve benefit adequacy, or to address other measures to improve efficacy.

2. Implement federal standards for benefit levels, eligibility requirements, state tax rates, and state tax bases. All of these aspects of the program are determined by state legislatures, but the federal government can increase minimum standards. The federal government can also set these standards to reflect state economic conditions. For example, maximum and minimum benefit levels might be set as a multiple of the average weekly wage in the state.

3. Explore the cost and benefits of fully federalizing the UI tax and benefit systems. Rather than setting a new floor for states, the federal government might take over application, funding, and administration of the program. Such a change would end any state differences in benefit amounts, eligibility, and tax rates.

4. Bring independent contractors and the self-employed permanently into the UI system. During the pandemic, Congress created the Pandemic Unemployment Assistance (PUA) program for workers who were not eligible for UI because they had insufficient earnings, were self-employed, or were independent contractors.²⁷³The National Employment Law Project explains PUA and other boosts to unemployment insurance benefits that were enacted early on in the pandemic. Since that piece was written, benefits were extended beyond December 2020. The proposed policy would incorporate these workers permanently into UI, though a separate tax collection method, benefit calculation, and eligibility rules may be required.

5. Include Short-Time Compensation (STC) in every UI system. Also known as work-sharing unemployment insurance, this program enables employers to decrease a worker’s hours and compensate for loss in wages with partial unemployment benefits.²⁷⁴See Putting Short-Time Compensation to Work: How Employers Can Avert Layoffs and Reduce Training Costs for more information on short-time compensation in practice in the U.S., and the impact it has on companies and states where it is practiced. As such, STC programs preserve jobs that would otherwise be cut and increase labor force attachment for a larger number of individuals (compared to layoffs).²⁷⁵Houghton, Charlotte, and Mariette Aborn. 2021. As the Economy Continues to Struggle, Can Short-Time Compensation Offer Relief?. Bipartisan Policy Center. As of November 2020, twenty-five states had STC incorporated into their UI system.²⁷⁶Pirtle, Jennifer. 2020. STC State Websites. WorkforceGPS.

The majority of workers in the U.S. do not have access to any paid family and medical leave program.²⁷⁷See Designing Universal Family Care (NASI 2020) and Paid Family and Medical Leave in the United States (CRS 2020).^{, 278}As of March 2020, 21 percent of private, state, and local workers had access to paid family leave (U.S. Bureau of Labor Statistics. National Compensation Survey: Employee Benefits in the United States, March 2020. Table 31). At the federal level, the Family and Medical Leave Act entitles some employees in some firms to take unpaid, job-protected leave for specified family and medical reasons.²⁷⁹S. Department of Labor, Wage and Hour Division. Family and Medical Leave Act. These reasons include the birth or adoption of a child; caring for the employee’s spouse, child, or parent who has a serious health condition; and/or a serious health condition that makes the employee unable to perform the essential functions of their job.

Related to inadequate paid family and medical leave is the lack of an adequate system of long-term services and supports (LTSS) in the U.S. Recent studies find that 50–70 percent of U.S. adults who survive to sixty-five years old will have LTSS needs. Between 2015 and 2050, the number of seniors with LTSS needs is expected to rise from 6.3 million to 15 million.²⁸⁰National Academy of Social Insurance. 2020. Designing Universal Family Care. pp.145–146. Simultaneously, only 7 percent of the population over age fifty is covered by a long-term care policy. ²⁸¹Life Insurance and Market Research Association (LIMRA). 2017. Combination Products Giving Life Back to Long-term Care Market. It does not seem likely that the private market will fulfill this need, at least in the short term.²⁸²Sammon, Alexander. 2020. The Collapse of Long-Term Care Insurance. The American Prospect. In the meantime, families are sacrificing their financial security to ensure that the caregiving needs of their loved ones are met.²⁸³Designing Universal Family Care notes that

