by Shawn Young
Over the past several months, as I’ve delivered the Frameworks in Financial Health class across Colorado, I’ve noticed a tremendous appetite for conversations about how we might better impact/inform policy. The curiosity usually starts from a conversation we have about the economic value of benefits, which then leads into a conversation about the “cliff effect.”
However, to understand the cliff effect, we need to have a clear and succinct understanding of personal finances and economics. When we use the word “finances” we are really talking about how money flows in and out of a person’s life. When we are using the word “economics” we are talking about how all of their resources flow in and out of their life. In this way, a person’s finances are a part of their whole economic system.
What is the Cliff Effect?
The “cliff effect” as we define it at FHI is when a client increases their financial resources (usually through getting a job or getting a raise) and as a result loses more in their whole economic picture than what they gained financially. So, as an example, a client gets a ten cent raise and, as a result, that raise pushes them over the income limit for the Child Care Assistance Program (CCAP). The economic loss of the CCAP benefit far outweighs what the client gained financially. As such, in many cases, the cliff effect will disincentivize clients from trying to move towards “self-sufficiency.”
There are a lot of studies being published about the cliff effect issue right now. There are also some new tools that are being created to help people explain the “cliffs” to their clients. FHI created a tool about two years ago that you can use to help your clients plan for their decrease in benefits as their earning increases. Still, fundamentally, the cliff effect is created by and driven by policy and regulations at the federal, state and county levels.
What can we do about it?
At the organization level, we hear from case managers and other staff frequently about their frustration with the cliff effect. They ask us “What can we do about it?” or, “what is the solution?” Unfortunately, there’s not a silver bullet solution. What we can do is better understand it ourselves so that we can better educate and prepare our clients on this very difficult concept. We can also learn more about the policies and regulations so we can share our voices about that.
As usual, I believe this is accomplished through learning. It is accomplished by all of us having a better understanding of how policy is developed and then eventually plays out in real life with real human beings.