Cyclical Welfare Costs In The Post-Reform Era: Will There Be Enough Money?

This paper will address the burden imposed on states by cyclically-induced increases in the demand for welfare. The first part will estimate how much states likely will be forced to spend on additional welfare payments in the event of an economic downturn. I use data from 1976-1996 on welfare expenditures and economic activity in all 50 states and the District of Columbia and estimate the sensitivity of overall (state and federal) welfare costs to a recession. Then I review the specific details of the TANF program and the federal contingency fund that will determine how these costs will be split between federal and state governments. Findings indicate that the financial burden imposed upon some states is likely to be quite high. Ironically, the additional welfare costs are likely to swamp the size of the contingency fund in all but the mildest of downturns. However, payments from the fund probably will not commence until well into a recession and states will be required to bear a very large share of these costs. The second part of this paper will examine the method of financing Unemployment Insurance (UI) with particular emphasis on its ability to cover the additional benefit payments that are required during a recession. After providing details of the institutional arrangements of the financing system, I explore the historical ability of the system to provide adequate resources to fund high cyclical expenditures. I then simulate the resources required to weather recessions of different magnitudes in the future and determine whether current funding patterns are sufficient to meet these needs. Unfortunately, the results of this analysis do not bode well for many states' abilities to save for a rainy day.