“The majority of LTSS today is provided by family and friends, often to the detriment of their health and financial security. In the coming decades, most professional care will be paid for by families out of pocket. Most of the remainder of paid care will be covered by Medicaid, the primary public payer of LTSS. To qualify for Medicaid, however, a person must have low income and may not have assets above a certain level. Many middle-income people “spend down”—they use their assets to pay for care until they have very little left and qualify for Medicaid. Those individuals who qualify for Medicaid (whether low- or middle-income) must contribute most of their income to their care costs, losing financial independence, and may be forced to enter a nursing home because they cannot access sufficient home- and community-based services or afford to remain at home.” (p. 143) Another set of programs that might reduce the burden on a paid family and medical leave program are those relating to the care of children and other dependents. Under current law, the Child and Dependent Care Tax Credit (CDCTC) aims to offset the costs of child and dependent care via a nonrefundable tax credit that varies with income as a percentage of care expenses. Due to its design, the credit does little to help the least financially secure households.²⁸⁴In practice, because it is nonrefundable and, because of how it interacts with other tax policies, the CDCTC offers minimal benefits to workers earning less than $25,000; in 2018, those with adjusted gross incomes of less than $25,000 received 3.2 percent of benefits in spite of accounting for 5.6 percent of returns claiming the credit. Households earning at least $75,000 in adjusted gross income in 2018 accounted for 58.0 percent of aggregate CDCTC dollars spent. The income brackets that determine one’s tax credit rate are not adjusted for inflation annually and have not been updated by legislation since 2001 (Congressional Research Service, Child and Dependent Care Tax Benefits: How They Work and Who Receives Them, Table 1).

A means by which the federal government aims to offset childcare expenses specifically is the Child Care and Development Fund (CCDF), a joint federal–state partnership, in which the federal government provides block grants to states. Recipients of support via the CCDF are low income and are provided either a voucher with which they may select a childcare provider or a reserved slot at a childcare facility with which one’s state has contracted (in 2017, 94 percent of children benefited by this program were served by the former).²⁸⁵Income eligibility thresholds and work/training requirements vary by state, as the CCDF typically functions in coordination with each state’s TANF program. For more information, see Child Care Entitlement to States, Congressional Research Service. Although the CCDF helps many families afford childcare, only about one out of six eligible children receives benefits. Without this or other assistance, low-income families cannot afford the $9,000–$9,600 average annual cost for early care and education for children 0–4 years old.²⁸⁶National Academy of Social Insurance. 2020. Designing Universal Family Care. pp. 15–16.

Options:

1. Establish a state-administered paid family and medical leave system under federal guidelines. Such a system would build on the experience developed through existing programs in some states that have implemented social insurance programs for paid leave, but it would extend access to every state.

2. Create a federal paid family and medical leave program. Under this model, the federal government would administer a paid leave program, ensuring uniform eligibility standards, benefit amounts, financing, and administration across the country.

3. Establish a state-administered long-term care system under federal guidelines. A state-administered program would allow states to experiment with the parameters of a long-term care insurance system while ensuring adherence to certain basic standards. Options for coverage range from “front-end,” under which everyone with an LTSS need receives some benefit, to “back-end” or “catastrophic,” under which those individuals with the greatest LTSS needs receive targeted benefits, to “comprehensive,” under which all needs are covered to some degree.²⁸⁷Chapter 3: Long-Term Services and Supports of Designing Universal Family Care makes the case for state action on long-term care insurance via a social insurance design. The chapter lays out finance, coverage, and benefit options. The coverage options mentioned here are outlined in Table 1 on page 176.

4. Create a federal long-term care program. Under this model, the federal government would administer a long-term care social insurance program, ensuring uniform eligibility standards, benefit amounts, financing, and administration across the country. The Obama administration made efforts to implement such a program under the Community Living Assistance Services and Supports (CLASS) Act of 2010; however, then–U.S. Department of Health & Human Services Secretary Kathleen Sebelius determined that CLASS was not financially viable.²⁸⁸Spoerry, Scott. 2011. Obama drops long-term health care program. CNN. Whether or not a program is enacted successfully, long-term care needs continue to grow. The 2013 Congressional Commission on Long-Term Care provides many recommendations under the realms of service delivery, workforce maintenance—for family caregivers—and finance.²⁸⁹Chernof, Bruce, et al. 2013. Commission on Long-Term Care Report to the Congress. U.S. Senate.

5. Significantly increase investments in childcare. Many means could be considered for improving access to, and the quality of, childcare in the U.S. This report does not outline all the options but notes that investments in childcare serve as a complement to any paid family and medical leave type of social insurance policies.²⁹⁰Chapter 1: Early Child Care and Education of Designing Universal Family Care outlines the childcare landscape in the U.S. and proposes three potential social insurance models for states to improve early child care and education including “1. a comprehensive universal early childcare and education program, 2. an employment-based early childcare and education contributory program, and 3. a universal early childcare and education subsidy program.”In Ending Child Poverty Now, the Children’s Defense Fund proposes both: 1) Expanding federal childcare subsidies to all families with incomes less than 150 percent of the poverty line and exempting these families from copays; and 2) Making the CDCTC fully refundable with cost reimbursements up to 50 percent (from 35 percent) for lower-income families (see Chapter 2, policies 5 and 6). Other proposals for improving the CCDF and CDCTC come from the National Academies of Sciences, Engineering, and Medicine (see Appendix D, 5-3, p. 415, of A Roadmap to Reducing Child Poverty), the Center for American Progress in A New Vision for Child Care in the United States, and Title III of H.R.3300: Economic Mobility Act of 2019

