Is The U.S. Building An Unsustainable Welfare Support System?

Includes: COST, DG, DLTR, FDO, WMT
by: Paulo Santos

There is a huge debate going on regarding welfare, with Republicans usually defending that cuts are needed, and Democrats taking the opposite view. In this debate, Paul Krugman obviously sides with the Democrats, always taking the view that more support is better. The debate is centered on the sustainability of the U.S. budget, given the large deficits being run ever since 2008.

There is, however, another angle, another reason to call welfare unsustainable at the levels it presently sits in the U.S. as well as elsewhere (UK, Japan). This angle has to do with the fact that the many existing welfare programs are mostly independent of each other. This means that if someone accesses a plethora of these welfare programs, something weird happens: the beneficiary of those programs, taken together, might well exceed amply what someone working and not accessing the programs earns. In other words, a non-working beneficiary can have a lifestyle that's superior to the lifestyle of a working person putting in 8 hours or so per day of his life into his work. Worse still, working not only takes time but adds to living costs in terms of transportation and food.

Living on welfare

Voluntarily living on welfare, whose recipients are sometimes pejoratively labeled as "welfare queens", is seen as a politically motivated myth. However, what I am about to do next is to use a website which concentrates information on many assistance programs in Massachusetts, and show that this myth can certainly be reality. The base for the simulation I present below is a family of 3 living in Boston, with 1 single non-working mother and 2 children. Most of these programs are means-tested, so only available to households with low income or, as I considered, without jobs - I didn't, however, consider jobless insurance in this exercise as the purpose is to see what kind of income is possible while not working (or only working enough to claim the earned income credit). Also, the mother needs not be single, but if it were advantageous, it's not hard to understand that such mom would present herself as single no matter what the real status was. So here goes.

As we can see -- and this list is not exhaustive, there are more benefits to be had - this simulated family could get almost $76000 in annual income and benefits from the plethora of programs available to it, or $6333 per month. As a reference, the median household income in Massachusetts is $62859 and the median household income in Boston is $69455.

The implication here is clear. As a single mother in Boston, it's clearly more favorable not to work. Not working and taking full advantage of all the existing assistance programs can lead to a lifestyle that's superior to the majority of the other Boston citizens.

Worse still, in one hand the table above is not exhaustive. I left some support options outside because they were hard to quantify. And for someone working, there are some costs which are inflated, such as transportation or eating out. These increase the difference between the lifestyle such a non-working mother can achieve versus someone working.

If this option is kept open, over time more and more people will use it, leading to more taxation, to more government debt, to less overall production, less competitiveness and a worse living standard for all - both subsidized citizens and taxpayers. This is unsustainable.

Increased usage

The first consequence of it getting attractive to live on public assistance is obviously increased usage of such assistance. For sure, some of that usage is as intended to mitigate suffering of the truly needed. This is true for all the programs, be them SNAP, TANF, Section 8 or any other.

However, as living on welfare starts competing on equal grounds with working, it's also likely that some, perhaps even many, beneficiaries of these programs enter into them because of a lifestyle option. In those cases, the beneficiaries did not need to be in a situation where they have to accept public assistance. Instead, they choose to be in that situation conscientiously.

The hard part is knowing which is which. The easy part is just seeing the increased usage, such as pictured below for SNAP and disability (Source for SNAP chart: The Washington Dispatch; Source for disability: "From Welfare Queens to Disabled Deadbeats", Paul Krugman, NYT blog).

(of particular notice how the number of recipients continued growing even while the employment-population ratio stabilized)

Section 8 housing might seem to be growing less than other assistance programs (see chart below), but that's just because it's budget-limited and most counties and States have long waiting lists stretching out to 5 years. While Section 8 housing is already providing support for nearly 2.1 million families, real demand for the program as structured might be up to 10 times higher. Section 8 subsidies are routinely awarded through lotteries. All in all this overwhelming demand isn't a surprise - of all the support programs, Section 8 has the potential to be the most lucrative one for the beneficiaries, as we can see in the first table in the market. There are some locales where Section 8 subsidies can approach $3000 per month. (Source: Congressional Budget Office)

Section 8 is just part of the available housing assistance programs; the overall number of families in housing assistance programs is around 5.4 million. I didn't take into account other housing assistance programs as their help would be much more restrictive to a welfare lifestyle than Section 8, where beneficiaries can actually move into more affluent neighborhoods. It's thus likely that Section 8 will be more prone to fraud or "optionality" in the lifestyle (tough to prove, though).

