State Governments and the Welfare System: An Econometric Analysis

Abstract

The future status of the welfare system is one of the most important issues in current U.S. federal-state government relations. Effective January 1, 1974, the federal government discontinued three of the public assistance programs, Old Age Assistance (OAA), Aid to the Blind (AB), and Aid for the Permanently and Totally Disabled (APTD), replacing them with a new Supplemental Security Income (SSI) program. Federal payments under SSI far exceed the federal contribution under the old programs. Despite these reforms, the underlying premise of this paper is that states' experiences with the welfare system over the past two decades remain highly relevant in determining their responses to the new regime. This is so primarily because welfare will remain an important state decision. In the first place, the two largest welfare programs, Aid For Dependent Children (AFDC) and Medicaid, continue as a joint federal-state program operating under the old federal aid formulae, in which states determine recipient payment levels. Secondly, the federal SSI payments are still less than the combined federal-state-local payments for the old public assistance programs in many states. These states will almost certainly continue to provide welfare assistance from their own budgets. For them the SSI program merely represents a change in the federal aid formulae and/or the amount of federal support. Finally, states previously paying recipents less than the current SSI levels may well choose to supplement the federal payments since they were forced to contribute under the old formulae. Therefore in most state t the overall level of welfare support will remain as important a decision as it has been in the past, even for SSI recipients. In attempting to answer some of the policy issues in the welfare area, we estimated a full model of state government behavior using an extensive data base covering the sixteenyear period, fiscal years 1954 through 1969.1 The coefficient estimates shed light on the following questions: a) During the sample period, how did states react to changes in the federal welfare formulae, which have always contained both price and income incentives?2 The relevance of this question for the AFDC and Medicaid programs has already been noted. In addition, knowledge of the states' reactions to the previous federal welfare formulae will