The Earned Income Tax Credit (EITC) is a refundable tax credit targeted to households with low to moderate earnings from work. The EITC was designed to encourage work and offset the cost of Social Security contributions and other work expenses of low-income workers by providing a tax credit based on a percentage of earnings. The maximum credit varies in size and eligibility depending on number of children and marital status and phases out with additional income. The highest eligible income for tax year 2021 was $57,414 for joint filers with three or more children. That income level corresponds to the earnings of a full-time, full-year worker making about $27.60 an hour, or two full-time workers making about $13.80 an hour.²⁹²Credit levels are updated each year by the IRS in the Earned Income and Earned Income Tax Credit Tables.

For workers without children at home, the EITC is very low. For these workers, the maximum refundable credit in 2021 was $543, which was fully phased out for joint filers with earned income of $21,920.²⁹³With the passing of the American Rescue Plan Act of 2021, the maximum credit for workers without children at home increased to $1,502 for 2021, and fully phased out for joint filers at earned income of $27,367 (Tax Policy Center 2021. EITC Parameters). The current single-worker phase-out corresponds to a full-time, full-year worker making about $7.68 an hour.²⁹⁴This analysis/calculation is based on an individual working forty hours per week, fifty-two weeks per year. Researchers have noted that at $15,980 a year, a worker’s employment and sales taxes would reduce their income to federal poverty levels.²⁹⁵Marr, Chuck, Chye-Ching Huang, Cecile Murray, and Arloc Sherman. 2016. Strengthening the EITC for Childless Workers Would Promote Work and Reduce Poverty. Center on Budget and Policy Priorities.

Twenty-nine states and the District of Columbia supplement the federal EITC with their own EITC program.²⁹⁶Internal Revenue Service. 2021. State and Local Governments with Earned Income Tax Credit.

Options:

1. Increase benefit size and eligibility for workers without dependents at home, beyond 2021.²⁹⁷The American Rescue Plan Act of 2021 implemented a temporary (for tax year 2021) increase in both benefit size and eligibility for workers without dependents at home. This option would make this expansion a permanent part of the EITC (Congressional Research Service 2021, The American Rescue Plan Act of 2021 (ARPA;
P.L. 117-2): Title IX, Subtitle G—Tax Provisions Related to Promoting Economic Security). With the passing of the American Rescue Plan Act of 2021 (ARP), the maximum credit/refund for this group increased to $1,502 and phased out completely at $27,367 of income.²⁹⁸Prior to passage of the ARP, the maximum credit for workers without dependents was $543 and phased out completely at $21,920 for married filers. Prior to the ARP, workers not caring for children in their homes were the only group the federal government taxed into, or further into, poverty. This policy would maintain or expand the ARP increase, which was set to return to lower levels after 2021 absent further legislative action.

2. Increase benefit size for workers with dependents at home. The maximum credit a household could claim for one, two, and three or more dependents was $3,618, $5,980, and $6,728, respectively, for tax year 2021. This policy would increase the size of these credits to ensure that low- and middle-income workers with dependents are better compensated for their labor and to account for the cost of caring for dependents.

3. Phase the credit in faster. EITC benefits phase in, reach a maximum level, and then phase out. Each phase-in and phase-out level depends on family structure. A faster phase-in would increase the credit’s value for the lowest earners.

4. Allow workers without children at home ages 19–24 at home and those ages sixty-five and older to claim the credit beyond 2021. Currently, the credit cannot be claimed by individuals under age twenty-five without dependents at home or by individuals over age sixty-four.²⁹⁹A 2019 Urban Institute blog post further discusses the degree to which an age-eligibility expansion of the EITC would help older workers both in the short term and in retirement.The ARP made these workers eligible for tax year 2021. No age restrictions apply for workers with dependents at home.

