The Welfare Wall

 

By Patrick O’Brien (AIMS on Campus Student Fellow)

The Welfare Wall blocks a welfare recipient from moving off social assistance into paid employment. This wall is created through the impact of direct and indirect taxes that people on welfare have to carry when they supplement their welfare benefits with employment income. When recipients try to get off welfare by seeking employment, they are taxed heavily on each dollar earned above the amount received by the government in the form of welfare, which reduces their benefits. This is the “Welfare taxback” affect. After the initial claw back in employment earnings, there are income taxes and payroll taxes which come in the form of employment insurance premiums, and Canada Pension Plan contributions, and a loss of “income-in-kind” benefits such as health and dental.

This creates a disincentive for welfare recipients to enter the workforce, as they will lose majority of their benefits and pay a large portion of their earnings back to the government. To further illustrate the effect of joining the workforce, and trying to leap over the welfare wall, a study by the Parliament of Canada shows that a single parent with one child in 2016, who increases their earnings from $0 to $10,000 from employment, would lose an estimated 78 cents on every additional dollar earned. Comparing this to an increase in earnings from $40,000 to $50,000 would have a marginal tax rate of 41%. Based on this study we can conclude that because there is such a high tax imposed on those who are on welfare and seeking employment compared to those already in the workforce and moving up, then those who are on welfare are more likely to continue to use welfare, instead of seeking employment.

This is a major problem in our economy. While the working population in Canada will pay a portion of their tax returns to the government, this money will then be distributed through payments to those on welfare. Then the money will be used to help those recipients pay for basic necessities such as groceries, rent payments, and other durable goods. The tax that workers pay to the government should be thought of as a sum to be reinvested back into our economy through infrastructure spending, health care, our defense system, and social security. Social security spending from 2015-2016 contributed $81.8 billion to federal tax revenue, or 23.1 percent of total federal tax revenue.

The problem here is that the investment in social security, particularly welfare, is helping the recipients “sustain” their current consumption on basic durable goods, where it should be used to promote the shift into the labor market which will then contribute to the GDP or growth in our economy.

A solution to helping those who are on welfare overcome the “welfare wall” is the Working Income Tax Benefit. To qualify for this benefit the recipient must be 19 years of age or older, and earning at least $3000 a year from employment. This is a supplemental payment that is aimed towards low income workers who are in poverty. In 2016 the maximum supplement was $1,028 for an individual, and $1,868 for a family.

This is a temporary solution that will encourage those on welfare to actively seek employment, as it reduced the amount of benefits that will be clawed back under the current welfare taxback system. A broader look needs to be taken by our government towards the policies that are designed to help those in need of the welfare, so that we can encourage labor participation, growth, and overall wellbeing of those on social assistance so that they overcome the unfortunate welfare wall that exists in Canada.

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