The Problems With Means-Testing Are Real

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Meagan Day had a recent piece in Jacobin rehashing the general problems with means-tested benefits alongside a discussion of an emergency universal food stamp program implemented in New York City.

Day makes two main arguments in her piece, first that means-tested programs are vulnerable to cuts, and second that the bureaucratic hurdle of applying for them ends up excluding many eligible people.

In a piece on his own site, Max Sawicky criticized Day’s article and offered an argument in favor of means-testing, namely that it provides more assistance for less money. Sawicky’s criticism and his own argument are incorrect.

Political Vulnerability

Regarding political vulnerability, Sawicky writes that:

Another knock on means-testing is that it is more politically vulnerable to cuts. But this isn’t quite right either. In the U.S., cash benefits have certainly been obliterated, but health care benefits have expanded significantly, if one cares to track the trends in spending under Medicare and Medicaid. The food stamp program is still cranking as well. Here again, the non-existent universal cash benefit is held up as a superior alternative.

He acknowledges that Aid to Families with Dependent Children (AFDC), now Temporary Assistance for Needy Families (TANF), has been effectively “obliterated.” But then he suggests Medicaid and food stamps have avoided this outcome.

While it is true that Medicaid and food stamps still exist and were expanded under the Obama administration, it is also true that the programs have suffered cuts and other kinds of rollbacks.

In the case of Medicaid, CMS announced in January of 2018 that it would grant waivers to states that wanted to impose work requirements on Medicaid beneficiaries. Since then, 18 states have applied for those waivers, with five of those states having implemented the rules, throwing tens of thousands of people off of the Medicaid rolls and into uninsurance.

In the case of food stamps, USDA announced in December of 2019 a new rule that would impose strict work requirements on able-bodied adults without dependents. It was estimated that the rule would have eliminated the food stamp benefits of 700,000 people, though it is currently hung up in the courts.

These recent actions are not comprehensive proof of the claim that means-tested benefits are more vulnerable than other kinds of benefits, but they at minimum undermine Sawicky’s claim that these programs are disproof of that proposition.

Bureaucratic Hurdles

Regarding the point that the inherent bureaucratic hurdles of means-testing ends up excluding eligible people, Sawicky had this to say:

Means-tested benefits are said to limit eligibility and leave many needy behind, unlike ‘universal benefits.’ Unfortunately, there is no really existing universal benefit that remedies this problem, so we are committing the basic fallacy of criticizing an existing program by comparison to an idealized alternative. There is no reason a benefit founded on a means-testing formula could not be provided to anyone you might like.

The bolded conclusory statement is simply not true. There is a reason. The reason is that, all else equal, means-testing comes with a larger administrative burden on the recipient because they must prove that they satisfy the test. Surely, at the margin, that extra burden cleaves off some eligible people who would have otherwise participated in the program.

When we look at the participation rates of means-tested programs in the US, we typically find that around one in five eligible people are not receiving the benefits they are owed.

The overall participation rate of the food stamp program is 85 percent and is only 75 percent for the working poor who likely have a harder time proving their eligibility to the welfare office. The participation rate of Medicaid is 94 percent for children, 80 percent for parents, and around 75 percent for childless adults. The participation rate of the Earned Income Tax Credit (and also presumably the Child Tax Credit) is 78 percent. The low participation in the EITC cuts the poverty-reducing effect of the program by around 33 percent, according to the Census Bureau, meaning that mainstream estimates of the EITC’s impact (e.g. those produced by CBPP) overstate the effectiveness of the program by at least 50 percent.

It is hard to believe that universal alternatives to these programs would not have higher take-up rates. In countries with national health insurance, for example, the participation rate for childless adults is approximately 100 percent, not 75 percent.

More Assistance

After making these critiques, Sawicky moves on to his affirmative argument for means-testing, which goes as follows:

The real rationale for means-testing is not that it deprives the unworthy of assistance. That is a straw man often deployed by the less progressive among us. It is that for any sub-group of the population, a means-tested program will be cheaper, or for any given amount of money, it can provide more assistance than a universal one.

There are at least two problems with this argument.

The first problem is that the “for any given amount of money” constraint assumes that the size of the redistributive budget is fixed and crucially that the design of the welfare state has no impact on the size of the redistributive budget. But as Korpi and Palme pointed out 22 years ago, universal welfare programs do not wastefully eat up a fixed redistributive budget but instead create the political conditions for making the redistributive budget larger. Thus, when we look across countries, we see that the poor actually find themselves getting more assistance in a universal welfare state despite receiving a smaller share of the total assistance.

The second problem is that means-testing is the same thing as taxation, just applied at the point of transfer income disbursal as opposed to being applied at the point of factor income disbursal. So it is not really a question of whether means-tested programs are cheaper than universal programs, but rather whether taxing transfer income (aka a benefit phase-out) is better than taxing factor income.

As a purely technocratic matter, the answer to this question is almost always no. The reason is that transfer income taxes (aka benefit phase-outs) are only applied to transfer income recipients while factor income taxes are applied to everyone. For example, a $4,000 child allowance that phases out at a rate of 5 percent for families with factor incomes exceeding $100,000 is like applying a 5 percent surcharge tax on factor incomes between $100,000 and $180,000 except that the phase out only taxes families with children while the regular tax hits all families. By hitting all families, you broaden the base, which allows you to lower the rate (from 5 percent to, let’s say, 3 percent) and you also ensure that high-earning families with children receive more income than high-earning families without children, which serves income-smoothing as well as egalitarian purposes.