5. Allow independent students to claim the credit. Under current law, students under the age of twenty-four who are working and attending school at least half-time are ineligible for the EITC.³⁰⁰Maag, Elaine. 2021. Increasing the Childless EITC Is a Good Start; It Should Include Students Too. Tax Policy Center. Over 60 percent of college students, however, work at least part time, over half of students are financially independent from their parents/guardians, and 39 percent of students report being food insecure.³⁰¹Thompson, Darrel, Whitney Bunts, and Ashley Burnside. 2020. EITC for Childless Workers: What’s at Stake for Young Workers. Center for Law and Social Policy. This option would ensure that low-income, financially independent students are allowed to claim the EITC.³⁰²Maag et al. 2020 explore the impacts of extending EITC eligibility to “low-income students who are in school at least half time and independent for tax purposes [such that they] would receive the maximum credit even if their earnings are too low to qualify for the maximum. Essentially, being in school would be treated as meeting the earnings requirements in place for most credit recipients.”

Under the ARP, the Child Tax Credit (CTC) provides $3,000 per year per child to families with children ages 6–17 years old and $3,600 per year per child to families with children ages five years or younger. The credit is fully refundable, meaning families with adjusted gross incomes of zero receive the full benefit. For this reason, this credit is referred to as a “child allowance.” The credit begins to phase out at household earnings of $112,500 for single filers and $150,000 for joint filers. Households with incomes that were eligible for the credit in 2020 had the option to receive a portion of the credit in advanced payments throughout 2021 beginning on July 15. This benefit structure ended in 2022 and reverted to its prior form, as described in the following paragraph.

Prior to the ARP, the CTC functioned as a partly refundable tax credit of up to $2,000 per child under seventeen. The credit offset taxes owed. If a person qualified for the credit beyond what they owed in taxes, they would receive part of the credit as a refund. Workers needed to earn at least $2,500 before they were eligible for a refundable CTC. The refundable portion was equal to either 15 percent of earnings in excess of $2,500 or $1,400 per child, whichever was less. It did not vary with the age of one’s children, only a household’s number of children. Households with children ages seventeen and eighteen, older dependents, and full-time college students ages 19–24 were eligible to receive a $500 nonrefundable credit.³⁰⁴The ARP granted households with seventeen-year-old children eligibility for the $3,000 credit in 2021.

Options:

1. Increase the value of the CTC per child beyond 2021. This policy would raise the maximum benefits offered by the CTC beyond 2021. Under this policy, the credit will continue to phase out at high incomes; current law for 2022 and onward decreases the credit by 5 percent of adjusted gross income exceeding $200,000 for single filers and $400,000 for joint filers.

This option was enacted under the ARP via an increase from $2,000 to $3,600 for children ages 0–5, from $2,000 to $3,000 for children ages 6–16, and from $500 to $3,000 for seventeen-year-old children.

2. Provide a larger credit to families with very young children, beyond 2021. Research findings indicate that the earliest years of life are critical for development³⁰⁵In 2019, the National Academies of Sciences, Engineering, and Medicine issued a report titled A Roadmap to Reducing Child Poverty, which outlined options to cut child poverty in half in ten years. The report draws on existing literature to conclude that “poverty in early childhood…[is] associated with worse child and adult outcomes,” and that “income poverty itself causes negative child outcomes, especially when it begins in early childhood” (pp. 73, 89). but also see the highest rates of child poverty.³⁰⁶Haider, Areeba. 2021. The Basic Facts About Children in Poverty. Figure 4. Center for American Progress. An age-varying policy would provide a larger credit for young children to protect very young children from poverty and enable families to invest in children during the critical early years of life. The Canada Child Benefit, for example, began delivering monthly benefits up to $6,765 per year for children under six years old and up to $5,708 per year for children ages six through seventeen in July 2020.³⁰⁷Prime Minister of Canada. 2020. Prime Minister announces annual increase to the Canada Child Benefit.

The ARP established a larger credit of $3,600 for children under six years old compared to $3,000 for children ages 6–17.

3. Remove the minimum earning threshold and make the credit fully refundable beyond 2021. As of 2018, 27 million low-income children were not eligible for the full CTC because of the earned income requirements.³⁰⁸Greenstein, Robert, Elaine Maag, Chye-Ching Huang, and Chloe Cho. 2018. Improving the Child Tax Credit for Very Low-Income Families. U.S. Partnership on Mobility from Poverty. These reforms would ensure that the CTC is fully available to the children and families who need it the most, while simplifying its structure and making it easier for families to understand.

The ARP enacted this measure, making households with no income eligible to receive the full benefit.

