Thayer Watkins

Social Welfare Programs

Aid to Families with Dependent Children (AFDC)

The Federal Government created in 1935 a program called Aid to Families with Dependent Children (AFDC). It was created with the Social Security Act of 1935 to aid children without fathers. To qualify families had to include dependent children under the age of 19. By 1994 AFDC was covering 14 million individuals in 5 million families. From that time until 1996 this was the primary social welfare program. It was not the only one by any means. In 1994 government at all levels spent $345 billion on means-tested transfer payment programs. But in 1997 AFDC was replaced with Temporary Assistance to Needy Families (TANF) with the administration turned over to state governments. The Federal Government gave block grants to the states to provide financing.

Qualification for AFDC in 1996 was based upon three tests:

The monthly benefit was set to bring a families countable income up to the level set by the state. For example, an AFDC family in Alaska which had a countable income of $528 per month would qualify because the qualifying level for Alaska was $1028. The family would get an AFDC payment of $500 (=1028-528) per month. If a family's countable income increased the AFDC would decrease dollar for dollar. Thus there was no incentive to work since, in effect, there was a 100 percent tax on additional income. Some states changed the rules so that the AFDC payment would not be decreased dollar for dollar for new earnings.

The AFDC program was used by a large group of people for a short period of time (one year or two) and a smaller group of people for a longer period of time (eight years or more).

Supplemental Security Income (SSI)

There were many cases of destitute individuals or couples who do not qualify for AFDC because no children were involved. This included people with a physical or mental handicaps. SSI was created in 1974 to combine several federal and state programs for payments to the disabled. By 1996 the standard payment was $470 per month for a single individual and $705 per month for a couple.

Earned Income Tax Credit

The earned income tax credit program was an outgrowth of Milton Friedman's idea of a negative income tax to replace other welface programs and the welfare agency bureaucracy. The idea of the negative income tax is that if someone's income is below a certain level they receive a payment instead of paying a tax. Under the negative income tax the smaller a person's income the larger the payment. Under the earned income tax credit only people who earned some income are eligible and over a certain range the greater the income the greater the payment received. Beyond a certain point as earned income goes up the lower the earned income tax credit rebate.

In-kind Programs

In-kind programs provide goods or services instead of cash. These include medical care (Medicaid), food (Food Stamps), housing (Public Housing and Rental Assistance). Medicaid is a joint Federal-state program financed out of matching funds. It is by far the largest program, serving 35 million recipients in 1994. The Food Stamp program was created in 1964 under the initiative of Hubert Humphrey, vice president under Lyndon Johnson. It was argued at that time that there was some isolated islands of hunger in the rural South that this program would eliminate. It was sold on the basis of there being only a very limited problem of hunger and that the program would be of short duration. By 1995 over $27 billion was being spent on the program annually and almost 27 million persons, 10 per cent of the population, were receiving Food Stamps. The maximum monthly Food Stamp allotment was $397 in 1995 with the average being $71 per person per month and $175 per family.

To qualify for food stamps a households gross monthly income must be less than 130 per cent of the OPT (official poverty threshold) and its countable income must be less than the OPT. A household is expected to spend 30 per cent of its cash income on food. The difference between the cost of the "thrift food plan" and 30 per cent of a households income is the amount of the Food Stamp benefit.

The Federal Government started a program of financing public housing but the problems with public housing encouraged the government to seek a different solution. The method selected was to subsidize the rents of the poor.

The magnitudes of the various programs in Fiscal Year 1994 are shown below.

Social Welfare Programs in 1994
Other Cash Programs$13.9
Medicaid and
medical care
Food Stamps and
other nutritional
Job Training$5.5
Other In-kind Programs$14.7

Note that the Medicaid and other medical care programs were by far the most costly of the social welfare programs.

The breakdown between In-cash programs and In-kind programs is of interest:

Social Welfare Programs in 1994
Program TypeExpenditure

Note that the In-kind programs were enormously more costly than the In-cash programs.