Incentive to Retrench? Institutional Moral Hazard among Federal & State Social Assistance Programs after Welfare Reform

This paper investigates whether interactions of federal- and state-administered social assistance programs in the United States provide state governments a financial incentive to cut back on cash assistance for low-income families. We test two complementary hypotheses: First, that the federally-financed Supplemental Nutrition Assistance Program (SNAP) and Supplemental Security Income (SSI) programs act as insurance mechanisms for retrenchments in cash assistance through the state-administered Temporary Assistance for Needy Families (TANF) program, and second, that the structure of TANF provides states a financial incentive to cut back on cash assistance. Applying a differences-in-differences approach on household income data from 1997 to 2014, we find that the federal government insures states for more than half of their retrenchment in TANF cash assistance: A $50 decline in state spending on cash support leads to an average $27 increase in federal social assistance expenditures. We find that 39 percent of states’ retrenchment in TANF cash assistance is reallocated toward a broad set of expenditures that might otherwise have to be funded through general state revenues. Our findings suggest that state governments have a financial incentive to disinvest in TANF cash assistance and instead shift the burden of social assistance to the federal government.