4. Pay out the CTC monthly beyond 2021. The report of the National Academies of Sciences, Engineering, and Medicine regarding how best to reduce child poverty included this recommendation.³⁰⁹The NAS report outlines two options for this proposal on page 148:

“[1)] Pay a monthly benefit of $166 per month ($2,000 per year) per child to the families of all children under age 17 who were born in the United States or are naturalized citizens. In implementing this new child allowance, we would eliminate the Child Tax Credit and Additional Child Tax Credit as well as the dependent exemption for children. The child allowance benefit would be phased out under the same schedule as the Child Tax Credit… [2)] Pay a monthly benefit of $250 per month ($3,000 per year) per child to the families of all children under age 18 who were born in the United States or are naturalized citizens. (As with Child Allowance Policy #1, we would eliminate the Child Tax Credit and Additional Child Tax Credit as well as the dependent exemption for children.) The child allowance benefit would be phased out between 300 and 400 percent of the poverty line.”

The report projects the former proposal to reduce child poverty rates by 3.4 percentage points (13.0 to 9.6) and the latter proposal by 5.3 percentage points (13.0 to 7.7) (see Figure 5-1).National Academies of Sciences, Engineering, and Medicine. (2019). A Roadmap to Reducing Child Poverty. Washington, DC: The National Academies Press. doi: https://doi.org/10.17226/25246. Typically, tax credits are delivered once a year and, since income and tax liability can vary from year to year, individuals may be wary of taking an advance on their return. A fully refundable credit would not vary if income at low and middle incomes dropped and would thus limit the unpredictability of a tax benefit.³¹⁰High-income households may see their credits vary if the credit phases out at high incomes (as it does under current law). A higher credit for younger children might introduce some unpredictability, too; impending declines in monthly benefits should be communicated to households well ahead of time. This policy would help families better meet the costs of raising children year-round, since child-related expenses such as diapers, cribs, clothing, and activities do not wait for tax time. Households may still be eligible for different benefits if a child leaves or moves into a different household and may be given an option to receive part or all of the credit monthly.

Consistent with this concept, the ARP provided for a portion of the credit to be paid out by the IRS on the fifteenth of each month beginning with July 15, 2021.

5. Exclude the refundable credit from income in determining transfer program eligibility for means-tested programs. This approach would avoid unintended consequences in which increasing the CTC or changing the payment structure might reduce eligibility for other benefits. Under current law, tax credits do not count as income in means-tested programs. This option ensures that disregarding the tax credit payments as income would continue to be the case even if the credit is paid out monthly to certain households.

A negative income tax (NIT) is a system in which the government makes payments to people if their income is below a defined threshold, while taxing people on income above that threshold. If the threshold were, for example, $39,000, about three times the federal poverty level for an individual in 2021, and the NIT rate were 50 percent, an individual with no earnings would receive $19,500 from the government, not including any benefits from other programs or tax credits. In this example, an individual earning $30,000 would receive $4,500 from the government.³¹²This $4,500 benefit is calculated by taking the NIT threshold ($39,000) minus income ($30,000) and multiplying the difference by the NIT rate (50 percent).

In this sense, the NIT is like a refundable tax credit that requires no other sources of income for the benefit to be available. Rather than phasing in to a maximum benefit like the EITC, the benefit would be largest at zero earnings and phase out until the base threshold is earned. An NIT might work in conjunction with existing refundable tax credits, like the EITC, to reduce work disincentives. As a refundable tax credit, it would create an assured income floor in the U.S. for all households, regardless of circumstances. It might also be flexibly designed so that certain sources of income, such as Social Security benefits, would be disregarded from earnings that count against the tax refund.

The NIT differs from a universal income base in that all individuals receive the UIB whereas only individuals with incomes below the defined threshold would receive NIT payments. A NIT in the U.S. nearly became a reality in the early 1970s under Nixon’s Family Assistance Plan proposal. Had it been enacted, the proposal would have set an annual income floor of $1,600 for a family of four, plus $800 in food stamps.³¹³Passell, Peter, and Leonard Ross. 1973. Daniel Moynihan and President-Elect Nixon: How Charity Didn’t Begin at Home. The New York Times. Adjusting for inflation from August 1969—when the proposal was announced—to May 2021, the policy would have provided $11,641 in income and $5,820 in food stamps; just under $17,500 in resources annually. Under Nixon’s plan, benefits would be reduced at 50 percent of earnings, or 50 cents for every dollar of household income.

Options:

1. Create a negative income tax (NIT) indexed to the average or median wage. An NIT would provide a minimum floor of income, similar to the UIB, and increase every year.

2. Update the EITC to harmonize with the NIT. Policies and programs with different phase-out schedules might create work disincentives. This policy would design the NIT so that it harmonizes with the level, design, and phase-out of the EITC to avoid benefit cliffs or high phase-out rates.