Economic and Stock Market Consequences

As welfare starts making a larger part of the overall income, it necessarily has consequences for companies selling products to its beneficiaries. This is particularly visible in retail, where Wal-Mart (NYSE:WMT) has often spoken about the first of month impact from EBT cardholders. There is even anecdotal evidence of individual stores doing as much as 25-40% of their revenue from such sources.

Another interesting story comes from Costco (NASDAQ:COST). Costco was initially against serving EBT cardholders and had to be convinced to do so. Costco didn't expect those customers to be relevant since it expected to serve a higher earning cohort, namely due to its annual $50 membership fee. Upon serving EBT cardholders, however, Costco was surprised by their relevance, with EBT acceptance evolving from a NY pilot program and expanding nationwide.

EBT cards are also increasingly accepted at the fast-growing segment of dollar stores, including Dollar Tree (NASDAQ:DLTR), Family Dollar Stores (NYSE:FDO) and Dollar General (NYSE:DG). And it's not just EBT that's at stake here. Stores accepting EBT/SNAP dollars also have a higher chance of capturing income from other assistance programs, such as TANF. It's thus not a coincidence that more and more establishments are accepting EBT cardholders' dollars.

Seen from the former perspective, the effects of much wider assistance might even seem positive. However, making "living on welfare" a viable option, at times even an attractive option, also has huge societal costs, namely:

  • It creates an incentive to not work and produce. Overall production and competitiveness can suffer and, over time, lead to lower living standards for the entire population;
  • It creates a group of people unwilling to work and worse still, unable to work due to the lack of learned skills;
  • It increases costs for the State which provides the assistance, while also reducing revenues due to less work-related income. Over time this eternizes the budget problem, leading to more money printing and, ultimately, collapse of the currency and economy;
  • This phenomenon also leads to increased inequality, in the sense that once dependent of assistance programs, a family will only see increased income as the payments of those programs are expanded, and the payments will tend to be expanded at the inflation rate or less, if there's an austerity drive. At the same time income from working will usually increase at a real rate, it will thus increase at a slightly faster rate than inflation. This leads to increased inequality versus income that's only inflation-adjusted.

All in all, assistance is supposed to be temporary, but what is taking place in many of these programs is far from temporary. On the other hand, even today's usage of these support programs greatly understates their potential use, because some of the major programs like SSDI and Section 8 can take up to 2-5 years to get into, due to bureaucracy, lack of budget allowance, lotteries, waiting lists, etc. Were it not for these artificial limits and the programs would expand even faster.


First I need to say something. I have nothing against welfare and social support. I have nothing against education and health being financed by the State, either. However, I do have something against the value of all the assistance programs exceeding what a working person can earn. At the very best, the level of assistance ought to remain short of the lowest paid full time worker, or else an incentive is created towards not working and producing for others.

The U.S. has clearly reached and exceeded such levels by a significant margin. This fact will, over time, lead to a greater and greater incentive to not produce for others. This means that the very same thing which brought the Soviet Union to its knees (an incentive not to produce), is now in motion in the U.S. economy. If not arrested, this trend might well produce the same result in the U.S.

Oddly enough, one of the measures being championed by the IMF for Portugal touches exactly this. The IMF is saying that Portugal ought to aggregate the existing social programs and put a cap on the aggregate value that can be gotten from those programs, so that incentives to not work can be restrained. The U.S. clearly needs the same kind of rule at this point.

Many charts regarding the number of beneficiaries in many of these programs (SNAP, disability, etc) already show an increasing usage of assistance, as would be expected as the people at large get wind of the relative benefits. Almost 6% of the U.S. population is already receiving disability benefits (though part is due to an overall aging of the population) and 15.1% of the population is on food stamps (NYSE:SNAP). This is a trend which is already in full motion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.