7.5a Help at the Bottom

In 1997, the U.S. federal government transformed welfare from Aid to Families with Dependent Children (AFDC) to Temporary Assistance to Needy Families (TANF). The government gears both programs toward households with children under the age of 18. Under AFDC, if a household qualified, members could receive help and did not have to work. In contrast, TANF limited aid to a maximum of five years over a person’s lifetime and imposed work requirements. Approximately 826,000 families received TANF in 2023, with an average monthly payment of $650 (Office of Family Assistance, 2024).

The federal government also expanded the Earned Income Tax Credit (EITC) in 1993 for low-income and working households. The credit is large enough that it lifts households who have parents employed full-time all year at a low-wage job above the poverty threshold (Halpern-Meeken et al., 2015). Families who qualify for the EITC receive an average tax refund of about $2,000 (Internal Revenue Service, 2023).

Photo 7.16

The Earned Income Tax Credit Lifts Many Low-Income Households Above the Poverty Threshold

How households spend cash-based aid and these tax refunds interests scholars and critics of government assistance. In one study, researchers surveyed 332 families at tax preparation sites (Tach et al., 2019). Then, they interviewed a stratified random sample of 115 lower-income working families from their survey group in Boston to understand these families’ goals for upward mobility and how they managed unstable incomes and unexpected expenses. The sample was racially diverse and included both married and single respondents.

The researchers found that EITC refunds accounted for a portion of annual income, ranging from 16.5% for married respondents to 24.2% for single respondents (Tach et al., 2019). Families used their refunds to manage economic insecurity “[b]y saving, purchasing durable goods, stockpiling household staples, and paying off debts to kin and creditors at tax refund time” (Tach et al., 2019, p. 274). These low-income families faced financial setbacks due to economic shocks, family issues, and health problems. Economic shocks included being laid off and having work hours reduced. Among the family issues they faced were divorce, pregnancy, death, and a family member needing money. Health problems often brought about high bills or affected the income earner’s ability to work.

Contrary to myths about low-income people, families did save part of their refund dollars (at least temporarily), prepaid bills, paid down debt, and bought both immediate necessities and those they expected to need in the future, such as school uniforms. Families who were able to save at least $1,000 of their refund and still have it at least six months later shared a few characteristics. They were frugal but had economic stability, such as from full-time employment, kin support, or other government aid like the Housing Choice Voucher Program (Section 8) or SNAP, which enabled them to save. Overall, the families in the study shared a middle-class perspective on finances; however, they did not save in the same way. For instance, they bought food in bulk for the future rather than putting money in the bank.