Oct 9, 2009

The catch-22 of low-income benefits that are phased out quickly


My friend Emily is a single mom. She works full time for a salary that keeps her and her child above the poverty line but doesn’t allow for much more. Her income is low enough that she qualifies for temporary relief from paying her student loans (which are massive even though she is yet to complete her degree). She lives in subsidized housing and receives the provincial childcare subsidy, which certainly help a lot. But she still has trouble making ends meet and spends considerable time worrying about how she’d cover unforeseen expenses such as car repair.

It’s hard for me to see friends struggle financially, so I’ve tried to encourage Emily to get a better job. Though she doesn’t have a degree, Emily is bright and a hard worker — she should be able to do better.

But Emily doesn’t want to get a better paying job. There is no point, she tells me, because she’s close to the cut off point of many of the government subsidies she relies on and if she made even $1,000 more per year, she’d lose so much in government benefits that her net income would end up lower.

She’s calculated that she needs to earn thousands of dollars more per year to compensate for the value of the lost benefits and she figures that she can’t get such a job without finishing her degree. Which she can’t afford because her low income doesn’t allow her to save up for school. But she can’t get a higher-paying job to help finance her education because if her income went up she’d lose her childcare subsidy, her housing subsidy and will have to start making payments on her student loans.

It seems like the system is stacked against her.

And she’s not the only one. Many low-income people find themselves in a similar position as the majority of government benefits are targeted to the lowest income categories and phased out quickly as soon as the family’s income gets above the bare minimum. A recently released CCPA brief addresses the problem of benefit “stacking” and presents some possible solutions. You can read more about it here.

It’s a classic case of unintended consequences: policy-makers start with the laudable goal of helping the most needy first and they try to avoid spending scarce resources on those who are able to pay for themselves, but in targeting benefits narrowly to the lowest income families they make it very difficult for people like Emily to break out of the low-wage cycle of economic insecurity. For those who need to obtain further post-secondary education or training to be able to move up, the system becomes a catch-22 when BC’s high tuition fees are taken into account.

Benefit stacking is a real problem in BC and it needs to be considered carefully in the design of all new low-income tax credits and other benefits. I haven’t run the numbers, but my guess is that the new low-income credits the government just introduced in the last budget (the HST credit and the new premium assistance) are only compounding the problem.

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